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Health reform sector implications Payer

Health insurance companies are almost immediately subject to new regulations on their products. April 2010

Background
On March 30, 2010, President Obama signed the Health Care and Education Affordability Reconciliation Act of 2010, P.L. 111152) (2010 Reconciliation Act) that amends the comprehensive healthcare reform legislation enacted March 23 (the Patient Protection and Affordable Care Act, P.L. 111-148, PPACA). This report focuses on aspects of the final healthcare reform and reconciliation legislation that are expected to be most significant to payers. For purposes of this report, except as expressing stated otherwise, the term the Act refers to PPACA as modified by the 2010 Reconciliation Act. In addition, this report is not intended to be a technical assessment of the Act and as such may not specify all implementation nuances related to timing (e.g., calendar vs. plan year dates) or applicability by business segment (e.g., individual vs. group (small vs. large), insured vs. selfinsured, or grandfathered vs. nongrandfathered). Health reform was frequently called health insurance reform, by its advocates, which is why the health insurance sector may be impacted more by this legislation than any other industry. Health insurance companies may benefit from having more insured individuals through coverage expansions in the insurance exchanges and expansions of existing government programs. However, health insurance companies are almost immediately subject to new regulations on their products, including a ban on lifetime limits as well as annual limits on essential benefits except as specifically permitted by the government, a ban on pre-existing condition exclusions for children, mandatory coverage of preventive services, a ban on rescissions and an extension of dependent coverage. In 2011, new minimum medical loss ratios (MLRs) begin. Then, beginning in 2014, the insurance exchanges are slated to begin and insurance companies will be subject to additional regulations such as a ban on all annual limits, guaranteed issue, and ban on pre-existing exclusions for adults. Medicaid will be expanded to individuals with incomes at or below 133% of the Federal Poverty Level beginning Jan. 1, 2014. All newly eligible adults will be guaranteed a benchmark benefit package that at least provides the essential health benefits as defined by the Secretary of the U.S. Department of Health and Human Services (HHS).

Health reform was frequently called health insurance reform, by its advocates, which is why the health insurance sector may be impacted more by this legislation than any other industry. Health insurance companies may benefit from more individuals with insurance through coverage expansions in the insurance exchanges and expansions of existing government programs. However, health insurance companies are almost immediately subject to new regulations on their products.

Policies that affect products and coverage take effect quickly

Health insurance companies will be more restricted in what products they offer, to whom they can or cannot deny coverage, and how much they spend on medical services. Provisions include: MLR requirements Beginning with effective plan year 2010, health insurance companies will have to report the amount they spend on medical services, known as MLRs to the Secretary of HHS. Beginning Jan. 1, 2011, large group insurance companies must have a MLR of at least 85% and small group and individual market insurance companies must have a MLR of 80%. If they do not, then they must provide a rebate to their enrollees. Mandatory coverage of certain preventative services, primary care and emergency services Effective six months after enactment, health insurance companies must pay for immunizations as well as infant, child, and adolescent preventive services recommended by the U.S. Preventive Services Task Force, Center for Disease Control, and Health Resources and Services Administration (HRSA) without any cost-sharing required from members. Additionally, health plans must cover womens preventive care and screenings recommended by HRSA. A plan enrollee must also be allowed to select their primary care provider from any available participating primary care provider. Health insurance companies can no longer require enrollees to have prior authorization before emergency services are covered or increase cost-sharing for emergency service, whether provided by in-network or out-of-network providers. Health insurance companies cannot require members to get pre-authorization or referral for obstetrical or gynecological services. Ban on lifetime limits and restrictions on annual limits Effective six months after enactment, health insurance companies can no longer put a lifetime dollar limit on the insurance benefits covered by a plan, if those services are deemed essential health benefits. In Restrictions on ratings Health insurance premiums in the individual and small group markets may vary only by family structure, geography, the actuarial value of the benefit, age (limited to a ratio of 3 to 1), and tobacco use (limited to a ratio of 1.5 to 1). This provision does not apply to self-insured plans. Guaranteed issue and ban on pre-existing condition exclusions Health insurance companies will be prohibited from excluding patients with pre-existing conditions from their health plans. They are also prohibited from instituting policies that restrict eligibility based on an individuals current health, medical history or indicators of future health, such as genetic information, disability or domestic violence. Health insurance companies cannot bar customers from renewing plans and cannot rescind enrollee coverage because of a members health status. The ban on preexisting condition exclusions is applicable to children (under the age of 19) six months after enactment, and extends to adults in 2014. Limits on executive compensation Health insurance companies will only be able to deduct the first $500,000 of compensation to any officer, director, or employee of the health insurance provider, or to anyone who provides services for or on behalf of such covered health insurance provider. Previously, the $1 million limit on the deductibility of executive compensation applied only to the top executives of public companies, though a $500,000 limit was imposed on compensation paid to certain executives of companies receiving TARP funds. The provision applies to all health insurance companies that derive at least 25% of their gross income from plans that meet the coverage requirements established under the bill. addition, annual dollar limits on such benefits may be imposed only as specifically permitted by the Secretary of HHS until 2014, at which time lifetime and annual limits are prohibited. This applies to both group and individual health plans. Consumer coverage navigation assistance Within 60 days of enactment, health insurance companies are required to develop and distribute a standard format to present coverage options. By July 1 of this year, the government will post a website to help consumers identify health coverage options as well as prices for medical services. Temporary high-risk pool Within 90 days of enactment, the government will establish a high-risk insurance pool for those who are uninsured and have pre-existing conditions. The high-risk pools are a stop-gap measure that will terminate when the exchanges open in 2014. Other requirements on health insurance companies effective six months after enactment: Coverage of primary care and emergency services Dependent coverage for children up to age 26 for all individual and group policies Premium review process by the Secretary of the HHS

Observation
State and federal oversight of health plans will increase, and health insurance companies will have to act quickly to make sure that their plans are compliant with the new regulations. The Act creates intense pressure for payers to reduce or cut administrative costs and improve efficiency without diminishing service or member satisfaction. Lost cost-sharing for some preventative services may add to this pressure, at least in the short run. One way to handle these new pressures would be to increase premiums, but the new premium review process could make that difficult. Some plans may simply exit certain markets. Health insurance companies should review their expenses to make sure they are properly classified.
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The Act requires states to establish American Health Benefit Exchanges that facilitate the purchase of qualified health plans by 2014. Individual enrollment in the insurance exchanges is expected to be 21 million. Plans offered in the exchanges would have to provide an essential health benefits package. Components of the essential health benefits packages will be defined by the Secretary of HHS. However, the Act does set certain requirements for the individual and small group market. It prohibits out-of-pocket limits from being

Insurance exchanges
Participating health insurance companies would have to offer plans at the silver and gold level. They also would have to disclose in plain language information about payment, enrollment, denials, rating practices, out-of-network costsharing, and enrollee rights. They would

Observation
Participating health insurance companies will have new state and federal regulations to cope with in the exchanges. This could incentivize health insurance companies to standardize their plans along the exchanges four-tier structure and compete more on price and service rather than benefits. Some of the rules, such as what constitutes an essential health benefit, are still to be determined. Understanding the legislative intent and how future rule-making may affect members will help health insurance companies prepare for changes still to come. Health insurance companies may need to carefully monitor member satisfaction as it may be easier for current customers to switch after 2014.
greater than the health savings account (HSA) limits, and, for the small group market, limits deductibles to $2,000 for individuals and $4,000 for families. Health insurance companies would also have to offer a catastrophic plan that would cover essential health benefits and at least three primary care visits and require costsharing up to the HSA out-of-pocket limits. Individual and small-group plans offered in the exchanges would have to fall into one of four tiers based on the percentage of costs paid for by the plan: Bronze: 60% Silver: 70% Gold: 80% Platinum: 90% have to comply with marketing, choice of providers, reasonableness of premium increases, and other quality criteria set by the Secretary of HHS. Plans will be rated on a system designed by the Secretary of HHS. States could set up additional criteria for their own exchanges, but they would have to fund the cost of administering and overseeing these additional criteria. Health insurance companies could continue to offer plans outside the exchanges but only current enrollees will be grandfathered in. These companies will have to decide how to deal with this diminishing population. CBO estimates that enrollment in individual plans outside of the exchange will decline by 5 million below what would have been expected in 2016 and employer coverage will fall by 3 million.

Table 1: Penalties on individuals for not maintaining coverage by year FY Individual and employer mandates will introduce new consumers to the insurance market. By 2014, individuals will be required to maintain a minimum level of coverage for at least nine months of the year. As seen in Table 1, the individual penalty is the greater of a flat dollar amount and a percentage of household income. The flat amount begins at $95 in 2014, increases to $325 in 2015, and $695 in 2016. The percentage of income is 1% of income in 2014, 2% in 2015, and 2.5% in 2016 and thereafter. Families will pay half the penalty amount for children up to a cap of $2,085 for the entire family. After 2016, dollar amounts will increase by the annual cost of living adjustment. Penalty amount per individual, or Percentage of household income, if greater 2014 $95 1% 2015 $325 2% 2016 $695 2.5% After 2016 Indexed to CPI-U 2.5%

Exemptions are allowed for religious objectors, incarcerated individuals, members of Indian tribes, those without coverage for less than three months, and undocumented immigrants. Also exempt are individuals who cannot afford coverage because of their required contribution for employer-sponsored coverage or the lowest cost bronze plan in the local exchange costs more than 8%

Mandates will increase covered lives

of family income for the year. This would be indexed by the rate at which premium growth exceeds income growth for the year. Also exempt are taxpayers whose income is below the income tax filing threshold ($9,350 single and $18,700 married, in 2009). The Act imposes penalties on employers that do not provide coverage for full-time employees, as well as on employers whose coverage is inadequate or unaffordable for low-paid employees, beginning in 2014. Employers with fewer than 50 full-time employees (counting the full-time equivalents of part-time employees to determine whether there are 50 full-time employees) are exempt from this penalty. A full-time employee is defined as working at least 30 hours per week. The penalties vary based on whether the employer offers minimum essential coverage and, if so, the employer contribution towards the cost of the coverage and the employees income.

Observation

Many of the newly insured will be among the young invincible market, or individuals of a younger age and fewer health issues who may have elected not to obtain insurance before because they could not afford it and were relatively healthy. The employer mandate will also entice some companies to obtain coverage, which may prompt payers to offer new services and plans geared towards that market if they do not already do so. Though employers will still need to be competitive in their benefit offerings, the flow of new customers in the form of employers desiring to provide insurance for their employees may be stymied because some employers may find it more cost-effective to pay the penalty. For both the individual and employer mandates to be effective in the long-term, the annual cost-of-living and salary increases will have to keep up with healthcare inflation. Agility is needed to take advantage of the new consumer base, particularly in the individual and small group markets. Furthermore, payers may need to scale their IT capabilities, including web portals, to prepare for a larger volume of members and to maintain brand and trust with their current members.

There are two types of penalties for employers. If the employer does not offer coverage and at least one full-time employee enrolls in a qualified health plan under an exchange and receives a premium tax credit, the employer would pay $2,000 times the number of full-time employees, excluding the first 30 full-time employees. If the employer offers coverage but at least one full-time employee enrolls in an exchange and qualifies for a premium tax credit, the employer pays $3,000 for each such employee, but not more than $2,000 times the number of full-time employees excluding the first 30 full-time employees.

Health insurance companies will face new fees, based on their respective market shares, beginning in 2014. Table 2 shows how the fees, which are not deductible, gradually increase. The fees would not apply to companies with total net premiums written of $25 million or less. The Act also provides a limited exemption for certain not-forprofit health insurance companies with MLRs of 90% or more in the individual, small group and large group markets and overall MLRs of at least 92%.

Industry fees and taxes begin in 2014

Beginning in 2018, health insurance companies also would be assessed a 40% excise tax on high-cost selfinsured and group market insurance plans. High-cost would be defined as a plan above the threshold of $10,200 for individual coverage and $27,500 for family coverage. The Act allows employers to reduce the cost of the coverage when applying the tax if the employers age and gender demographics are not representative as compared to a national risk pool. The dollar thresholds are also indexed to inflation, and are automatically increased in 2018 if premium inflation rates between now and 2018 are higher than forecasted. The tax would apply to the amount of the premium in excess of the threshold. In addition, insured and self-insured plans would pay a comparative effectiveness fee for actives and retirees of $2 times the average number of lives covered under the plan ($1 in the case of plans ending during fiscal year 2013). The fee applies to each plan year ending after Sept. 30, 2012, and will be indexed to the growth of national health expenditures.

Observation
The high cost plan excise tax may be avoided if plans are redesigned to decrease benefits so premiums are below the dollar threshold(s). However, the industry fees cannot be avoided. To pay for industry fees while maintaining growth and keeping premiums steady, health insurance companies will face growing pressure to reduce cost by focusing on administrative expenses. Administrators of selfinsured plans will also be subject to the high cost plan excise tax and potentially other fees for those plans and will likely need to pass those costs back to self-insured employers on a tax-adjusted basis.

Table 2: Industry fee on health insurance companies FY Fee amount 2014 $8 billion 2015 $11.3 billion 2016 $11.3 billion After 2016 $13.9 billion 2018 and beyond* $14.3 billion

*Indexed to medical cost growth after 2018.

Medicare Advantage payment cuts

Payments to Medicare Advantage plans are frozen in 2011, and cuts begin in 2012. Beginning in 2011, Medicare Advantage payments will begin a four-year phase-in based on the average of the bids from those plans in each market. Overall, the Act cuts government payments to Medicare Advantage by $132 billion over 10 years. To offset these cuts, the Act creates performance bonuses for care coordination, care management and quality rankings. Some highcost areas would be paid 5% below traditional Medicare while some lower-cost areas would be paid 15% above Medicare.

Observation
As health insurance companies face pressure to reduce administrative cost, administrative simplification may be in their best interests regardless of new requirements set out by the Act. However, simplification may also require an initial large investment in health information technology at a time when there already is intensive pressure on the bottom line. In any event, high degrees of collaboration across the industry and with other stakeholders will be required to drive administrative simplification.

Observation
Most health insurance companies will have to reduce benefits or increase premium requirements and some may withdraw from certain markets. Medicare Advantage plans will want to ensure that they have a comparable product to offer to avoid losing those members to other companies. Long term sustainability of these products will increasingly be driven by the effectiveness of health management initiatives in significantly reducing demands for health services compared with traditional Medicare.

Administrative simplification
The Act accelerates the timetable for HHS to adopt uniform standards and operating rules for electronic transactions between providers and payers governed by HIPAA (the Health Insurance Portability and Accountability Act). Administrative simplification requirements for health insurance companies include adopting a single set of operating rules for claims status and eligibility verification, electronic funds transfer for healthcare payment and remittance, health claims and encounter information, enrollment and disenrollment, premium payments, referral certification and authorization. These requirements become effective between 2013 and 2016. Health insurance companies that are not able to document compliance may be fined up to $1 per covered life per day.

As health insurance companies face pressure to reduce administrative cost, administrative simplification may be in their best interests regardless of new requirements set out by the Act.

 Temporary reinsurance program for retirees, reimbursing participating employment-based plans for 80% of the costs of benefits provided per enrollee between $15,000 and $90,000. Appropriates $5 billion, which is available until expended, beginning 90 days after enactment. Sliding scale tax credits for small employers with fewer than 25 employees and average annual wages of less than $50,000 that purchase health insurance for their employees. Begins in 2010 and increases for some small businesses in 2014. Filling Medicare Part D doughnut hole with a 50% discount to beneficiaries for brand-name drugs and biologics beginning in 2011. Establishes a new national, voluntary insurance program for purchasing community living assistance services and supports (CLASS act), effective Jan. 1, 2011. Non-discrimination rules will be extended to insured policies effective six months after the effective date. Prior policies may be grandfathered until 2014 for adults. An external review process approved by HHS will be required for all new policies effective six months after the effective date. Over-the-counter drugs will no longer be considered qualified medical expenses effective 2011 (will impact administration of health accounts FSA, HSA, HRA).

Other provisions affecting payers

Observation
The number of provisions that are included in the health reform bill go beyond this brief and are extensive, complex and far reaching. Health insurance companies are already establishing project management offices (PMOs) to inventory and manage the compliance and strategic issues associated with the entire bill. In addition, regulations are likely to both clarify and add further complexity to those efforts.

Effective date plan years beginning after Six months after enactment

Provision

Ban on pre-existing condition exclusions for children Ban on lifetime limits and restrictions on annual limits Prohibition on plan recissions Temporary reinsurance program begins Standard format for presenting information on coverage options (60 days after enactment) Temporary high-risk insurance pool implemented (90 days after enactment) Medicare Part D drug discount Small business tax credits Minimum MLR goes into effect Medicare Advantage rates freeze until 2012 CLASS insurance begin Medicare Advantage reimbursement cuts begin and bonus payments implemented Comparative effectiveness research fee begins Plan administration simplification rules for eligibility and claims status go into effect FSA contribution limit $2,500 per year and then grows by cost-of-living adjustments Health insurer industry fee begins Guaranteed issue for individual plans, rating bands, risk adjustment requirements in effect Individual and employer mandate begin Health insurance state-based exchanges begin All exchange plans required to offer essential benefits Tax on high-value employer-provided health insurance first applies

2010 2011

2012

2013

2014

2018

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To have a deeper conversation about any of these issues in this paper, please contact:

Michael Galper (213) 217-3301 michael.r.galper@us.pwc.com Michael Thompson (646) 471-0720 michael.thompson@us.pwc.com George Churchill (312) 298-6895 george.churchill@us.pwc.com Alexander Fowler (415) 309-3712 alexander.fowler@us.pwc.com Benjamin Isgur (214) 754-5091 benjamin.isgur@us.pwc.com

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