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Small Business Employee Benefits and HR Blog

Health Care Insurance Reform - How it Affects Insurance Agents and their Clients

Note: This article focuses only on the impact of H.R. 3590 and H.R. 4872 (“health care reform”) on the health insurance industry. It does not cover the thousands of changes to U.S. health care (vs health insurance) and should not be used as legal or tax advice.

health reform insurance agentsThe U.S. House of Representatives has passed H.R. 3590 - the Patient Protection and Affordable Care Act (the “Senate Bill”), and H.R. 4872 - the Health Care and Education Reconciliation Act of 2010 (the “Reconciliation Bill”) which makes changes to the Senate Bill. President Obama signed the Senate Bill into law today. The Reconciliation Bill must first pass the Senate before it can also be signed into law.

Below is a summary of the key points in the bills affecting the health insurance industry. These changes are divided into three major categories: 

    1. Changes Beginning in 2010
    2. Changes Beginning in 2011
    3. Changes Beginning in 2014.

During the next few days, and when health care reform is finalized, we (and you through your comments) will be discussing in detail the impact of each item on insurance agents, employers and employees.

1. Changes Beginning in 2010

Temporary High-Risk Pool

Senate Bill: In 90 days, a temporary national high-risk pool will be established to provide health coverage to individuals with pre-existing medical conditions. Individuals who have a pre-existing medical condition and who have been uninsured for at least six months will be eligible to enroll in the high-risk pool and receive subsidized premiums. Premiums for the pool will vary by no more than 4 to 1 due to age and maximum cost-sharing will be limited to the Health Savings Account (HSA) limit ($5,950/individual and $11,900/family in 2010).

Reconciliation Bill: same as above

Employer Subsidies -- Phase 1

Senate Bill: Provide small employers with 25 or fewer employees and average annual wages of less than $50,000 with a tax credit if they purchase health insurance for employees. Beginning in the 2010 tax year and ending in 2013, Phase 1 of this subsidy will provide a tax credit of up to 35% of the employer’s contribution toward the employee’s health insurance premium if the employer contributes 50% or more of the total premium cost (or 50% of a to-be-established benchmark premium). The full credit will be available to employers with 10 or fewer employees and average annual wages of less than $25,000, but the credit will decline as the company size and average wage rates rise. Tax-exempt companies are eligible for tax credits of up to 25% of the employer’s contribution toward the employee’s health insurance premium. 

Reconciliation Bill: same as above

Increased Dependent Coverage

Senate Bill: In 6 months, insurance companies must provide dependent coverage for children up to age 26 for individual and group health plans.

Reconciliation Bill: same as above

No Lifetime Maximum

Senate Bill: In 6 months, insurance companies will be prohibited from placing lifetime limits on individual and group health plans.

Reconciliation Bill: same as above

No Exclusions for Children

Senate Bill: In 6 months, insurance companies will be prohibited from placing pre-existing condition exclusions on a policy-holder's children.

Reconciliation Bill: same as above

2. Changes Beginning in 2011

Health FSA Contribution Limit 

Senate Bill: Beginning in 2011, the amount of contributions to health FSAs is limited to $2,500 per year.

Reconciliation Bill: Delays this provision until 2013.

Over the Counter Drugs Excluded from HRA/HSA/FSA

Senate Bill: Beginning in 2011, the costs for over-the-counter drugs not prescribed by a doctor will no longer be eligible for tax-free reimbursement through an HRA, FSA or HSA.

Reconciliation Bill: same as above

3. Changes Beginning in 2014

Individual Mandate

Senate Bill: Phasing in at smaller amounts from 2014-2016, individuals must have coverage or pay a penalty of the greater of $750 per year up to a maximum of three times that amount per family or 2% of household income. Exceptions will be made for religious objectors, those who cannot afford coverage and individuals who meet other special criteria.

Reconciliation Bill: Changes the penalty to the greater of $695 up to a maximum of three times that amount per family or 2.5% of income.

Individual Premium Subsidies

Senate Bill: Beginning in 2014, the federal government will give tax credits (called "premium credits") to individuals with incomes between 100 and 400% of the federal poverty line (FPL) that cap an individual's health insurance cost on a sliding scale from 2.8% to 9.8% of income respectively.

Reconciliation Bill: Increases the tax credits to individuals by reducing the cap on an individual's insurance cost to 2% to 9.5% of income.

Employer Mandate 

Senate Bill: Beginning in 2014, a company with more than 50 full-time employees that does not offer coverage and has at least one full-time employee receiving an individual tax credit (see Individual Subsidies above) must pay a penalty of $750 per full-time employee. An employer with more than 50 employees that does offer coverage that is "unaffordable" or does not meet the "minimum coverage requirement" and has at least one full-time employee receiving an individual tax credit, will pay the lesser of $3,000 for each employee receiving a credit or $750 for each full-time employee. 

Examples: An employer with 50 full-time employees that does not offer health coverage will pay a penalty of $37,500 ($750 per employee for 50 employees). An employer with 100 full-time employees that does not offer health coverage will pay a penalty of $75,000 ($750 per employee for 100 employees). 

Reconciliation Bill: Modifies the employer penalty for not offering coverage by subtracting the first 30 full-time employees from the payment calculation. The bill also increases the payment amount for firms that do not offer coverage to $2,000 per full-time employee.

Examples: An employer with 50 full-time employees that does not offer health coverage will pay a penalty of $40,000 ($2,000 per employee for 20 employees). A 100-person employer not offering health coverage will pay a penalty of $140,000 ($2,000 per employee for 70 employees).

Employer Subsidies -- Phase 2


Senate Bill: Beginning in 2014 and available for 2 years, small companies that purchase coverage through the state exchanges (see Health Insurance Exchange Mandate below) will be eligible for a tax credit of up to 50% of the company's contribution toward an employee’s health insurance premium if the company contributes at least 50% of the total premium cost. In Phase 2, the full credit will only be available to companies with 10 or fewer employees and average annual wages of less than $25,000. Similar to Phase 1, the size of the credit will decrease as company size and average wage increases. Tax-exempt businesses are eligible for tax credits of up to 35% of the company's contribution toward the employee’s health insurance premium.

Reconciliation Bill: same as above

Insurance Carrier Rating Rules 

Senate Bill: Beginning in 2014, medical underwriting and pre-existing condition exclusions for individual and small group health insurance plans will be prohibited in all states. Insurers will be prohibited from denying coverage or setting rates based on gender, health status, medical condition, claims experience or other health-related factors. Premiums will vary by age (limited to a 3:1 ratio), family structure, geography, actuarial value, tobacco use (limited to a 1.5 to 1 ratio) and participation in a health promotion program.

Reconciliation Bill: Adds a provision to grandfather existing individual and group health plans with respect to the new benefit standards. 

Health Insurance Exchange Mandate 

Senate Bill: By 2014, each state must create an American Health Benefit Exchange and a Small Business Health Options Program Exchange, administered by a governmental agency or non-profit organization. The exchanges must provide a place where individuals and small businesses with up to 100 employees can purchase coverage that meets certain requirements (see Insurance Coverage Requirements). 

Reconciliation Bill: same as above

Insurance Coverage Requirements 

Senate Bill: Beginning in 2014, any health plan offered through the state-based exchanges must provide health benefits that include cost sharing limits. No out-of-pocket requirements can exceed those in Health Savings Accounts, and deductibles in the small group market cannot exceed $2,000 for an individual and $4,000 for a family. Coverage must be offered in four different benefit categories: Platinum (90% coinsurance), Gold (80% coinsurance), Silver – (70% coinsurance), and Bronze (60% coinsurance). Additionally, a catastrophic-only plan must be offered to individuals under age 30 and to others who are exempt from the individual responsibility requirement.

Reconciliation Bill: same as above

Miscellaneous Provisions
    • One provision requires employers to disclose the value of the benefit provided by the employer for each employee’s health insurance coverage on the employee’s annual Form W-2
    • The bill also provides provisions to establish a new employee benefit cafeteria plan to be known as a "simple cafeteria plan" that includes self-employed individuals as qualified employees
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