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Let’s face it: The health care reform package that became law in March is a mess. It’s even messier than most complex federal legislation, due to the unusual way it became law. Instead of working out details, closing gaps and resolving contradictions in a conference committee, Congress passed the Patient Protection and Affordable Care Act, and then, a few days later, a second measure–the Health Care and Education Reconciliation Act, which made many changes to the first bill. That leaves lawyers and benefits experts plowing through 3,000-plus pages and bouncing back and forth between bills to see what actually stayed in, what was removed and what changed in the reconciliation measure.
Not surprisingly, this has led to a lot of misinformation. Ask two employee benefits lawyers about details of how the bill will impact employers and it’s not unusual to get two different answers. “There’s a morass of confusion,” says Alisa Chestler, of counsel at Baker Donelson.
Among the complications: Most of the law’s key provisions differ for small versus large employers, and some are different for self-insured versus insured plans. Effective dates extend over four years: A few changes take effect this year; several take effect for plan years starting after Sept. 23, 2010; and most of the biggest changes don’t kick in until 2014. Many of the missing details presumably will be fleshed out when the government departments involved–Health and Human Services, Treasury and Labor–start issuing regulations, expected to start trickling out by late summer. But employers facing open enrollment periods this fall need to start making key decisions now, in the absence of clear guidance.
“My message to in-house counsel is, don’t hit the panic button, but you need to get educated because you need to understand what your company’s issues are going to be,” Chestler says.
In that spirit, on the following pages, InsideCounsel takes a look at some of key factors that in-house counsel need to consider as the first deadlines approach.
Proceed with Caution
It became an enduring image of the campaign for health care reform legislation: Barack Obama pointing directly at someone in a skeptical crowd and asserting, “If you like your health care plan, you can keep it!”
That promise, repeated from podiums across the country as the candidate and then president stumped for support for his health care agenda, took shape in the grandfather provision, a key element for employer-based health care plans in the legislation that eventually emerged from Congress.
Essentially, grandfathering is an incentive for employers not to change their health care plans. It says that any plan in effect on March 23, 2010–the date the president signed the Patient Protection and Affordable Health Care Act–is exempt from or may defer meeting some of the requirements that will impact new health care plans, but it also implies that substantive changes in coverage jeopardize that status (see “What’s Excluded”). The exemption covers both insured and self-insured plans. Collectively bargained plans are grandfathered until the last of the union contracts they cover ends; after that, their status is unclear.
“Most employers for the foreseeable future will try to keep within grandfathered status,” says Michael Rosenbaum, a partner at Drinker Biddle & Reath. “It means you are exempt from a lot of changes in the law but not all.”
The problem is that it’s not clear how to do that. Benefits experts who have studied the law agree that adding new employees or family members of current employees will not jeopardize grandfathered status. Beyond that, the law is silent, and the Department of Health and Human Services hasn’t yet issued any guidance or regulations.
“There is a big question mark as to what actions risk losing grandfathered status,” says Scott Macey, of counsel at Covington & Burling and former head of government relations at Aon Consulting. “Companies need to tread carefully in making changes until we have some guidance.”
For example, Rosenbaum thinks it is reasonable to allow changes of insurers or plan administrators, as long as the plan itself remains fundamentally the same. However Alisa Chestler, of counsel at Baker Donelson and former associate general counsel at APS Healthcare, says that remains an open question.
“One would argue that as long as the benefits stay the same, who cares who is processing and paying claims on behalf of the plan,” she says, “But it remains to be addressed by regulation.”
There’s a yin and a yang to the “no changes” imperative: On the one hand, most experts think you will lose grandfathered status if you drop any group of employees covered by your group plan. On the other hand, you don’t have to offer coverage to a category of employees if you weren’t already doing so, says Michael Zolandz, a partner at Sonnenschein Nath & Rosenthal. “If you only offer health care to full-time employees, you don’t have to start offering it to part-time or seasonal workers,” he says.
Even if your health care plan is grandfathered, you aren’t off the hook. Several important provisions apply to both grandfathered and new plans.
In an ideal world, an in-house attorney would wait for the government to issue regulations clarifying the ambiguities in those provisions before meeting with his company’s benefits and tax departments to develop an action plan. But when it comes to health care reform, most companies won’t have the luxury of waiting. Several key changes take effect the first plan year starting after Sept. 23, which for most companies means plan years starting Jan. 1, 2011. For them, open enrollment will be in the fall, making it imperative to start ironing out required changes in order to communicate them to employees.
“In-house counsel need to start looking at plan documents now and thinking about what they need to amend,” says Kevin Henderson, a partner at Bradley Arant Boult Cummings.
One of those changes exemplifies the complexities of the law. It requires employers that offer dependent coverage, whether insured or self-insured, to cover their employees’ adult children, up to age 26, even if the children are not tax dependents. While most group plans have covered unmarried children who were full-time students, and some states had extended the age limit to the mid-20s, the new law includes adult children who are married and those not in school. The only exception is that grandfathered plans need not provide coverage for young adults working for an employer that offers them health care coverage–although they will have to do so starting in 2014.
“This is bowing to the economic reality that a lot of young kids get out of school and don’t get jobs, or don’t have jobs with health care,” says Jennifer Gimler Brady, a partner at Potter Anderson & Corroon.
The impact of that economic reality is reflected in the flurry of questions human resources departments are receiving from anxious parents of graduating seniors, wondering how soon they can get those children on their health plans. Some major insurance companies have announced they will allow parents with individual plans to cover graduating students now to avoid a break in coverage, but employers have the option of waiting for the next plan year. Even President Obama contributed to the confusion, mistakenly saying in an April speech that the extension of employer coverage to adult children starts this year.
In fact, most employers are waiting for their next plan year since regulations weren’t published until May 10. Those regs require spreading the cost among all families in the plan, rather than passing the cost only to those enrolling adult children, unless the plan already bases premiums on the number of children the employee enrolls.
In addition, Henderson points out that it is important for in-house attorneys at companies with self-insured plans to coordinate any such changes with their stop-loss carrier, which covers claims over a certain dollar amount. Such coverage is based on the policy in effect at the beginning of a plan year.
“If you make changes [such as adding adult children] midyear without negotiating with your stop-loss carrier, and a child age 25 has a catastrophic medical condition, the stop-loss carrier may deny coverage,” he says.
On the Horizon
Most of the dramatic changes to the health care system won’t kick in until 2014. That’s when individuals must have health insurance or pay an income tax penalty, and when employers with more than 50 full-time equivalent employees face fines if they don’t offer reasonably priced coverage.
The formula for figuring out just how much impact this will have on any employer is complex. But given the political volatility of health care reform, is it possible that Congress will repeal some major changes before they take effect?
“I wouldn’t count on it,” says Michael Zolandz, a partner at Sonnenschein Nath & Rosenthal. “Congress is too unpredictable. With that said, I find it unlikely the bill will remain static between now and 2014. I think there will be changes, initially at the margins. Beyond that, it’s largely dependent on how this is received and how it polls; how Congress looks after 2010 and how the White House and Congress look after 2012.”
Zolandz thinks the parts of the bill directed at reforming the insurance market–such as prohibiting plans from dropping people who get sick and requiring them to cover people regardless of pre-existing conditions–”aren’t going anywhere easily.”
Therefore, as general counsel, “You’ve got to start building toward the expectation that the scope of coverage will expand and the ability to limit coverage will contract,” he says. “It’s the patient’s bill of rights with teeth, so it’s hard to roll it back.”
At the same time, Zolandz points out there is “a lot of road ahead” before more controversial parts of the bill take effect, such as mandating individuals to have health care coverage and imposing penalties on employers who don’t offer it.
With so much uncertainty, many benefits attorneys advise educating yourself so you can anticipate issues and lobby for changes on provisions that may negatively impact your business.
“As they start to think about it, in-house counsel should identify the things that will be big issues for their companies down the road. They should either take that to a trade association [that is negotiating with government agencies charged with health care reform implementation] or bring them to the agencies themselves,” says Scott Macey, of counsel at Covington & Burling.
The benefits community is anxiously awaiting regulations giving specificity to some of the rather vague requirements for employer-based health care.
“The 800-million-pound pink elephant in the room is the regulations that will interpret all this,” says Gregory Robertson, a partner at Hunton & Williams. “My bet is that they will be tome-like in length. You may end up with a situation that is relatively manageable, and a cost factor that can be reconciled from an employer’s standpoint–or you may end up having to add people whose job it is just to administer the health care program.”
Employers with more than 50 full-time equivalent employees face a $2,000-per-employee fine starting in 2014 if they don’t offer basic health insurance, but Robertson suggests that may end up looking like a bargain.
“There may be employers who say writing a check for $2,000 [per employee] is easier than employing three people to tell me what I have to do,” he says.
While the deadlines for such decisions are down the road, regulations are needed to clarify some of the bill’s widespread immediate effects, such as the rules surrounding requirements for grandfathered plans. Uncertainty on this point is hamstringing many employers.
“I have one client who wants to raise the maximum out-of-pocket cost [for employees] from $3,000 to $4,000,” says Sandra Mills Feingerts, a partner at Fisher & Phillips. “Is that a big change [that will lose the plan its grandfathered status]? I don’t know. You could argue that [the increase tries] to make employees more prudent about what they are spending, but you don’t want to lose grandfathered status.”
Some other major unknowns include the implementation date for a requirement that companies with more than 200 employees automatically enroll new employees in their health care plan, although the employee can choose to opt out. Lifetime dollar limits on “essential benefits” are prohibited but remain to be defined. Uncertainty surrounds the future of collectively bargained plans, which are grandfathered only until the last of the applicable union contracts expire. And more guidance is needed for changes to Health Savings Accounts and Flexible Spending Accounts, which will face new dollar limits as well as exclusions for over-the-counter drug purchases without a doctor’s prescription.
For companies with insured plans, most of the burden for immediate change is on their insurance carriers. Their legal and human resources departments will be tasked primarily with considering how any premium increases will be apportioned, making necessary plan document changes and communicating changes to employees. Companies with self-insured plans face a much bigger task in staying on top of the regulations as they are issued so appropriate plan changes can be implemented.
Those regulations are expected to come in pieces, rolling out over an extended period of time. The message from most benefits lawyers is to stay tuned but stay calm.
“Be patient,” advises Michael Rosenbaum, a partner at Drinker Biddle & Reath. “We will get guidance and we will be able to deal with it.”