On November 20, 2012, the Department of Health and Human Services (“HHS”) issued the first major post-election guidance under the Patient Protection and Affordable Care Act (“PPACA”). The proposed regulations address two important issues facing employers that sponsor group health plans:
- Essential Health Benefits (“EHB”); and
- Minimum Value
ESSENTIAL HEALTH BENEFITS
General Rule
First, an employer-sponsored group health plan may not impose a lifetime or annual limit on the dollar value of EHB beginning in 2014. (In 2013, a plan may have a restricted annual limit on EHB of up to $2,000,000.) This rule does not require the plan to provide EHB. It only prohibits dollar limits on EHBs that are provided under the plan. For example, this rule does not require the plan to cover emergency services. However, if the plan does cover emergency services, it cannot impose any lifetime or annual dollar limits on those benefits.
Second, these new proposed regulations provide that the only employer-sponsored group health plans that must provide all of the EHB are non-grandfathered plans that are insured in the small group market.* Accordingly, plans that fall into any of the following categories are exempt from the requirement to provide EHB:
- Self-insured group health plans
- Grandfathered health plans under PPACA
- Large group market insured plans (generally over 100 employees).
Definition of EHB
Section 1302 of PPACA sets forth ten broad categories of EHB:
- Ambulatory patient services
- Emergency services
- Hospitalization
- Maternity and newborn care
- Mental health and substance use disorder services, including behavioral health treatment
- Prescription drugs
- Rehabilitative and habilitative services and devices
- Laboratory services
- Preventive and wellness services and chronic disease management
- Pediatric services, including oral and vision care
These broad categories do not contain any specific benefits. PPACA states that the Secretary of HHS will define the specific benefits in each category.
Rather than the Secretary of HHS setting uniform EHB standards, these proposed regulations provide that EHB will be determined on a state-by-state basis. States can choose among the following plans to serve as that state’s “base-benchmark plan:”
- The largest health plan by enrollment in any of the three largest small group insurance products
- Any of the largest three employee health benefit plan options by enrollment offered and generally available to state employees in that state
- Any of the largest three national Federal Employees Health Benefits Program (FEHBP) plan options by aggregate enrollment that is offered to all eligible federal employees
- The coverage with the largest insured commercial non-Medicaid enrollment offered by an HMO in the state
The Secretary of HHS will designate a default base-benchmark plan for states that do not make a selection. The default plan is the largest plan by enrollment in the largest product in the state’s small group market.
Once the state selects its base-benchmark plan, that plan will be supplemented as necessary to comply with PPACA. The final product is referred to as the state’s “EHB-benchmark plan.” Accordingly, a state’s EHB-benchmark plan will contain the definition of EHB for any plans offered in that state.
California recently selected the Kaiser Foundation Health Plan, Inc. Small Group HMO as its base-benchmark plan. The proposed regulations include an Appendix A listing the proposed EHB-benchmark plans for all 50 states, including the proposed default selection for states that have not designated a base-benchmark plan.
Compliance Issues for Self-Funded Plans with Participants in Multiple States
While employer-sponsored self-funded plans are not required to provide EHB, these plans still cannot impose lifetime or annual limits on the dollar value of EHB that are covered under the plan. These proposed regulations will therefore require plan sponsors to understand the EHB-benchmark plans in each state in which the group health plan operates. To avoid the need to tailor a large group health plan’s lifetime and annual limit provisions to the benefits of each state’s specific EHB-benchmark plan, we anticipate that plan sponsors will consider the following approaches:
- Lowest Common Denominator
Under this approach, the employer will determine which EHB-benchmark plan in the states in which the group health plan operates offers the most expansive EHB coverage in each EHB category. The employer will then ensure that the group health plan it sponsors does not impose lifetime or annual limits on the dollar value of any benefit under that broadest applicable definition for each category of EHB.
- Remove All Lifetime and Annual Dollar Limits
PPACA’s prohibition on lifetime and annual limits applies only to dollar limits on EHB. Other limits on EHB are permissible. Employers may therefore eliminate dollar limits in favor of alternative limits (e.g., visitation limits) as a method of cost containment that will not require awareness of the state-by-state EHB-benchmark plan benefits.
MINIMUM VALUE
General Rule
The proposed regulations also address the issue of minimum value, which is a component of PPACA’s play or pay provisions. The play or pay (or “employer shared responsibility”) rules require employers with 50 or more full-time employees during the preceding calendar year to offer certain health coverage to all full-time employees and their dependents beginning in 2014 to avoid penalty taxes under Internal Revenue Code § 4980H. There are two penalties under this rule—the “A” Penalty and the “B” Penalty.
The “A” Penalty
The largest play or pay penalty under PPACA applies where the employer fails to offer “minimum essential coverage” to all or substantially all of its full-time employees and their dependents. Minimum essential coverage is any employer-sponsored health coverage that is not a HIPAA excepted benefit. Employers that fail to meet this requirement will be subject to a $2,000 annualized tax penalty multiplied by the total number of full-time employees (minus the first 30 full-time employees) if any full-time employee receives premium credit or cost-sharing assistance on an Exchange.
The “B” Penalty
The smaller play or pay penalty applies where the employer does offer minimum essential coverage to all or substantially all of its full-time employees and their dependents, but such coverage fails to be affordable or does not provide minimum value. Employers that fail this requirement will be subject to a $3,000 annualized tax penalty multiplied only by number of full-time employees who actually receive premium tax credit or cost-sharing assistance on the Exchange.
Affordable Coverage
Coverage is affordable if the employee contribution portion of the premium or cost of coverage does not exceed 9.5% of the employee’s “household income.” IRS Notice 2011-73 established a safe harbor approach for employers to make this affordability determination, because the adjusted gross income of an employee’s household members is generally not known to the employer. Under the safe harbor approach, employers may rely on the employee’s Form W-2 wages as the baseline for determining affordability. In other words, coverage will be deemed affordable if the employee contribution portion of the premium or cost of coverage does not exceed 9.5% of the employee’s Form W-2 wages.
Minimum Value
The plan provides minimum value if its share of the total allowed costs of benefits provided under the plan is at least 60% of such cost. This measurement is referred to as the plan’s actuarial value. The proposed regulations provide three acceptable methods for determining minimum value:
- The minimum value calculator to be made available by HHS and the IRS
- Any other safe harbor approach established by HHS and the IRS
- Certification of minimum value by an actuary where the minimum value calculator and other safe harbor approaches are not appropriate
Minimum Value Calculator
The calculator approach will be based on continuance tables (i.e., a table of claim probabilities) and a standard population reflecting claims data of typical self-insured employer plans. The employer enters information about the plan’s cost sharing into the calculator to determine whether the plan provides minimum value.
Safe Harbor Checklists
This second approach will consist of an array of design-based safe harbor checklists published by HHS and the IRS to determine whether the plan provides minimum value.
Actuary Certification
The final approach is available for an employer-sponsored plan with unusual features that make it unsuitable for the calculator or safe harbor checklists. In this situation, the plan can rely on an actuary’s certification of minimum value. This option is only available where the other approaches are not appropriate, and it must be performed by a member of the American Academy of Actuaries based on an analysis performed in accordance with generally accepted actuarial principles and methodologies.
Health Savings Account (HSA) and Health Reimbursement Arrangement (HRA) Contributions
The proposed regulations also address the inclusion of employer contributions to HSAs and HRAs as part of the minimum value determination. Under the proposed regulations, current year employer HSA contributions and amounts newly made available under an HRA for the current year are accounted for in minimum value calculations. This is welcome news for plan sponsors of high deductible health plans (HDHPs) that utilize HSAs or for plan sponsors that utilize HRAs as a consumer-driven method of defraying participants’ deductibles and other out-of-pocket expenses.
CONCLUSION
These proposed regulations issued by HHS to address EHB and minimum value determinations are among the first in what we anticipate to be a large volume of new regulations and other administrative guidance that will be released over the next few months. There are still a number of major areas in PPACA that require further implementing guidance as we near 2014, when much of PPACA will take full effect. We will continue to keep you updated on new guidance as it is issued in the future.
*Note: Qualified Health Plans (“QHP”) must also provide all of the EHB. QHPs are insurance policies offered on the state or federally facilitated Exchange. Individuals and small employers can purchase QHPs beginning in 2014. Large employers (generally over 100 employees) are not eligible to purchase coverage through an exchange until 2017.
Copyright © 2012 Trucker Huss. All rights reserved. This newsletter is published as an information source for our clients and colleagues. The articles appearing in it are current as of the date shown above, are general in nature and are not the substitute for legal advice or opinion in a particular case.
