States and Health Care Reform

Health insurance has long been a state affair in the USA. Insurance companies were even exempt from many aspects of federal anti-trust law to better enable state regulators to oversee their activities. Yes, there were federal laws that standardized certain aspects of the business—think HIPAA and COBRA. Think about Medicaid, Medicare and SCHIP while you’re at it. But when it came to health insurance regulation the states reigned supreme.

Enter Congress and President Barack Obama stage left. With the passage of the Patient Protection and Affordable Care Act the federal role in shaping and regulating health insurance shifted significantly to Washington, DC. The Secretary of the Department of Health and Human Services is now arguably the most important health insurance regulator in the country. The Department of Labor and Internal Revenue Service will also play significant roles in determining the future of the nation’s health insurance market and the choices (or lack of choices) Americans have to meet their health care coverage needs. No wonder critics of the PPACA condemn the law as a “federal takeover.”

That the nexus of health plan oversight has shifted to the federal government is beyond argument. The new health care reform law touches everything from how medical plans are designed, priced, offered, maintained and purchased. To conclude that state insurance regulators are shunted to the sideline, however, dangerously overstates the case. In fact, the PPACA invests tremendous flexibility in the states, allowing them to implement the federal requirements in what will likely be very divergent ways.

Rebecca Vesely, writing in Business Insurance, makes this clear in her article describing how two states, Vermont and Florida, are taking strikingly different paths in addressing health care reform. Vermont has taken the first step toward creating a single payer system by 2017. Legislation to set up a five member board to move the state in this direction has already been enacted. And while many details need to be worked out (funding, to name one) and Vermont will need to obtain a waiver from the Centers for Medicare and Medicaid Services to put the package together, the state is further down the road to single payer than any other.

Then there’s Florida where the move is in the opposite direction. That state is seeking to shift virtually all of its Medicaid population from government coverage into private plans starting in July 2012. These private managed care plans would be offered through large health care networks with health plan profits above five percent shared with the state. Whether this approach will achieve the $1.1 billion in first year savings promised by the Governor or not, it has brought new participants into the Medicaid marketplace such as Blue Cross and Blue Shield of Florida.

The Business Insurance article includes a prediction by Boston University law professor Kevin Outterson that the Obama administration will sign off on the waivers Vermont and Florida need to move forward.

What the starkly different approaches to reigning in skyrocketing health care costs being taken by Florida and Vermont demonstrates is the broad flexibility states retain in shaping their own health care destiny. Yes, federal waivers are required, but that would be the case even if the PPACA had never passed—Medicaid is a federal program after all. The CMS web site lists 451 state waivers or demonstration projects in place today. The concept of allowing experimentations and exceptions is ingrained in the Medicaid program just as they are in the Patient Protection and Affordable Care Act. There’s nothing wrong with this any more than having shock absorbers on a car is an indictment of an automobile’s chassis or tires.

The marked variation in approaches being taken by Vermont and Florida are extreme examples of what we’ll see as states implement exchanges and other aspects of the Patient Protection and Affordable Care Act. Of course, whether this is good news or bad news depends a great deal on the state in which you live and work. States that are heavily tilted toward one party or the other (I’m looking at you California and Wisconsin) could make some of their residents yearn for the federal government to step in and keep things in perspective. Given the way the PPACA preserves state powers, however, they are going to be disappointed.

Catching Up With Health Care Reform

I’ve taken a few weeks off from blogging, but health care reform sure hasn’t taken a break. There’s a lot going on, so let’s catch up with some interesting tidbits:

  1. In April the Internal Revenue Service issued guidelines concerning one of the more popular provisions of the new health care reform bill: the tax credit some small employers may use to offset the cost of their health insurance premiums. The credit is available to qualifying group of less than 25 employees, and there’s a cap: the average premium paid for coverage in the business’ state. In other words, the amount of premium paid above these average premiums is not eligible for the credit. The list of average premiums (published by the IRS, but created by the Department of Health and Human Services) is interesting in its own right. For example, employee-only coverage ranges from a low of $4,215 in Idaho to a high of $6,205 in Alaska. (In California, where I hang out, it’s $4,628). Idaho again has the lowest premium for family coverage $9,365), with Massachusetts having the highest family premium ($14,138).
  2. In addition to the original IRS guidelines, the Obama Administration has released additional guidance to the small business tax credit created in the Patient Protection and Affordable Care Act (“PPACA”). There’s some welcome news in the material: dental and vision coverage are eligible for the credit; employers can choose the method of determining hours worked by their employees in whatever way maximizes the tax credit; and the federal credit is in addition to any state health care tax credits or subsidies available to an employer. This document also lists other benefits health care reform delivers to small businesses: the ability to pool together in exchanges; elimination of pre-existing conditions, elimination of the “hidden tax” employers with coverage currently pay (see #5, below) of roughly $1,000 per policy.
  3. You might think all this would be music to ears of small businesses. If so, it’s not enough to satisfy the National Federation of Independent Businesses. The NFIB has signed onto the law suit filed by 20 state attorneys general and governors challenging the constitutionality of the Patient Protection and Affordable Care Act. The key argument of the suit is that the federal government has no power to regulate whether an individual to enter into an intrastate contract. According to the Associated Press article reporting the NFIB’s support of the suit, the government will argue that “a decision to opt out of health insurance is not merely a matter of personal choice. It has consequences for others, since uninsured people will get sick, or have accidents, and someone must pay for their care if they can’t afford it.  Individual decisions to forgo insurance coverage, in the aggregate, substantially affect interstate commerce by shifting costs to health care providers and the public.” Welcome to a gray area of constitutional law. Feel free to argue one side or the other all you want, but there are responsible arguments on both sides. And they’ll be argued before many courts over the next three or four years.
  4. Much of the health care reform debate focused on the pricing practices of health insurance carriers. Now focus is moving towards the pricing practices of medical providers. In Massachusetts, for example, the U.S. Department of Justice is investigating whether one of the state’s hospitals are guilty of violating antitrust laws. According to an editorial in the Boston Globe, the DOJ the inquiry was launched after it was shown that some hospitals are demanding “rates much higher than others … for identical procedures.”  Meanwhile, the same editorial cites a report by Massachusetts Attorney General Martha Coakley that showed that hospitals with “geographic monopolies” use their market clout to push rates up “and contributes to annual increases in insurance premiums that greatly exceed the cost-of-living index.” Nice of someone to notice, isn’t it?
  5. There tends to be a lot of two-sided coins when it comes to health care reform. Take the term “Medical Loss Ratio.” This refers to the percentage of premium dollars spent on medical care and health quality by health plans. The Venture Cyclist blog asked an interesting question, “Why do they call it Medical Loss Ratio? Why is looking after me (or you) called ‘Medical Loss’, when the whole point of a health care system is to look after me (or you)?” He’s got a point. Calling this expense “Wellness Investment” (as the Venture Cyclist suggests), would be as accurate. He goes further, suggesting that what’s not spent on looking after the health of premium payers be termed an “Administrative Loss Ratio.” It reminds me of when folks started referring to cost-shifting (which is the increased cost insured consumers pay to cover expenses incurred by their non-insured neighbors) a “hidden tax.” Words do matter.

Well, that’s enough catch-up for now, but there’s more to come.

IRS Offers Guidance on Health Insurance Tax Credit for Small Businesses

One of the first benefits to arrive from the Patient Protection and Affordable Care Act, the health care reform bills signed into law by President Barack Obama, is the assistance it provides small businesses in providing coverage for their employees. The tax credits are available beginning with the 2010 tax year and can reimburse small employers for as much as 35 percent of their contribution to worker  health insurance premiums for eligible employers. The IRS has recently issued guidelines concerning the small business health care tax credit. The process for determining if the you or your group qualify for the tax credit — and if so, for how much of one — requires some careful calculations (these are IRS guidelines after all). But those calculations are fairly straightforward (as these things go). Which makes spending some time with the IRS FAQs well worth the time.

(Please note: I’m not giving tax advice here nor am I qualified to do so. I’m simply reading through the IRS’ FAQ and commenting on some interesting aspects of the tax credit — as I understand them. Consult with your tax advisor before taking any action).

The full tax credit (35 percent) is available to qualified employers with 10 or fewer workers (not counting the owner and family members on the payroll) whose workers earn, on average, less than $25,000 annually. “Workers” in this context are not physical bodies, but “full-time equivalents” or “FTEs”. Calculating FTEs is simple: a full-time employe is expected to work 2080 hours per year. Simply add up the number of hours actually worked by each employee and divide the total by the number of bodies on the payroll (rounding down to the lowest whole number). Determining the average salary of these employees is easy, too. Take the total annual wages paid by the company and divide it by the number of FTEs. (The IRS health care tax credit FAQ provides examples). That the IRS is not counting business owners in this calculation will significantly increase the number of firms considered to be qualified employers.

Qualified employers with up to 25 FTEs and providing average wages of up to $50,000 are also eligible for a smaller tax credit on health insurance premiums they pay. The formula for determining the dollar amount of their tax credit is in the IRS FAQ.

One interesting twist: the premium paid by the small businesses against which the tax credit is calculated is capped by the average premiums paid by small business the in the state. (The IRS will be publishing a list of those averages later this month). So as noted before, there’s some careful calculations required to determine eligibility and the credit amount.

Still, a subsidy is a subsidy is a subsidy. And for small business owners this is a welcome subsidy. The Kaiser Family Foundation in their 2009 Employer Health Benefits Survey reports that only 46 percent of companies with 3-to-9 employees and 72 percent of firms with 10-to-24 workers offer health insurance coverage. Any uptake in the number of these firms will reduce the number of uninsured in this country. And a 35 percent tax credit could make a big difference in those uptake numbers.

My thanks to Bruce Jugan over at BenefitsCafe  who brought the IRS FAQ to my attention. The IRS will be providing additional details concerning the tax credits by the end of April. But so far, as Mr. Jugan notes, the guidelines they have provided so far “look good.”