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Small Business Health Care Tax Credit: Frequently Asked Questions

The new health reform law gives a tax credit to certain small employers that provide health care coverage to their employees, effective with tax years beginning in 2010. The following questions and answers provide information on the credit as it applies for 2010-2013, including information on transition relief for 2010. An enhanced version of the credit will be effective beginning in 2014. The new law, the Patient Protection and Affordable Care Act, was passed by Congress and was signed by President Obama on March 23, 2010.

Employers Eligible for the Credit

1. Which employers are eligible for the small employer health care tax credit?

A. Small employers that provide health care coverage to their employees and that meet certain requirements (“qualified employers”) generally are eligible for a Federal income tax credit for health insurance premiums they pay for certain employees. In order to be a qualified employer, (1) the employer must have fewer than 25 full-time equivalent employees (“FTEs”) for the tax year, (2) the average annual wages of its employees for the year must be less than $50,000 per FTE, and (3) the employer must pay the premiums under a “qualifying arrangement” described in Q/A-3. See Q/A-9 through 15 for further information on calculating FTEs and average annual wages and see Q/A-22 for information on anticipated transition relief for tax years beginning in 2010 with respect to the requirements for a qualifying arrangement.

2. Can a tax-exempt organization be a qualified employer?

A. Yes. The same definition of qualified employer applies to an organization described in Code section 501(c) that is exempt from tax under Code section 501(a). However, special rules apply in calculating the credit for a tax-exempt qualified employer. See Q/A-6.

Calculation of the Credit

3. What expenses are counted in calculating the credit?

A. Only premiums paid by the employer under an arrangement meeting certain requirements (a “qualifying arrangement”) are counted in calculating the credit. Under a qualifying arrangement, the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage. See Q/A-22 for information on transition relief for tax years beginning in 2010 with respect to the requirements for a qualifying arrangement.

If an employer pays only a portion of the premiums for the coverage provided to employees under the arrangement (with employees paying the rest), the amount of premiums counted in calculating the credit is only the portion paid by the employer. For example, if an employer pays 80 percent of the premiums for employees’ coverage (with employees paying the other 20 percent), the 80 percent premium amount paid by the employer counts in calculating the credit. For purposes of the credit (including the 50-percent requirement), any premium paid pursuant to a salary reduction arrangement under a section 125 cafeteria plan is not treated as paid by the employer.

In addition, the amount of an employer’s premium payments that counts for purposes of the credit is capped by the premium payments the employer would have made under the same arrangement if the average premium for the small group market in the State (or an area within the State) in which the employer offers coverage were substituted for the actual premium. If the employer pays only a portion of the premium for the coverage provided to employees (for example, under the terms of the plan the employer pays 80 percent of the premiums and the employees pay the other 20 percent), the premium amount that counts for purposes of the credit is the same portion (80 percent in the example) of the premiums that would have been paid for the coverage if the average premium for the small group market in the State were substituted for the actual premium.

4. What is the average premium for the small group market in a State (or an area within the State)?

A. The average premium for the small group market in a State (or an area within the State) will be determined by the Department of Health and Human Services (HHS) and published by the IRS. Publication of the average premium for the small group market on a State-by-State basis is expected to be posted on the IRS website by the end of April.

5. What is the maximum credit for a qualified employer (other than a tax-exempt employer)?

A. For tax years beginning in 2010 through 2013, the maximum credit is 35 percent of the employer’s premium expenses that count towards the credit, as described in Q/A-3.

Example. For the 2010 tax year, a qualified employer has 9 FTEs with average annual wages of $23,000 per FTE. The employer pays $72,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer's State) and otherwise meets the requirements for the credit. The credit for 2010 equals $25,200 (35% x $72,000).

6. What is the maximum credit for a tax-exempt qualified employer?

A. For tax years beginning in 2010 through 2013, the maximum credit for a tax-exempt qualified employer is 25 percent of the employer’s premium expenses that count towards the credit, as described in Q/A-3. However, the amount of the credit cannot exceed the total amount of income and Medicare (i.e., Hospital Insurance) tax the employer is required to withhold from employees’ wages for the year and the employer share of Medicare tax on employees’ wages.

Example. For the 2010 tax year, a qualified tax-exempt employer has 10 FTEs with average annual wages of $21,000 per FTE. The employer pays $80,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer's State) and otherwise meets the requirements for the credit. The total amount of the employer’s income tax and Medicare tax withholding plus the employer’s share of the Medicare tax equals $30,000 in 2010.

The credit is calculated as follows:

(1) Initial amount of credit determined before any reduction: (25% x $80,000) = $20,000
(2) Employer’s withholding and Medicare taxes: $30,000
(3) Total 2010 tax credit is $20,000 (the lesser of $20,000 and $30,000).

7. How is the credit reduced if the number of FTEs exceeds 10 or average annual wages exceed $25,000?

A. If the number of FTEs exceeds 10 or if average annual wages exceed $25,000, the amount of the credit is reduced as follows (but not below zero). If the number of FTEs exceeds 10, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the number of FTEs in excess of 10 and the denominator of which is 15. If average annual wages exceed $25,000, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the amount by which average annual wages exceed $25,000 and the denominator of which is $25,000. In both cases, the result of the calculation is subtracted from the otherwise applicable credit to determine the credit to which the employer is entitled. For an employer with both more than 10 FTEs and average annual wages exceeding $25,000, the reduction is the sum of the amount of the two reductions. This sum may reduce the credit to zero for some employers with fewer than 25 FTEs and average annual wages of less than $50,000.

Example. For the 2010 tax year, a qualified employer has 12 FTEs and average annual wages of $30,000. The employer pays $96,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer's State) and otherwise meets the requirements for the credit.

The credit is calculated as follows:

(1) Initial amount of credit determined before any reduction: (35% x $96,000) = $33,600
(2) Credit reduction for FTEs in excess of 10: ($33,600 x 2/15) = $4,480
(3) Credit reduction for average annual wages in excess of $25,000: ($33,600 x $5,000/$25,000) = $6,720
(4) Total credit reduction: ($4,480 + $6,720) = $11,200
(5) Total 2010 tax credit: ($33,600 – $11,200) = $22,400.

8. Can premiums paid by the employer in 2010, but before the new health reform legislation was enacted, be counted in calculating the credit?

A. Yes. In computing the credit for a tax year beginning in 2010, employers may count all premiums described in Q/A-3 for that tax year.

Determining FTEs and Average Annual Wages

9. How is the number of FTEs determined for purposes of the credit?

A. The number of an employer’s FTEs is determined by dividing (1) the total hours for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by (2) 2,080. The result, if not a whole number, is then rounded to the next lowest whole number. See Q/A-12 through 14 for information on which employees are not counted for purposes of determining FTEs.

Example. For the 2010 tax year, an employer pays 5 employees wages for 2,080 hours each, 3 employees wages for 1,040 hours each, and 1 employee wages for 2,300 hours.

The employer’s FTEs would be calculated as follows:

(1) Total hours not exceeding 2,080 per employee is the sum of:

a. 10,400 hours for the 5 employees paid for 2,080 hours each (5 x 2,080)
b. 3,120 hours for the 3 employees paid for 1,040 hours each (3 x 1,040)
c. 2,080 hours for the 1 employee paid for 2,300 hours (lesser of 2,300 and 2,080)

These add up to 15,600 hours

(2) FTEs: 7 (15,600 divided by 2,080 = 7.5, rounded to the next lowest whole number)

10. How is the amount of average annual wages determined?

A. The amount of average annual wages is determined by first dividing (1) the total wages paid by the employer to employees during the employer’s tax year by (2) the number of the employer’s FTEs for the year. The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000). For this purpose, wages means wages as defined for FICA purposes (without regard to the wage base limitation). See Q/A-12 through 14 for information on which employees are not counted as employees for purposes of determining the amount of average annual wages.

Example. For the 2010 tax year, an employer pays $224,000 in wages and has 10 FTEs.

The employer’s average annual wages would be: $22,000 ($224,000 divided by 10 = $22,400, rounded down to the nearest $1,000)

11. Can an employer with 25 or more employees qualify for the credit if some of its employees are part-time?

A. Yes. Because the limitation on the number of employees is based on FTEs, an employer with 25 or more employees could qualify for the credit if some of its employees work part-time. For example, an employer with 46 half-time employees (meaning they are paid wages for 1,040 hours) has 23 FTEs and therefore may qualify for the credit.

12. Are seasonal workers counted in determining the number of FTEs and the amount of average annual wages?

A. Generally, no. Seasonal workers are disregarded in determining FTEs and average annual wages unless the seasonal worker works for the employer on more than 120 days during the tax year.

13. If an owner of a business also provides services to it, does the owner count as an employee?

A. Generally, no. A sole proprietor, a partner in a partnership, a shareholder owning more than two percent of an S corporation, and any owner of more than five percent of other businesses are not considered employees for purposes of the credit. Thus, the wages or hours of these business owners and partners are not counted in determining either the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit.

14. Do family members of a business owner who work for the business count as employees?

A. Generally, no. A family member of any of the business owners or partners listed in Q/A-13, or a member of such a business owner’s or partner’s household, is not considered an employee for purposes of the credit. Thus, neither their wages nor their hours are counted in determining the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit. For this purpose, a family member is defined as a child (or descendant of a child); a sibling or step-sibling; a parent (or ancestor of a parent); a step-parent; a niece or nephew; an aunt or uncle; or a son-in-law, daughter- in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law.

15. How is eligibility for the credit determined if the employer is a member of a controlled group or an affiliated service group?

A. Members of a controlled group (e.g., businesses with the same owners) or an affiliated service group (e.g., related businesses of which one performs services for the other) are treated as a single employer for purposes of the credit. Thus, for example, all employees of the controlled group or affiliated service group, and all wages paid to employees by the controlled group or affiliated service group, are counted in determining whether any member of the controlled group or affiliated service group is a qualified employer. Rules for determining whether an employer is a member of a controlled group or an affiliated service group are provided under Code section 414(b), (c), (m), and (o).

How to Claim the Credit

16. How does an employer claim the credit?

A. The credit is claimed on the employer’s annual income tax return. For a tax-exempt employer, the IRS will provide further information on how to claim the credit.

17. Can an employer (other than a tax-exempt employer) claim the credit if it has no taxable income for the year?

A. Generally, no. Except in the case of a tax-exempt employer, the credit for a year offsets only an employer’s actual income tax liability (or alternative minimum tax liability) for the year. However, as a general business credit, an unused credit amount can generally be carried back one year and carried forward 20 years. Because an unused credit amount cannot be carried back to a year before the effective date of the credit, though, an unused credit amount for 2010 can only be carried forward.

18. Can a tax-exempt employer claim the credit if it has no taxable income for the year?

A. Yes. For a tax-exempt employer, the credit is a refundable credit, so that even if the employer has no taxable income, the employer may receive a refund (so long as it does not exceed the income tax withholding and Medicare tax liability, as discussed in Q/A-6).

19. Can the credit be reflected in determining estimated tax payments for a year?

A. Yes. The credit can be reflected in determining estimated tax payments for the year to which the credit applies in accordance with regular estimated tax rules.

20. Does taking the credit affect an employer’s deduction for health insurance premiums?

A. Yes. In determining the employer’s deduction for health insurance premiums, the amount of premiums that can be deducted is reduced by the amount of the credit.

21. May an employer reduce employment tax payments (i.e., withheld income tax, social security tax, and Medicare tax) during the year in anticipation of the credit?

A. No. The credit applies against income tax, not employment taxes.

Anticipated Transition Relief for Tax Years Beginning in 2010

22. Is it expected that any transition relief will be provided for tax years beginning in 2010 to make it easier for taxpayers to meet the requirements for a qualifying arrangement?

A. Yes. The IRS and Treasury intend to issue guidance that will provide that, for tax years beginning in 2010, the following transition relief applies with respect to the requirements for a qualifying arrangement described in Q/A-3:

(a) An employer that pays at least 50% of the premium for each employee enrolled in coverage offered to employees by the employer will not fail to maintain a qualifying arrangement merely because the employer does not pay a uniform percentage of the premium for each such employee. Accordingly, if the employer otherwise satisfies the requirements for the credit described above, it will qualify for the credit even though the percentage of the premium it pays is not uniform for all such employees.

(b) The requirement that the employer pay at least 50% of the premium for an employee applies to the premium for single (employee-only) coverage for the employee. Therefore, if the employee is receiving single coverage, the employer satisfies the 50% requirement with respect to the employee if it pays at least 50% of the premium for that coverage. If the employee is receiving coverage that is more expensive than single coverage (such as family or self-plus-one coverage), the employer satisfies the 50% requirement with respect to the employee if the employer pays an amount of the premium for such coverage that is no less than 50% of the premium for single coverage for that employee (even if it is less than 50% of the premium for the coverage the employee is actually receiving).

Health Care reform 2010-2014

We may not all be happy about it, but health care reform is the new law and we will work with the hand we have been dealt. The new law will be bring many new changes with government mandates.

Our firm is diligently working on the changes that will come to small business owners with under 50 employees, we will be here to help. In the coming months, there will be a full analysis of current group health plans in place so as to stay in compliance. We also want to make you aware of the tax credits avialble in 2010 and the new mandates that take effect this year.

Effective Immediately Mandates:

1.Individuals and employer group plans that wish to keep their current policy on a grandfathered basis can only do so if the only plan changes made are to add or delete new employees and any new dependents. In addition, an exception is made for employers that have scheduled plan changes as a result of a collective bargaining agreement. Once a plan loses its grandfathered status, it will be subject to all of the market reforms in the legislation when they take effect, regardless of where coverage is purchased (either through an exchange or outside of an exchange). However, most of the market reform provisions slated to take effect in the next six months will apply to all plans, whether or not they hold grandfathered status.

2.Eligible small businesses (those that have no more than 25 FTEs, pay average annual wages of less than $50,000 and provide qualified coverage) are eligible for phase one of the small business premium tax credit. Small employers will receive a maximum credit, based on number of employees, of up to 50% of premiums for up to two years if the employer contributes at least 50% of the total premium cost.

3.Employers that provide a Medicare Part D subsidy to retirees will have to account for the future loss of the deductibility of this subsidy in 2013 on liability and income statements. While the elimination of the deductibility does not take effect until 2013, there could be an immediate accounting impact.

I will send you future email updates with detail explanations of each mandate and change as it is explained by the administration. I have been attending almost daily webinars and meetings in regards to these changes so our firm can be at the forefront of these historic changes.

If you are a client of the firm and we do not currently manage your group health insurance account, please contact us immediately so we may email you the BOAR approval process form. We will actively monitor all clients accounts and our service offerrings will expand over the years to keep your business in federal and state compliance.

New requirements take effect for plans beginning on and after September 23, 2010

Your new and renewing clients will start seeing a number of required changes to their group plans beginning on and after September 23, 2010. Please note: While this information focuses on group business, this impacts both group and individual business. We'll send another communication focusing on the individual market.

Here's what your clients can expect:

All plans

The following changes impact all plans on their effective dates, or upon renewal - whether they are grandfathered or not:

Members can add dependents up to age 26, regardless of student or marital status.
Pre-existing exclusions for members under age 19 are removed.
Lifetime limits are eliminated.
Certain annual dollar limits are removed.
Coverage changes (fraud or intentional misrepresentation) are rescinded

For non-grandfathered plans

For plans that are not grandfathered, the following changes are also required:

Removal of member cost sharing for in-network preventive benefits, as defined by the law.
New internal claims appeal and external review processes.
Patient protections - primary care physician selection, direct access to OB/GYN services, emergency services

For grandfathered plans

For plans that are grandfathered:

A subscriber can add a new family member to a grandfathered plan.
A group can add new employees to a grandfathered plan.

More about grandfathering

We believe there are benefits to maintaining existing benefits coverage, for those who wish to do so. Therefore, we'll offer grandfathering for most standard and non-standard benefit plans in our portfolio. This is an important topic, and we understand you and your clients may have questions. Here are some answers to common questions about grandfathering:

Can a group make changes to its current benefit plan and maintain its grandfathered status?

Certain limited benefit changes allowed within the legislation and interim final regulation do not impact grandfathered status, but there are very few situations in which an alternative standard plan complies. As a result, only large groups that are eligible to customize their benefits will be allowed to change their benefits and retain grandfathered status if the changes are within the level of changes allowed by the legislation. Other changes allowed according to the interim final rules are:

Changes in premiums of a policy or plan
Changes required to comply with federal or state law
Changes to increase benefits or voluntarily comply with provisions of the Patient Protection and Affordable Care Act
Changes to plan structure, for example, switching from a health reimbursement arrangement to major medical coverage, or from insured to self-funded coverage
Changes to a provider network
Changes to accommodate mergers and acquisitions (as long as the merger or acquisition is not done solely to allow a group to move from one grandfathered plan to another when the plan change would reduce benefits or increase cost sharing in excess of that allowed by the regulations)
Changes to a self-funded plan's third-party administrator

What changes would cause a group to lose grandfathered status?

Groups that are not eligible to customize their benefits will not be allowed to change benefits and retain grandfathering status. For a group that is eligible to customize benefits, the following changes would cause a loss of grandfathered status:

Eliminate all (or substantially all) benefits to diagnose or treat a particular condition.
Increase coinsurance (or another percentage cost-sharing requirement) above the level that was set on March 23, 2010.
Increase fixed-amount cost-sharing requirements other than copayments, such as a deductible or an out-of-pocket limit, by a total percentage (measured from March 23, 2010) that is more than the sum of medical inflation plus 15%.
Increase copayments above the level in effect on March 23, 2010, by an amount that exceeds the greater of (a) the sum of medical inflation plus 15%, or (b) $5 increased by medical inflation.
Reduce employer contributions (calculated by cost or formula, such as hours worked) toward any tier of group health insurance coverage or a group health plan by more than 5% below the contribution rate on March 23, 2010.
Impose an annual limit on the dollar value of benefits if an annual or lifetime limit had not been previously imposed on all benefits or, for plans that previously imposed a lifetime limit on all benefits, impose an overall annual dollar limit that is lower than the lifetime limit, or, for plans that previously imposed an annual limit on all benefits, decrease the dollar value of the annual limit.
Issuer or plan sponsor does not disclose to participants and beneficiaries that the plan or coverage is a grandfathered health plan.
Change from one insurer to another.

If a group commits to making a change before March 23, 2010, does the group have to change back?

Probably not. If changes were made according to a written agreement or a filing with an insurance department before March 23, 2010, and the changes were implemented before or after March 23, 2010, the plan will likely be considered grandfathered.

If a group commits to making a change after March 23, 2010, can the group change back?

According to the interim final regulations, it appears that groups that have changed benefits between March 23, 2010, and June 14, 2010, may have the opportunity to revoke or modify the changes and regain grandfathered status at their next renewal date in 2011.

How can I help large group clients determine the impact of grandfathering or not grandfathering?

We're developing a tool for large groups that can customize their benefits to evaluate how much the benefits can be adjusted and still maintain grandfathered status.

When will we know which plans will be grandfathered?

We anticipate in the next few weeks.

We know you may have more questions. You can expect more information about grandfathering in the future. And, as always, you can talk with your sales representative for more information.

Appeals process for non-grandfathered plans

As you know, the health care reform law includes requirements for internal claims and appeals, and external reviews for fully insured and self-funded non-grandfathered plans. The law says that a plan must, at a minimum:

Have an internal claims and appeals process.
Provide notice of an external appeals process.
Allow an enrollee to review his or her file, present evidence during the appeals process and continue to receive coverage pending outcome.
Implement an external review process.

A recent interim final rule offers more information. Key points include:

The rule applies to individual plans and fully insured and self-funded group plans
The rule does not apply to any grandfathered plans.
Plans must follow state or federal appeals processes.
A benefit determination subject to internal review includes:
Whether a service is a covered benefit.
Imposition of pre-existing condition or other benefit limits.
Medical necessity and experimental treatment determinations.
A determination to rescind coverage.
Plans must ensure that internal review processes are fair and impartial.
Individuals must be notified of their rights to internal reviews and external appeals in a "culturally and linguistically appropriate manner."
Consumer protections for the external review process are required for certain benefit determinations and decisions to rescind coverage.
For plan years before July 1, 2011, insurers in states with an existing external review process that complies with health care reform may follow that process. If the state external review process does not comply, or if there is no applicable state external review process, the federal standard (not yet published) must be followed. For self-insured plans, unless the state external review process applies, the federal standard (not yet published) must be followed.
All non-grandfathered fully insured and self-funded group health plans must meet the new consumer protection standards for internal and external review for plan years on and after September 23, 2010.

More regulations will be issued for internal claims and appeals process, as well as additional guidance for external reviews. We'll keep you posted as this information becomes available. As always, talk with your sales representative with any questions.

Authorized Agents

Health Insurance Reform and Illinois: The Case for Change

The health care status quo is not an option for our states. If we do nothing, by 2019 the number of uninsured people will grow by more than 30 percent in 29 states and by at least 10 percent in every state. The amount of uncompensated care provided will more than double in 45 states. Businesses in 27 states will see their premiums more than double. And fewer people will have coverage through an employer.¹ The time for health insurance reform is now.

Under reform in Illinois:

1.8 million residents who do not currently have insurance and 612,000 residents who have nongroup insurance could get affordable coverage through the health insurance exchange.
1 million residents could qualify for premium tax credits to help them purchase health coverage.
1.8 million seniors would receive free preventive services.
314,000 seniors would have their brand-name drug costs in the Medicare Part D “doughnut hole” halved.
144,000 small businesses could be helped by a small business tax credit to make premiums more affordable.

Health Insurance Reform Provides Early Relief and Health Security.
Proposals implemented in 2010 and 2011 will produce real benefits for:

Families: The 12.9 million residents of Illinois will benefit as reform:
- Ensures consumer protections in the insurance market. Insurance companies will no longer be able to place lifetime limits on the coverage they provide, use of annual limits will be restricted, and they will not be able to arbitrarily drop coverage.
- Creates immediate options for people who can’t get insurance today. 8 percent of people in Illinois have diabetes², and 28 percent have high blood pressure³ – two conditions that insurance companies could use as a reason to deny health insurance coverage. Reform will establish a high-risk pool to enable people who cannot get insurance today to find an affordable health plan.
- Ensures free preventive services. 41 percent of Illinois residents have not had a colorectal cancer screening, and 22 percent of women over 50 have not had a mammogram in the past two years.⁴ Health insurance reform will ensure that people can access preventive services for free through their health plans. It will also invest in a prevention and public health fund to encourage prevention and wellness programs.
- Supports health coverage for early retirees. An estimated 177,000 people from Illinois have early retiree coverage through their former employers, but early retiree coverage has eroded over time.⁵ A reinsurance program would stabilize early retiree coverage and provide premium relief to both early retirees and the workers in the firms that provide their health benefits. This could save families up to $1,200 on premiums.
Seniors: Illinois’s 1.8 million Medicare beneficiaries⁶ will benefit as reform:
- Lowers premiums by reducing Medicare’s overpayments to private plans. All Medicare beneficiaries pay the price of excessive overpayments through higher premiums – even the 91 percent of seniors in Illinois who are not enrolled in a Medicare Advantage plan.⁷ A typical couple in traditional Medicare will pay nearly $90 in additional Medicare premiums next year to subsidize these private plans.⁸ Health insurance reform clamps down on these excessive payments.
- Reduces prescription drug spending. Roughly 314,000 Medicare beneficiaries in Illinois hit the “doughnut hole,” or gap in Medicare Part D drug coverage that can cost some seniors an average of $4,080 per year.⁹ Reform legislation will provide a 50 percent discount for brand-name drugs in this coverage gap.
- Covers free preventive services. Currently, seniors in Medicare must pay part of the cost of many preventive services on their own. For a colonoscopy that costs $700, this means that a senior must pay $163¹⁰ – a price that can be prohibitively expensive. Under reform, a senior will not pay anything for that colonoscopy, or for any other recommended preventive service. A senior will also get free annual wellness visits to his or her provider, with a personalized prevention plan to remain in good health.
Small businesses: While small businesses make up 75 percent of Illinois’s businesses, only 41 percent of them offered health coverage benefits in 2008.¹¹ 144,000 small businesses in Illinois could be helped by a small businesses tax credit proposal that makes premiums more affordable.¹² And these small businesses would be exempt from any employer responsibility provisions.
States: State budgets will be relieved from rising health care costs as reform:
- Reduces state employee premiums. Coverage would immediately be expanded to the uninsured, decreasing the amount of uncompensated care costs that gets shifted to the premiums of state employees. For states that provide early retiree health benefits to their state employees, a reinsurance program would provide premium relief of up to $1,200 per family policy per year for all employees.
- Reduces uncompensated care. Right now, providers in Illinois lose $2.2 billion in uncompensated care each year,¹³ which states subsidize at least in part. Instead, under reform, uncompensated care would begin to be reduced immediately as more uninsured people gain coverage.

Health Insurance Reform Provides Stability, Security, and Choice.

Provides relief from rising health care costs.
- Ends the “hidden tax”. The $2.2 billion spent on uncompensated care in Illinois often gets passed along to families in the form of a hidden premium “tax”.¹⁴ By expanding coverage to the uninsured, health insurance reform will eliminate this burden on people who already have insurance.
- Provides premium tax credits. Without reform, individuals and families in Illinois will spend increasing amounts of money out-of-pocket to cover premiums, deductibles, and co-payments, from $14.7 billion today to up to $23.8 billion in 2019.¹⁵ Through health insurance reform, 1 million Illinois residents could be eligible for premium credits to ease the burden of these high costs.¹⁶
Promotes health insurance portability and choice. Health insurance reform establishes a health insurance exchange that will provide individuals with a wide variety of choices and ensure that they will always have coverage, whether they change jobs, lose a job, move or get sick.
- Currently 1.8 million residents of Illinois do not have health insurance, and if nothing is done, by 2019 this population could swell to 2.3 million. The exchange will help the uninsured to obtain needed coverage and will also help the 612,000 Illinois residents who currently purchase insurance in the individual insurance market to get quality coverage at an affordable price.¹⁷
Supports long-term home and community based services: It is estimated that 65 percent of those who are 65 today will spend some time at home in need of long-term care services,¹⁸ which typically cost almost $18,000 per year.¹⁹ This means that 878,000 older residents of Illinois who are aged 55 to 64 today will need home health services after they turn 65²⁰ – services that are not always covered by Medicare, Medicaid, or private health insurance.
- Health insurance reform will create a new voluntary long-term care services insurance program, which will provide a cash benefit to help seniors and people with disabilities obtain services and supports that will enable them to remain in their homes and communities.
- Reform will encourage states to expand their home and community based services through Medicaid by providing enhanced funding, and it will create a program to provide community support services for disabled Medicaid enrollees who would otherwise need to be in a nursing home. These programs could help improve care for many of the 290,000 disabled Medicaid beneficiaries in Illinois.²¹

Health Insurance Reform Improves Quality and Reforms the Delivery System.

Reduces preventable readmissions. The current health care system does not place enough emphasis on improving quality of care. For example, nearly 20 percent of Medicare patients who are discharged from the hospital end up being readmitted within 30 days.²² For Illinois, that’s 119,000 readmissions each year which could potentially be prevented with improved care coordination.²³ Health insurance reform will invest in innovations in primary care and will provide financial incentives to hospitals to better coordinate care at discharge to avoid preventable readmissions.
Lessens Paperwork. Physicians spend on average about 140 hours and $68,000 a year just dealing with health insurance bureaucracy.²⁴ For the 42,510 physicians in Illinois, this adds up to 5.9 million hours and $2.9 billion in costs.²⁵ By simplifying and standardizing paperwork and computerizing medical records, doctors will be able to focus on caring for their patients instead of dealing with bureaucracy.
Incentivizes primary care. Roughly 17,500 doctors in Illinois practice primary care and would qualify for a new 5 to 10 percent payment bonus under health insurance reform.²⁶
Invests in the health primary care. Approximately 2.2 million people, or 17 percent of Illinois’s population, cannot access a primary care provider due to shortages in their communities.²⁷ Health insurance reform will expand and improve programs to increase the number of health care providers, including doctors, nurses, and dentists, especially in rural and other underserved areas.

¹ Garrett B, Hoalan J, Doan L et al. The Cost of Failure to Enact Health Reform: Implications for States. September 2009.
² Behavioral Risk Factor Surveillance System Survey Data. Atlanta, Georgia: U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, 2008.
³ Behavioral Risk Factor Surveillance System Survey Data. Atlanta, Georgia: U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, 2007.
⁴ Behavioral Risk Factor Surveillance System Survey Data. Atlanta, Georgia: U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, 2007.
⁵ Kaiser Family Foundation. 2009 Employer Health Benefits Survey.
⁶ Kaiser State Health Facts. http://www.statehealthfacts.org/comparetable.jsp?ind=353&cat=7.
⁷ Kaiser State Health Facts. http://www.statehealthfacts.org/comparetable.jsp?ind=353&cat=7.
⁸ Rick Foster, Office of the Actuary, Centers for Medicare and Medicaid Services. Letter to Congressman Stark, June 25, 2009.
⁹ Office of the Actuary. Centers for Medicare and Medicaid Services.
¹⁰ Centers for Medicare and Medicaid Services.
¹¹ Center for Financing, Access and Cost Trends, AHRQ, Medical Expenditure Panel Survey - Insurance Component, 2008, Table II.A.2.
¹² Center for Financing, Access and Cost Trends, AHRQ, Medical Expenditure Panel Survey - Insurance Component, 2008.
¹³ Hospital uncompensated care cost is estimated using a GAO model and the Hospital Cost Reports. Total uncompensated care is computed as hospital uncompensated care divided by 63% (Hadley and Holahan’s study on “The Cost of Care for the Uninsured” for Kaiser in 2004 found that hospitals account for 63% of total uncompensated care). Data expressed in 2009 dollars using Centers for Medicare and Medicaid Services, “National Health Expenditure Data.”
¹⁴ Hospital uncompensated care cost is estimated using a GAO model and the Hospital Cost Reports. Total uncompensated care is computed as hospital uncompensated care divided by 63% (Hadley and Holahan’s study on “The Cost of Care for the Uninsured” for Kaiser in 2004 found that hospitals account for 63% of total uncompensated care). Data expressed in 2009 dollars using Centers for Medicare and Medicaid Services, “National Health Expenditure Data.”
¹⁵ Garrett B, Hoalan J, Doan L et al. The Cost of Failure to Enact Health Reform: Implications for States. September 2009.
¹⁶ U.S. Census Bureau, Current Population Survey. Annual Social and Economic Supplements, March 2007 and 2008.
¹⁷ Garrett B, Hoalan J, Doan L et al. The Cost of Failure to Enact Health Reform: Implications for States. September 2009.
¹⁸ Kemper P, Komisar H, Alecxih L. Long-term care over an uncertain future: What can current retirees expect? Inquiry 2005; 42(4): 335-350.
¹⁹ National Clearinghouse for Long-Term Care Information. http://www.longtermcare.gov/LTC/Main_Site/Understanding_Long_Term_Care/Costs_Paying/index.aspx
²⁰ U.S. Census Bureau, Current Population Survey. Annual Social and Economic Supplements, March 2008 and 2009.
²¹ Based on CBOs estimated Federal Outlays. Allocated by state using disabled Medicaid enrollees by state from Kaiser Family Foundation statehealthfacts.org.
²² Jencks SF, Williams MV, Coleman EA. Rehospitalizations among patients in the Medicare fee-for-service program. NEJM 2009;360:1418-28.
²³ Centers for Medicare and Medicaid Services.
²⁴ Casalino LP, Nicholson S, Gans DN, et al. What Does It Cost Physician Practices To Interact With Health Insurance Plans? Health Affairs, July/August 2009; 28(4): w533-w543.
²⁵ American Medical Association, Physicians Professional Data, year of data 2008, copyright 2008: Special Data Request.
²⁶ American Medical Association, Physicians Professional Data, year of data 2008, copyright 2008: Special Data Request.
²⁷ Office of Shortage Designation, Bureau of Health Professions, Health Resources and Services Administration (HRSA), Special Data Request, April 2009.

New regulations standardize appeals process

New regulations announced last week by the Obama administration empower patients to appeal denied claims, while standardizing appeals processes that many states already require.

The appeal regulations, released as an "interim final rule" from the Departments of Health and Human Services (HHS), Labor and the Treasury, outline a two-level process for questioning denied claims. First, patients appeal directly to the insurer, and then – if necessary – to an independent outside review panel. The panel's decision is binding, and health plans must pay the cost of external reviews.

If an insurer's decision is overruled, the health plan must cover the claim in question. People can also use the same process to appeal rescissions (cases in which their policy is cancelled). Humana has offered third-party review of rescissions since 2008.

The regulations take effect for plan years beginning on or after September 23. They do not apply to grandfathered plans – plans in existence before the health care reform law was enacted on March 23, 2010 – but the new rules do apply to self-funded plans, whose members will have "access to a federal external review program," according to an administration fact sheet. Self-funded group health plans must meet the new standards for external review for plan years on or after September 23, 2010. The administration says it will release additional guidance shortly on how such plans must comply.

The administration predicts 41 million people in new employer and individual plans will benefit right away from the new rules. That number is expected to grow to 88 million by 2013.

"The appeals rules today will extend important protections and simplify the system for consumers," said Labor Secretary Hilda Solis in a news release. "And they will ensure that consumers in new health plans have access to internal and external appeals processes that are clearly defined, impartial and designed to ensure that when health care is needed and covered, consumers get it."

States are encouraged to adopt the new standards by July 2011, but for many, that simply means modifying existing appeal statutes. While 44 states currently provide some form of external appeal, the administration's fact sheet says "the laws governing these processes vary greatly and fail to cover millions of Americans. ... The rules issued today will end the patchwork of protections that apply to only some plans in some states, and simplify the system for consumers."

During a transition period for policy years before July 1, 2011, insurers in states with existing external appeal processes are considered in compliance with the consumer protections. HHS will review state laws to determine if they meet the new standards.

Here's what the administration's fact sheet says about internal appeals processes. Plans "must have an internal appeals process that:

Allows consumers to appeal when a health plan denies a claim for a covered service or rescinds coverage;
Gives consumers detailed information about the grounds for the denial of claims or coverage;
Requires plans to notify consumers about their right to appeal and instructs them on how to begin the appeals process;
Ensures a full and fair review of the denial; and
Provides consumers with an expedited appeals process in urgent cases."

For external appeals, the regulations encourage states to adopt standards established by the National Association of Insurance Commissioners (NAIC), which call for many of the same protections. The NAIC standards also charge states with policing external reviewers.

In connection with the new appeal regulations, the administration announced $30 million in grants to help states establish or strengthen consumer assistance offices, which are designed to help people with everything from selecting a plan to filing appeals.

(Not to be used for implementation purposes. Humana's commercial health care reform implementation team is evaluating the HHS regulation. This is intended as an advisory only and does not constitute any legal or tax advice. Consult a legal or tax professional for guidance regarding this regulation.)

The battle over medical-loss ratios

Beginning next year, health insurance companies must spend 85 percent of large group premium dollars and 80 percent of small group premium dollars on medical care – or pay a penalty to customers in the form of premium rebates. But what exactly counts as "medical care?" The reform law gives the National Association of Insurance Commissioners (NAIC) the job of defining what should be included in the definition. NAIC's decision will be just a recommendation – the Department of Health and Human Services gets the final say.

It's a hot topic. The organization Health Care for America Now (HCAN) has accused the health insurance industry of trying to undermine the process of how these medical-loss ratios – or MLRs – will be calculated. An HCAN report says, "If insurers are successful at redefining medical care, they will continue ripping off Americans... They want to expand the definition of allowable medical expenses to include costs that are not directly related to the delivery of care and have not historically been classified as medical. They want to strengthen their ability to maximize profits and skirt incentives to reduce cost."

Robert Zirkelbach of America's Health Insurance Plans called HCAN's rhetoric "a desperate attempt to distract attention away from the fact that these regulations could put at risk important services and benefits that improve the quality of care for millions of patients." Those benefits include disease management, quality improvement, and anti-fraud programs.

State insurance commissioners and business have also weighed in, saying they are concerned that if the definition of medical care is too restrictive, the result could be larger premium increases and insurance companies pulling out of some markets. Read the concerns of some business groups here, and a letter from the Maine insurance commissioner here. Also, see graphics on health plan administrative costs here.

Meanwhile, a report by Weiss Ratings says that large insurance companies are likely to be able to cope with the new MLR rules requiring a higher percentage of spending on medical care. It's small insurers that may not be able to. The report points out that if small insurers fail, that could mean less competition in the marketplace, which could result in higher premiums and less choice.

NAIC is reportedly close to writing the draft recommendations, and may be ready to submit final recommendations to HHS within the next month.

Old business re: reform

On July 21, 129 House Democrats introduced legislation, H.R. 5808, proposing to amend the health reform law to include a government-run health plan. California Rep. Lynn Woolsey is the bill's lead sponsor. H.R. 5808 would require that a public health insurance option be offered through the new health insurance exchanges, which are scheduled to begin operation in 2014. During the first three years, provider payments would be 5 percent higher than Medicare payment rates. The HHS secretary would have authority to adjust payments that are excessive or deficient, on a budget-neutral basis. At this point, however, the bill is not thought to have a very good chance of being passed.
Regarding another reform battle – over the constitutionality of the individual mandate to buy insurance – the New York Times noted that although the Obama administration insisted during the reform debate that the individual mandate was not a tax, now, in court, they are defending the provision as an exercise of the government's "power to lay and collect taxes." Read the article about that change here.
The promotional brochure sent out by the federal government in May touting the benefits of health reform to 40 million Medicare beneficiaries continues to be under attack from the GOP. Here is the recent Republican response, which claims the brochure is "filled with inaccuracies and omissions" and is "misleading," and says it "selectively provided information, and, in some instances, blatantly contradicted conclusions made by Medicare's chief actuary." Health and Human Services Secretary Kathleen Sebelius responded that the brochure is "an important beneficiary tool." In May, House Speaker Nancy Pelosi described the brochure as "really good" and as "an important part of an outreach campaign" to challenge myths about reform.
The Center for Health Transformation's health-care reform wall chart is an amazing work of technical art. Catch a glimpse of it here.

Pressure from the states

Last week, Congress approved an extension of unemployment insurance benefits. But the health-related provisions that used to be part of that bill – increased Medicaid contributions to the states and COBRA-benefit subsidies for individuals who have lost their jobs – were not included this time.

This means individuals who have lost their jobs since June 1 will get no assistance in paying for COBRA benefits, which means many will not be able to stay on their former employers' policies. Individuals who lost their jobs before June 1 got subsidies worth 65 percent of the cost of their COBRA plan.

Meanwhile, state governors and state lawmakers – already looking at big budget deficits because of their smaller revenue streams and an increased number of people who qualify for Medicaid and other state programs – are putting pressure on members of Congress. But there is no plan or timetable right now for taking up either the Medicaid-funding or the COBRA issue.

The National Conference of State Legislatures is meeting this week in Louisville, and in a forum on health reform lawmakers expressed frustration over the situation they're in. One legislative staffer from California told the Louisville Courier-Journal that lawmakers there had hoped to balance a huge deficit by cutting some Medicaid services, but found out that was not allowed under the new health reform law. "Those options are no longer on the table for us," she said.

Pressure from the docs

Last week, the American Medical Association and 47 state medical groups sent insurance companies, including Humana, a letter objecting to the doctor-ranking methods used by some. The letter referred to a RAND study on physician cost profiling that said doctors were assigned to the wrong cost tier 22 percent of the time.

"We have been talking for years about the unreliability of physician profiling," the letter said, "particularly in regards to the Rube Goldbergesque systems used to assess so-called physician efficiency. In light of all this new evidence, it is time to reassess the potential damage these error plagued reports can cause. Patients are being encouraged, and often incentivized, to leave longstanding relationships with physicians they trust, or see certain physicians and physician groups, based on information that RAND has shown to be incorrect..."

The doctor groups asked insurers to subject their methods to outside review, and "to work with the AMA, and the physicians and state medical societies for each state... to formally reevaluate your physician rating program(s) and demonstrate that they are reliable, accurate and valid; drive quality improvement efforts; and address the concerns raised in RAND's research findings."

Humana's view: Humana is already working closely with the National Quality Forum, the AMA and the AQA Alliance to determine the most important measures to track. We do not exclude doctors from our networks solely on the basis of the cost of care – our tools include both cost and quality measures, and do not have the limitations of the methodology described by RAND.

Fighting fraud

Attorney General Eric Holder and Department of Health and Human Services Secretary Kathleen Sebelius are now in the process of leading seven regional health care fraud prevention summits. The first took place in Miami on July 16 and brought together federal, state and local law enforcement partners, beneficiaries, providers and other interested parties to discuss ways to eliminate fraud. Both Sebelius and Holder called the new health reform law "secretly one of the strongest health care anti-fraud bills in American history." Sebelius said, "For years, we tolerated health care fraud. We accepted that with any big enterprise, there was going to be some waste."

She continued, "Those days are over. As we try to bring down skyrocketing costs across our health-care system, we can't afford to ignore the billions of dollars we lose to simple theft. At a time when families are struggling to make every dollar count, we must too."

The reform law provides $350 million in new resources over the next 10 years to fight fraud in the health care system. It toughens sentencing for criminal activity, enhances screenings and enrollment requirements for providers and suppliers, encourages increased sharing of data across government agencies, expands overpayment recovery efforts, and provides greater oversight of private insurance abuses. Read Sebelius' full remarks here.

Health information technology

Two weeks ago, the Department of Health and Human Services released the final regulations on what providers must do to qualify for help paying for the creation of electronic health records. These regulations are different from the initial rules, which were met seven months ago with heavy criticism from hospitals and doctors, who thought they were too stringent.

This time, the rules offer greater flexibility. Doctors and hospitals have more latitude in determining a course for meeting and reporting certain objectives and how they demonstrate meaningful use. The final rule divides the objectives into two groups: a "core" group of required objectives and a "menu set" of procedures from which they may choose any five.

In the 2009 stimulus package, the federal government included $27 billion over the next 10 years to reward doctors and hospitals for installing electronic health systems. Doctors can get up to $44,000 from Medicare and $63,750 from Medicaid. Hospitals will be eligible for at least $2 million from the federal government depending on their size and number of patient discharges.

In 2015, the federal government will start reducing payments to hospitals and doctors that are not using electronic health records. According to HHS Secretary Kathleen Sebelius, only about 20 percent of hospitals and 10 percent of physicians have basic electronic health systems today.

These systems are expected to improve health-care quality, reduce errors and lower costs.

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