Location:
INSURANCE - HEALTH - REFORM;
Scope:
Federal laws/regulations; Program Description;

OLR Research Report


September 17, 2010

 

2010-R-0255

-Revised-

OLR BACKGROUNDER: FEDERAL HEALTH CARE REFORM:

PRIVATE HEALTH INSURANCE PROVISIONS

By: Janet Kaminski Leduc, Senior Attorney

The federal Patient Protection and Affordable Care Act (P.L. 111-148, PPACA) became law on March 23, 2010. PPACA was amended by the Health Care and Education Reconciliation Act (P.L. 111-152, HCERA), which became law on March 30, 2010. This report provides a brief summary of key provisions that affect private health insurance.

Major provisions of PPACA, including a requirement for most Americans to have health insurance, take effect in January 2014. Before then, various consumer-oriented provisions take effect for new and grandfathered plans. A grandfathered plan is, generally, health insurance coverage that existed on March 23, 2010 (PPACA 1251). Plans will lose their grandfather status if they make significant changes that reduce benefits or increase costs to consumers.

Certain details on the law's implementation will not be available until various federal agencies, primarily the Department of Health and Human Services (HHS), issue regulations and guidance.

This report is broken into two main sections: provisions effective before 2014 and provisions effective after 2014. Appendix A outlines a variety of funding opportunities related to private health insurance. Appendix B lists additional background resources.

INSURANCE REFORMS EFFECTIVE IN 2010

High-Risk Pool

By June 21, 2010, PPACA requires the HHS secretary to establish a temporary high-risk pool program (also called the “preexisting condition insurance plan”) to provide health insurance coverage to eligible individuals ( 1101). The program must run from June 21, 2010 until January 1, 2014. A person is eligible for coverage through the high-risk pool if he or she:

1. is a U.S. citizen or is lawfully present in the United States,

2. has been uninsured for at least six months,

3. is not eligible for Medicare or Medicaid, and

4. has a preexisting condition.

The high-risk pool cannot impose a preexisting condition exclusion. The out-of-pocket limit imposed must not be greater than the maximum amount applicable to a high-deductible health plan. (In 2010, the out-of-pocket maximum for such plans is $5,950 for single coverage and $11,900 for family coverage.) The premium rate charged may vary based on age by a factor of no more than four to one and must be established at a standard rate for a standard population.

The federal government has appropriated $5 billion nationally to support the high-risk pool program. Under the program, a state may choose to operate its own pool or have HHS run the pool.

Connecticut's Preexisting Condition Insurance Plan is operated by the Health Reinsurance Association under contract with the Department of Social Services. Medical benefits are coordinated through the UnitedHealthcare provider network. Benefits, premium information, and applications are available at http://www.ct.gov/dss/cwp/view.asp?Q=463668&A=2345.

Reinsurance Program for Early Retiree Coverage

By June 21, 2010, PPACA requires the HHS secretary to establish a temporary reinsurance program to reimburse participating employers a portion of health benefit costs for early retirees, individuals age 55 and

over but not eligible for Medicare, and their spouses and dependents ( 1102). The law allocates $5 billion for this program. The program will operate from June 21, 2010 to January 1, 2014 while funding is available.

HHS will reimburse valid claims that participating employers submit by paying 80% of the costs that exceed $15,000 but are less than $90,000. The amounts will be adjusted annually by the medical component of the Consumer Price Index rounded to the nearest $1,000. Employers must use the reimbursements to reduce premiums and other out-of-pocket costs for plan enrollees.

Small Business Tax Credits

Certain small businesses that purchase health insurance for employees are eligible for a tax credit toward a share of the cost of the insurance ( 1421, as amended by 10105(e)). PPACA provides a tax credit to employers with fewer than 25 full-time equivalent (FTE) employees and average annual wages of less than $50,000. The maximum credit is available to employers with 10 or fewer FTE employees and average annual wages of less than $25,000. The credit is phased out as the (1) number of FTEs increases from 10 to 25 and (2) average wages increase from $25,000 to $50,000. To be eligible, the employer must contribute at least 50% of the total insurance premium cost.

For 2010 through 2013, eligible (1) for-profit employers will receive a small business tax credit of up to 35% of their premium contributions and (2) nonprofit employers will receive a credit of up to 25% of their contributions. Beginning in 2014 the maximum credit is 50% for for-profit employers and 35% for nonprofit employers. The tax credit available beginning in 2014 is available for only two consecutive tax years.

The Internal Revenue Service has issued guidance on the small business tax credit, which is available at http://www.irs.gov/newsroom/article/0,,id=223666,00.html.

Annual Review of Unreasonable Premium Increases

PPACA requires the HHS secretary to establish a process for the annual review of unreasonable increases in premiums for health insurance coverage beginning in 2010 ( 1003). The law appropriates $250 million for a five-year period for this program, which includes grants to states to create and strengthen insurance rate review processes.

HHS announced a first round of grants on June 7, 2010. According to a June 8, 2010 press release from Governor M. Jodi Rell's office, the Office of Policy Management and the Public Health and Insurance departments will jointly prepare the state's application for the funding. Any grant money received must be used to enhance the state's rate review process and make insurance rate information more available to the public and HHS.

Lifetime and Annual Limits

For plan years beginning on and after September 23, 2010, health insurance plans cannot include (1) a lifetime limit on the dollar value of “essential health benefits” or (2) “restricted” annual limits to be determined by the HHS secretary ( 1001, as amended by 10101). (The rules on annual limits do not apply to individual health insurance coverage that is a grandfathered health plan.)

Under HHS' interim final regulations, annual limits on the dollar value of essential health benefits may not be, for plan years beginning on or after:

1. September 23, 2010 but before September 23, 2011, less than $750,000;

2. September 23, 2011 but before September 23, 2012, less than $1.25 million; and

3. September 23, 2012 but before January 1, 2014, less than $2 million (45 CFR 147.126).

So that individuals with certain coverage, including coverage under a limited benefit plan, are not denied access to needed services or experience more than a minimal impact on premiums, the interim final regulations authorize the HHS secretary to establish a program under

which the requirements relating to restricted annual limits may be waived if compliance with the regulations would result in a significant decrease in access to benefits or a significant increase in premiums.

Beginning January 1, 2014, PPACA prohibits annual limits as it does lifetime limits. Thus, insurers will only be permitted to place annual or lifetime limits on covered benefits not considered “essential health benefits.”

PPACA defines “essential health benefits” as:

1. ambulatory patient services;

2. emergency services;

3. hospitalization;

4. maternity and newborn care;

5. mental health and substance use disorder services, including behavioral health treatment;

6. prescription drugs;

7. rehabilitative and habilitative services and devices;

8. laboratory services;

9. preventive and wellness services and chronic disease management; and

10. pediatric services, including oral and vision care ( 1302(b)).

Rescissions

For plan years beginning on and after September 23, 2010, PPACA prohibits coverage rescissions except for instances of fraud or intentional misrepresentation of material fact (e.g., lying on an application for coverage or knowingly omitting material information) ( 1001). “Rescission” refers to retroactively canceling insurance after a policyholder becomes sick or injured. Where cancellation is permissible, an insurer must provide prior notice.

Preventive Health Services

For plan years beginning on and after September 23, 2010, new individual and group health insurance plans must provide full coverage for preventive care and screenings that the U.S. Preventive Services Task Force recommends, including vaccinations and cancer screenings ( 1001). Grandfathered plans, those existing as of March 23, 2010, do not have to comply with this provision.

Children Covered to Age 26

For plan years beginning on and after September 23, 2010, health insurance plans that provide dependent coverage must extend coverage to adult children until age 26, whether they live with their parents, are married, attend college, or are dependents for income tax purposes ( 1001). Prior to 2014, a child may enroll for coverage under a parent's grandfathered plan only if he or she is not eligible for health insurance at his or her place of employment.

Connecticut law already requires coverage of children to age 26, but includes certain restrictions. The law requires coverage under individual health insurance policies to continue at least until the policy anniversary date on or after the date a child:

1. marries;

2. ends Connecticut residency, unless he or she is (a) under age 19 or (b) a full-time student at an accredited college;

3. gets coverage under his or her employer's group health plan; or

4. turns age 26.

It requires group comprehensive health care plans to (1) extend coverage eligibility to unmarried children under age 26 and (2) offer continuation coverage to the end of the month in which the child meets the criteria for losing coverage under an individual policy (listed above) (CGS 38a-497 and 38a-554).

Since the federal law imposes fewer restrictions than state law, it appears that it will preempt state law (i.e., be the prevailing law) with respect to marriage and residency requirements. The Connecticut Insurance Department has completed a comparison of federal and state law on this point and has concluded that, once the federal law is

effective, insurers issuing policies in Connecticut will be allowed to terminate coverage for a child only when that child turns age 26 or becomes covered under a health insurance plan through his or her employment.

Covering Preexisting Conditions

For plan years beginning on and after six months after PPACA's enactment, September 23, 2010, health insurance plans cannot deny enrollment or specific benefits to children under age 19 because of a preexisting condition ( 1251, as amended by 10103 and HCERA 2301). For plan years beginning on and after January 1, 2014, the prohibition is expanded to all children and adults ( 1201, as amended by 10103(e) and HCERA 2301).

A “preexisting condition” is a medical condition that was present before enrolling for health insurance coverage, whether or not any medical advice, diagnosis, care, or treatment was recommended or received before that date.

Medical Loss Ratios

For plan years beginning on and after September 23, 2010, health insurers must report incurred claims, administrative expenses, and earned premiums to the HHS secretary ( 1001, as amended by 10101). Beginning January 1, 2011, an insurer must maintain a medical loss ratio of at least 85% in the group market and 80% in the small group and individual markets. If these ratios are not maintained, the insurers must issue rebates to each enrollee on a pro rata basis. HHS will be issuing regulations to define medical loss ratio, which is generally the amount of each premium dollar spent on medical care.

INSURANCE REFORMS EFFECTIVE IN 2014

Major provisions of the PPACA take effect in 2014. In addition to making qualified health plans available through insurance exchanges and requiring most individuals to purchase insurance (discussed below), the law imposes new requirements on group and individual insurance plans. For plan years beginning on and after January 1, 2014, PPACA:

1. prohibits individual and group plans from excluding coverage for preexisting health conditions;

2. prohibits individual and group plans from basing coverage eligibility on health status-related factors, including medical condition, claims experience, genetic information, and receipt of health care;

3. prohibits group plans from imposing a waiting period (the time that must pass before a person is eligible to use health benefits) of more than 90 days;

4. requires individual and group insurers to offer coverage on a “guaranteed issue” and “guaranteed renewal” basis;

5. requires insurers in the individual and small group markets to develop premiums using “adjusted community rating” rules; and

6. allows premium discounts or rewards based on enrollee participation in wellness programs ( 1201, as amended by 10103 and HCERA 2301).

“Guaranteed issue” is the requirement that an insurer accept every applicant. “Guaranteed renewal” is the requirement that an insurer renew (1) group coverage at the option of the plan sponsor (e.g., employer) and (2) individual coverage at the option of the enrollee.

“Adjusted community rating” prohibits insurers from setting premiums based on health factors. It requires a base rate (community rate) that is adjusted for key, permissible characteristics, such as age. Under PPACA, premiums will be allowed to vary based on family composition, location, age, and tobacco use. The HHS secretary must publish rules relating to permissible age-rating bands.

Essential Health Benefits Package

PPACA also requires health plans that offer insurance coverage in the individual and small group markets to ensure that such coverage includes the essential health benefits package, effective for plan years beginning on and after January 1, 2014 ( 1302). The HHS secretary must define what the essential health benefits package must contain, but PPACA requires that it include at least the following:

1. ambulatory patient services;

2. emergency services;

3. hospitalization;

4. maternity and newborn care;

5. mental health and substance use disorder services, including behavioral health treatment;

6. prescription drugs;

7. rehabilitative and habilitative services and devices;

8. laboratory services;

9. preventive and wellness services and chronic disease management; and

10. pediatric services, including oral and vision care.

The essential health benefits package will provide coverage in four benefit tiers: bronze, silver, gold, or platinum. A qualified health plan (see below) will generally have to provide coverage at one or more of the four levels, even if it does not offer plans on a health benefit exchange. The benefit levels differ in terms of the actuarial value of coverage. A bronze plan will cover 60% of the cost of essential health benefits, silver will cover 70%, gold will cover 80%, and platinum will cover 90%.

PPACA limits the annual out-of-pocket limit that may be imposed on a health plan providing the essential health benefits to no more than the maximum amount applicable to a high-deductible health plan. (In 2010, the out-of-pocket maximum for such plans is $5,950 for single coverage and $11,900 for family coverage.) It also limits the permissible deductible for a small group market health plan to $2,000 for single coverage and $4,000 for family coverage.

PPACA also permits insurers to offer a catastrophic health plan in the individual market for (1) young adults under age 30 and (2) people who are exempt from the individual mandate (discussed below).

Qualified Health Plans

PPACA establishes “qualified health plans”, a new health plan that is subject to a list of requirements related to marketing, choice of providers, essential health benefits, and other matters, whether or not the plan is offered through an exchange ( 1301). An insurer issuing a qualified health plan through an exchange must offer at least one silver and one gold level plan. The insurer must also charge the same premium for a qualified health plan, whether or not it is offered through an exchange. But premium credits and cost-sharing subsidies (discussed below) are available only through the exchanges.

Health Benefit Exchanges

PPACA requires states to create, by 2014, an “American Health Benefit Exchange” and a “Small Business Health Options Program (SHOP) Exchange” ( 1311). These exchanges will be online marketplaces where individuals and small businesses, respectively, will be able to compare and purchase qualified health plans. If a state fails to establish the exchanges or is not making adequate progress in doing so by January 1, 2013, HHS can organize a federally-run exchange or contract directly with a local nonprofit entity to run an exchange within a state or among several states.

Beginning in 2014, individuals may enroll in a qualified health plan through an exchange if they are lawful residents who are not incarcerated. Unauthorized aliens are prohibited from using the exchange.

Until 2016, states can define a small business as one with 100 or fewer employees or 50 or fewer employees. (Connecticut currently defines a small employer as one with 50 or fewer employees, including a self-employed person.) Beginning in 2016, PPACA requires small business to be defined as one with 100 or fewer employees. Beginning in 2017, states may expand the exchange to large employers, but are not required to do so.

PPACA permits a state to merge the two exchanges into one if it has separate resources to assist individuals and employers. A state may also have one or more exchange (“subsidiary exchanges”) if each serves a sufficiently large and geographically distinct area.

PPACA specifies that an exchange must:

1. implement procedures to certify, recertify, and decertify qualified health plans;

2. operate a toll-free hotline;

3. maintain a website through which people can view and compare information on qualified health plans;

4. provide information on eligibility requirements for Medicaid and other state or local programs and, if the exchange determines a person is eligible for a program, enroll them;

5. provide a calculator to determine a person's actual cost of coverage after taking into account any premium credits and cost-sharing subsidies (see below);

6. certify whether people are exempt from the individual mandate excise tax and provide that list to the treasury secretary; and

7. provide employers the names of employees who dropped the employers' coverage and received premium tax credits because the plan was unaffordable.

The HHS secretary, in consultation with the inspector general, is authorized to audit exchanges annually. If misconduct is found, up to 1% of federal payments due to the exchange may be rescinded until corrective action is taken.

Premium Tax Credits

Beginning in 2014, some people purchasing individual coverage through an exchange will be eligible for premium tax credits based on income ( 1401 et seq. as amended by 10105 and HCERA 1001 and 1004). (The advance payment will go directly to the insurer.)

A person with income above 400% of the federal poverty level (FPL) ($43,320 in 2009) is not eligible for the tax credit. A person who is eligible for Medicare, Medicaid, military coverage (TRICARE), an employer-sponsored plan, or a grandfathered plan is also not eligible for the tax credit. However, a person with income up to 400% FPL who is eligible for, but not enrolled in, an employer-sponsored plan will be eligible for the tax credit if (1) his or her premium contribution for the employer's self-only coverage exceeds 9.5% of household income or (2) the plan covers less than 60% of total allowed costs.

PPACA establishes premium caps based on a person's income and on the premium of the second lowest cost silver plan available. If a person's income is between 300% and 400% FPL, he or she will have to pay no more than 9.5% of income in premium. The amount of premium a person has to pay as a percentage of his or her income decreases as the income level decreases, as shown in Table 1. A person may enroll in a higher cost silver plan or a higher level plan (e.g., gold or platinum), but he or she would have to pay any additional premium amount.

Table 1: Maximum Premium as a Percent of Income

Federal Poverty Level

Maximum Premium

as a % of Income

Up to 133%

2%

133.01%

3%

150%

4%

200%

6.3%

250%

8.05%

300% - 400%

9.5%

Source: Congressional Research Service, Report R40942, Private Health Insurance Provisions in the Patient Protection and Affordable Care Act (PPACA).

Cost-Sharing Subsidies

Beginning in January 2014, people who qualify for premium tax credits and are enrolled in a silver plan through an exchange are also eligible for cost-sharing subsidies (i.e., assistance in paying any required out-of-pocket expenses). Exchange plans are required to limit out-of-pocket costs to no more than those permitted under federally qualified high-deductible health plans. In 2010, the out-of-pocket maximum for high-deductible health plans is $5,950 for single coverage and $11,900 for family coverage. The cost-sharing subsidies further reduce the out-of-pocket maximums for qualifying individuals based on income level, as shown in Table 2. Additional cost-sharing subsidies (e.g., reductions in copayments and deductibles) will be provided as necessary to ensure the plan covers the percentages of allowed health care expenses by income level shown in Table 2.

Table 2: Cost-Sharing Subsidies: Out-of-Pocket Maximums and Percentage of Allowed Expenses Paid by Plan, by Income Level

Federal Poverty Level

Out-of-Pocket Maximum Reduced By

Percent of Allowed Health Care Expenses Covered by Plan

Up to 150%

Two-thirds

94%

151% - 200%

Two-thirds

87%

201% - 250%

One-half

73%

251% - 300%

One-half

70%

301% - 400%

One-third

70%

Source: Congressional Research Service, Report R40942, Private Health Insurance Provisions in the Patient Protection and Affordable Care Act (PPACA).

INDIVIDUAL MANDATE AND EMPLOYER REQUIREMENTS

Individual Mandate and Penalties

Beginning in January 2014, PPACA requires individuals, with some exceptions, to maintain a minimum level of health insurance ( 1501 as amended by 10106 and HCERA 1002). People exempt from the mandate include those who (1) have a qualifying religious exemption, (2) are not in the United States lawfully, or (3) are incarcerated.

People who do not comply with the requirement must pay a penalty, with some exceptions. The penalty amount increases overtime and is calculated as the greater of either (1) a percentage of the amount by which household income exceeds the personal exemption for the applicable tax year or (2) a flat dollar amount assessed on each taxpayer and dependent with a family's total penalty capped at 300% of the flat dollar amount. The percentage amount is 1% in 2014, 2% in 2015, and 2.5% thereafter. The annual flat dollar amount is $95 in 2014, $325 in 2015, and $695 thereafter, adjusted for inflation. The flat dollar amount is reduced by one-half for dependents under age 18. Furthermore, the penalty charged cannot exceed the national average premium for a bronze-level qualified health plan.

No penalty will be imposed on:

1. a person whose required premium contribution exceeds 8% of household income,

2. a person who goes without insurance coverage for less than 90 days in a year,

3. members of Indian tribes whose household income is less than the personal exemption amount for the applicable tax year, or

4. anyone who the HHS secretary determines to have had a hardship obtaining insurance under a qualified health plan.

If a person does not pay a required penalty, the Internal Revenue Service will collect the funds by reducing the amount of any future tax refunds.

Employer Requirements and Penalties

PPACA does not explicitly require employers to provide health benefits to employees. Instead, it requires employers with more than 50 FTEs to pay a penalty if they (1) do not provide health benefits or (2) provide coverage that does not meet certain requirements ( 1511 et seq. as amended by 10106 and HCERA 1003). The number of FTEs for a given month is calculated as (1) the number of full-time employees and (2) the aggregate number of hours of service for employees who are not working full time, divided by 120. Full-time employees are those working an average of at least 30 hours a week.

An employer may be subject to a penalty only in relation to its full-time employees.

Employer Does Not Offer Benefits. An employer with at least 50 FTEs that does not offer health benefits to its full-time employees will be subject to a penalty if any full-time employee receives premium tax credits in an exchange plan. Such an employer will have to file a return with the federal government stating that it does not offer coverage, the number of full-time employees, and any other information the HHS secretary requires. The employer must give its employees notice of and information about the exchange.

The employer's penalty for a given month is calculated as the number of full-time employees minus 30, multiplied by one-twelfth of $2,000. After 2014, the penalty amount will be indexed by a premium adjustment percentage for the calendar year.

Employer Offers Benefits. An employer with at least 50 FTEs that offers its employees health benefits will be subject to a penalty if any full-time employee receives premium tax credits in an exchange plan because he or she is not enrolled in the employer's plan and (1) the employee's required premium contribution through the employer's plan for self-only coverage exceeds 9.5% of the employee's household income or (2) the employer's plan pays for less than 60% of covered health care expenses ( 1401 as amended by HCERA 1001).

An employer offering coverage must file a return with the federal government providing the:

1. name of each person provided the opportunity to enroll;

2. length of any waiting period;

3. number of months coverage was available;

4. monthly premium for the lowest cost option;

5. plan's share of covered health care expenses paid for;

6. number of full-time employees;

7. number of months each employee was covered; and

8. other information the HHS secretary requires, if any.

The employer must give their employees notice of and information about the exchange.

Employers with more than 200 full-time employees that offer coverage must automatically enroll new full-time employees in a plan. They must give new employees adequate notice and an opportunity to opt out of the automatic enrollment.

An employer's penalty for a given month is based on each full-time employee who receives a premium tax credit in an exchange plan. The monthly penalty that the employer will pay is one-twelfth of $3,000 for each full-time employee receiving a premium credit. But the total monthly penalty for the employer cannot exceed an amount calculated as the number of full-time employees minus 30, multiplied by one-twelfth of $2,000. After 2014, the penalty amount will be indexed by a premium adjustment percentage for the calendar year.

APPENDIX A: FUNDING OPPORTUNITIES

PPACA includes a number of funding opportunities for states and other entities. The chart below lists the available funding opportunities under PPACA that are related to the private insurance reforms.

Program Name and PPACA Citation

Funding Information

Summary

Health Insurance Consumer Information ( 1002)

$30 million in FY 10

Additional funding in future years will be authorized as necessary

Authorizes grants to states to establish, expand, or provide support for (1) offices of health insurance consumer assistance or (2) health insurance ombudsman programs

Premium Review Grants

( 1003)

$250 million for FYs 10-14

No eligible state will receive less than $1 million or more than $5 million for a grant year

Grants will be determined through an HHS formula allocation

Authorizes grants to states to assist with (1) reviewing and approving premium increases for health insurance coverage and (2) providing information and recommendations to HHS

High Risk Pools ( 1101)

$5 billion

To pay claims and administrative costs of high risk pool for people with preexisting conditions

Temporary Reinsurance Program for Early Retirees

( 1102)

$5 billion

To partially reimburse employers for the cost of health benefits provided to retirees under age 65

Wellness Program Demonstration ( 1201)

Cost neutral

Demonstration project for up to 10 states to provide health promotion programs in the individual market

Health Insurance Exchange – Planning and Establishment Grants

( 1311)

As determined by HHS secretary for each year

Must start no later than March 23, 2011 and no grants will be awarded after January 1, 2015

To support states' planning activities relating to establishing an exchange

The HHS secretary may renew a state's grant if the state is making progress and meets the secretary's benchmarks

Grants for Implementation of Appropriate Enrollment HIT (health information technology) ( 1561)

Not specified

Authorizes grants to state or local governments to develop new, and adapt existing, technology

systems to implement HIT enrollment standards and protocols

APPENDIX B: RESOURCES

● Congressional Research Service, Private Health Insurance Provisions in the Patient Protection and Affordable Care Act (PPACA), R40942: http://www.ncsl.org/documents/health/PrivHlthIns2.pdf

Connecticut Health Care Reform Cabinet: http://www.ct.gov/dph/cwp/view.asp?a=3902&q=459082&dphNav_GID=1981

HealthCare.gov, a federal website run by HHS to provide information on the new law and health plan options in each state: http://www.healthcare.gov/

HealthReform.gov, a federal website that provides news about the new law: http://www.healthreform.gov/

Kaiser Family Foundation Health Reform Gateway: http://healthreform.kff.org/

National Conference of State Legislatures: http://www.ncsl.org/IssuesResearch/Health/FederalHealthCareReform/tabid/17639/Default.aspx?TabId=17639

U.S. Department of Health & Human Services' Office of Consumer Information and Insurance Oversight: http://www.hhs.gov/ociio/regulations/index.html

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