Health care costs, and consequently employee health benefits costs, have been increasing at an alarming rate for nearly a decade. Though cost increases had seemed to be leveling out based on 2009 data, cost increases actually jumped in 2010 and are expected to rise further in 2011. Avoiding rising health care costs is nearly impossible, but you can learn about why they continue to rise and what you can do to manage costs for your organization and your employees.

The next few pages will discuss the latest health care cost figures, the factors leading to nearly a decade of unprecedented rate hikes, and some strategies that firms around the United States are implementing to help manage costs. Also included is a prescription drug report released each year by Kaiser Family Foundation.

National Health Care Cost and Renewal Rate Projections

Overall national health care costs have been skyrocketing for over a decade. Exhibit 1A, right, depicts the percent change in average annual health care cost increases from 2003 to 2011. Cost increases leveled off between 2007 and 2009, and last year’s Hewitt Health Value Initiatives had projected 2010’s increase to remain at 6 percent. However, cost increases in 2010 actually jumped to 6.9 percent, and Hewitt expects an even larger spike in 2011.

The overall cost of health care has a direct impact on the rates employers pay for employee health benefits. However, health benefits costs have varied widely across the country for the last several years, hitting some metropolitan areas much harder than others. Exhibit 1B, right, illustrates health care cost increases in major metropolitan areas in 2010.

Experts expect significant annual increases in health care costs to continue. According to the 2010 Hewitt Health Value Initiative, the average cost of health care benefits for active employees rose to $9,028 per year in 2010 and is expected to grow to $9,821 in 2011. Employers are also passing more of these costs onto employees, as the percentage that employees are asked to pay is also increasing. In 2010 employees paid an annual average of $1,966 (21.8 percent of the total cost of their coverage); this figure is projected to grow to $2,209 in 2011 (22.5 percent of the total cost).

Exhibit 2A, below, shows the average total health benefit costs for active employees for the years 2004 to 2011. Exhibit 2B below depicts the 2010 health care costs per employee in U.S. major metropolitan areas.

Factors Leading to Increased Health Care Costs

                Why are U.S. health care costs skyrocketing? Several market conditions working in tandem have lead to a decade of unrelenting increases. Understanding why your annual health plan renewal rates may be significantly higher than the previous year is the key to formulating alternatives and solutions to your particular plan’s challenges. It is also important for educating your employees about the reasons behind any plan or contribution changes you may decide to introduce.

Several factors that have contributed to climbing health care costs over the past decade include:

1. Demographics
2. Expansion of health care providers
3. Consolidation of managed care companies
4. Political environment/government regulation
5. Increased utilization and consumer demand
6. New medical technology
7. Weakening of managed care system
8. Health care spending and medical cost inflation
9. Increased prescription drug costs

In addition, Hewitt has identified a couple specific factors that are contributing to current 2010 health care costs and projected 2011 figures that are the highest we’ve seen in five years:

An Aging Population

     Not only is the American population aging, but workforces are as well. This is partially due to slower hiring levels recently, which has resulted in older employee populations. Because older workers are more prone to health problems, companies are seeing a rise in chronic conditions, costly medical problems and the use of prescription drugs, plus an increase in the amount and frequency of catastrophic claims.

Health Care Reform Implications

     It is too early to know exactly what impact health care reform will have on health care costs in the long run, but there are some clearer early implications. There are several provisions going into effect that are expected to raise costs, at least in the short term, including:

1. Covering dependents up to age 26
2. Elimination of certain lifetime and annual limits
3. Required coverage of preventive services
4. Prohibiting coverage rescissions
5. No pre-existing condition exclusions for children

What Can Employers Do?

                You and other employers are undoubtedly trying to determine how to keep accelerating health plan rates from having debilitating repercussions on your organization. After years of trying to absorb most of the costs because of attraction and retention issues, many firms are now trying to attack the root causes of rising costs with sustained, systemic changes. Especially with the uncertainty of the overall impact of health care reform, many employers are looking at strategies to manage costs both in the short and long term. 

Using Health Care Data to Drive Strategy

A separate Hewitt Associates survey found that employers cite using health care data to make strategic health plan decisions as their top cost-cutting strategy. However, the survey also discussed the importance of going beyond just accessing data, and understanding how to apply it to make decisions and implement strategic changes.

Greater Emphasis on Consumer-Driven Plans

An increasingly popular trend in the health care industry is the adoption of consumer-driven health plans, typically involving and HRA or HSA. These plans offer cost-savings for the employer, but also benefit the employee as well. With proper education, employees can become smarter health care consumers, which can save them and the company money.

Promoting Employee Health and Wellness

Health and wellness initiatives have become another popular health care cost management strategy in recent years, and remain one of employers’ top cost containment strategies. As more and more employers are realizing, improving employee health and wellness can effectively lower health care costs and increase productivity. As this trend continues, many employers are creating more comprehensive programs, targeting specific diseases and including dependents in the initiatives.

Incentives for participation are growing in popularity as well (including incentives for dependents), but it is important that effective incentives are used. Rewarding employees for participating in a program or meeting a health goal is much more impactful than incentivizing simply the completion of a health risk assessment. Many employers are instituting penalties for nonparticipation as well, often in the form of higher premiums or additional employee cost-sharing. It is also important to note that successful wellness and disease management initiatives are dependent on quality employee education and communication techniques.

Increased Employee Cost-Sharing

Though companies will continue to shoulder the burden of increasing health care costs, many are choosing to pass more and more costs to employees. These are a few of the strategies for doing so:

1. Moving from fixed dollar copayments to a coinsurance model (employee pays a percentage of costs for each health care service)
2. Increasing deductibles and out-of-pocket maximums
3. Increasing employee cost-sharing for non-network providers
4. Offering consumer-driven plans, either as an option along with a traditional plan, or as the primary plan

Dependent Management Strategies

Employers are changing the way the manage dependents and finding huge cost-saving opportunities. Dependent eligibility audits can save companies huge amounts of money, as studies show that an average of 3 to 12 percent of dependents are actually not eligible to be on the health plan. Many companies are also shifting to a per-member premium structure, rather than just “individual” and “family.” In addition, an emerging trend is companies requiring spouses to pay more in premium or assessing a surcharge, to encourage spouses to enroll in their own employer’s plan.

Strategic Vendor Management

A more recent trend involves companies more aggressively evaluating their vendor relationships and replacing or eliminating those vendors not producing measurable results. Employers are also increasingly looking for opportunities to consolidate vendor relationships to get the most for their money.

 Long-Term Solutions vs. Short-Term Fixes

                Particularly due to the financial pressure many employers are under, short-term tactics like employee cost-sharing are still prevalent. However, employers are increasingly exploring multi-year plans and longer-term initiatives to improve overall employee health and strategically manage costs into the future. Especially in the wake of health care reform, many employers are becoming more concerned with developing strategies that have sustainability in keeping costs down.

Which Solution is Right for You?

Should you pass costs on to employees at the risk of losing some of them? Or, should you try to manage costs in some of the other ways discussed in this report? Ultimately, it is a decision that you need to come to through thoughtful and detailed analysis of your plans and with the advice of your broker-consultant.

                Below are some questions you can address in order to begin developing an effective strategy that is right for your organization.

1. Is our program structure, plan design and pricing appropriate?
2. Do we have the right vendors, services, contracting and funding in place?
3. Are our employee communication efforts appropriate and effective – especially in regards to employee health and wellness and/or consumerism?
4. Do we have effective disease management and wellness programs for our employees?
5. Do our pricing and plan design features encourage cost-conscious behavior on the part of our employees?
6. Are we thinking about long-term solutions rather than simply quick fixes for this year?

What Should I Tell My Employees?

It’s a fact: health care costs and health benefit costs continue to increase at exceptionally high rates from year to year. You want to continue to offer valuable health benefits to your current and future employees, and you want those benefits to help you attract and retain quality employees. However, you also need to consider the cost-effectiveness of those benefits at a time when hefty rate hikes are the norm, rather than the exception.

The information contained in this report is designed to help you understand why your renewal rates may have increased, and to consequently help you educate your employees about the reasons for any plan or contribution changes you may have to make. If your employees understand current trends in the health care industry, they will be more supportive of changes and will appreciate the resources required to provide them with their health care benefits. 

By JANET ADAMY

Sandy Chung is grappling with a new kind of request at her pediatrics office in Fairfax, Va.: prescriptions for aspirin and diaper-rash cream.

Patients are demanding doctors’ orders for over-the-counter products because of a provision in the health-care overhaul that slipped past nearly everyone’s radar. It says people who want a tax break to buy such items with what’s known as flexible-spending accounts need to get a prescription first.

The result is that Americans are visiting their doctors before making a trip to the drugstore, hoping their physician will help them out by writing the prescription. The new requirements create not only an added burden for doctors, but also new complications for retailers and pharmacies.

“It drives up the cost of health care as opposed to reducing it,” says Dr. Chung, who rejected much of a 10-item request from a mother of four that included pain relievers and children’s cold medicine.

Though the new rules on over-the-counter drugs amount to a small part of the massive overhaul of the health-care system, the unintended side effects show how difficult it can be to predict how such game-changing legislation will play out in the real world.

Some doctors, irked by the paperwork and worried about lawsuits, are balking at writing the new prescriptions. Pharmacists and retailers say the changes mean they have to apply a personalized label on some 15,000 different everyday products for customers paying with certain debit cards.

The over-the-counter provision isn’t the only part of the health-care law that has defied expectations.

Health-policy experts predicted that new insurance pools for high-risk patients would attract so many expensive enrollees that funding would be quickly exhausted. In fact, enrollment is running at just 6% of expectations, partly because of high premiums.

A provision preventing insurers from denying coverage to children with pre-existing health conditions prompted insurers in dozens of states to stop selling child-only policies altogether.

And a piece of the law designed to centralize patient care by encouraging health-care providers to collaborate is running into antitrust concerns from regulators.

To the handful of congressional aides who came up with the idea to limit tax breaks on over-the-counter drugs, it was supposed to be a minor tweak to raise revenue and to discourage wasteful spending on health products.

Some 33 million Americans are in families that have flexible-spending accounts, which are funded through payroll deductions and allow consumers to pay for health expenses with tax-free dollars.

The change also applies to health savings accounts designed for consumers in insurance plans with high deductibles. If fewer people use these accounts to buy drugs, the government gets more tax revenue. Retail sales of over-the-counter medicines amounted to about $17 billion in 2010, not counting sales at Wal-Mart Stores Inc., according to Nielsen Co.

What the law’s writers didn’t anticipate was the determination of some people to squeeze every last drop of tax savings from their accounts.

When Dianna Greer of San Diego and her son came down with a cold, she wanted a $13 bottle of NyQuil and daytime cold medicine—and she wanted to pay for it by tapping the $5,000 in her flexible-spending account.

Ms. Greer says her doctor wouldn’t write prescriptions without an office visit, so she went without the drugs. Later, she got the prescriptions from a doctor at the emergency room, where she was diagnosed with pneumonia.

“It feels like you’re begging for something when it’s your money,” she says.

Much of the health law, which passed last year despite overwhelming opposition by Republicans, doesn’t take effect until 2014. The nonpartisan Congressional Budget Office has projected that an additional 32 million Americans will get insurance, and the law has already extended tax credits to small businesses for buying insurance and allowed many parents to keep their children on their health plan until their 26th birthday.

But opponents say it costs too much and gives the federal government too much control over health care. Republicans in the House voted this year to repeal the law, though the measure died in the Senate. Opponents are trying to get it struck down in the courts, a fight that is likely to last until at least next year.

As that larger battle plays out, the over-the-counter provision is emerging as a top target for change. Republicans in both the House and Senate have introduced legislation to repeal it and return to the old system. The largest chain drugstore lobbying group is backing the effort, arguing that the new rules are inefficient and limit access to the medicines. Asked whether she would support such legislation, Kathleen Sebelius, secretary of Health and Human Services, said: “I’d take a look at it.”

A spokeswoman for the Treasury Department, which oversees tax policy, says the provision “enjoyed bipartisan support in Congress, but, as the president said, anything can be improved, and we are always willing to listen to ideas about how to make health care better and more affordable.”

Tax breaks for over-the-counter drugs date to 2003, as popular drugs like the allergy medicine Claritin began switching to over-the-counter status. The Internal Revenue Service loosened the rules on flexible-spending accounts so consumers could use them to buy thousands of nonprescription medications. The tax-free dollars can also go for insurance co-payments, eyeglasses and other out-of-pocket health costs.

Critics say the accounts encourage overconsumption of medical services. Since consumers typically must forfeit unused funds by year’s end, they often ended up scrambling in December to drain their funds by loading up on aspirin, antacid and the like.

“The entire flexible-spending account thing is a waste of our taxpayer dollars,” says Jonathan Gruber, an economics professor at the Massachusetts Institute of Technology and a former paid consultant on the health law to the Department of Health and Human Services. “If you’re going to scale it back, this is a natural place to start.” (Another part of the law limits the amount consumers can save in flexible-spending accounts to $2,500 a year, starting in 2013.)

Peeling back tax breaks for health plans was on the table in 2009 when lawmakers began drafting the health overhaul. Inside the Senate Finance Committee, aides to three Democratic and three Republican senators hashed out the blueprint for what ultimately became the final bill.

Some big ideas—like limiting the tax break for employer-sponsored health insurance—lacked support, so committee aides lowered their sights. Making people pay the full price for over-the-counter medicines seemed like a way to reduce wasteful spending and generate money for the law’s main goal: expanding health insurance to nearly every American.

An objection came from William Pewen, senior health-policy adviser to Maine Republican Sen. Olympia Snowe.

He believed the tax-free treatment could lower health costs and thought everyone should have access to a flexible-spending account. He told the group that he takes over-the-counter Prilosec, a heartburn medication, which meant he didn’t need a more expensive prescription drug.

“I didn’t want to see us set up perverse incentives for people to use more costly drugs than they needed,” Mr. Pewen says.

He proposed a compromise that he concedes “was not the ideal solution.” People could spend tax-free dollars on over-the-counter drugs, but only if they got a doctor’s prescription. It wasn’t exactly a new idea: Medicaid, the federal-state program for the poor, already covers some over-the-counter drugs if they are prescribed.

Congress’s number-crunchers estimated the change would generate $5 billion over a decade. Hardly anyone noticed it, even as it stayed in the bill through passage in March 2010.

Only after the president’s signature was dry did the American Medical Association realize what had happened and send a letter to the government warning of unintended consequences, including more office visits and extra paperwork.

Sure enough, when the change took effect Jan. 1, patients began bringing lists of over-the-counter drugs to office visits and also requesting over-the-counter prescriptions by phone, doctors says.

While it may not be worth the trouble for some patients, the savings can add up for those with chronic conditions, especially if the doctor writes multiple refills. A survey late last year by Nielsen found that nearly half of consumers with flexible-spending accounts would request the prescriptions as a result of the changes.

Among those most upset by the changes are pediatricians, who say that small sizes of children’s medicines and multiple children per family make the requests particularly burdensome.

“It’s an amazingly disruptive policy,” says Jesse Hackell, a Pomona, N.Y., pediatrician who is charging $5 to fill such requests via phone. “I am now doing the IRS’s work, and that’s what I resent most.”

After writing two over-the-counter prescriptions free of charge in January, pediatrician Richard Schwartz of Vienna, Va., says he began imposing a $10 surcharge for each prescription, on top of the office co-payment. That is likely to discourage some patients from asking for a prescription, as the surcharge could outweigh the tax savings from using a flexible-spending account.

Doctors are also concerned about malpractice lawsuits, since a prescription potentially puts them on the hook for any problems a patient suffers from over-the-counter drugs.

Some malpractice insurers are urging doctors not to write any prescription without seeing the patient in person, says Lawrence Smarr, president of the Physician Insurers Association of America, which represents malpractice insurance providers.

Retailers and pharmacies, meanwhile, say another aspect of the change caught them flat-footed. Many flexible-spending accounts come with a debit card, making it easy for consumers to draw down the money in the accounts when they shop at a pharmacy. But under the original IRS guidance, people couldn’t use those cards for the prescribed over-the-counter medications.

An industry group representing Wal-Mart, CVS Caremark Corp., Visa Inc. and other large corporations warned that could temporarily halt use of the debit cards for any pharmacy purchase. The IRS eventually decided the cards could be used—as long as the pharmacist labels and processes the over-the-counter item exactly like a prescription.

That had another unintended effect. Thousands of over-the-counter products now must pass behind the pharmacist’s counter when the customer pays with the special debit card.

“At the moment it’s considered a prescription, it’s subject to all the regulatory requirements,” says Mike DeAngelis, a spokesman for CVS. “It runs through our quality assurance process. We have to generate a label.” The chain also puts each of the prescribed drugs in an individual paper bag.

Despite the hopes of Mr. Pewen in the Senate, some consumers think they will be better off getting a prescription-only drug in place of an over-the-counter medication.

In the Nielsen survey, 37% of flexible-spending account users said they would ask their doctor about prescription drugs that could replace their over-the-counter medicines.

Dr. Chung, the pediatrician in Fairfax, Va., says she recently imposed a policy under which her office writes prescriptions only for chronic conditions, like allergies. That deflects pleas from parents wanting a quick Rx for their child’s cold, but she’s worried about pushback. “It makes us look like the bad guy,” she says.

Adamy, J. (2011, March 9). In Health Law, Rx for Trouble. Retrieved from The Wall Street Journal: http://www.facebook.com/l.php?u=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052748704692904576166554110739560.html%3Fmod%3DWSJ_myyahoo_module&h=5d867

On March 23, 2010, President Obama signed historic health care reform legislation – the Patient Protection and Affordable Care Act (PPACA) – into law. Even before its enactment, controversy surrounded the health care reform law. The law continues to be at the center of partisan debate, especially with the recent changes in Washington.

In November 2010, Republicans took control of the House of Representatives. As promised, efforts to repeal the health care reform law followed soon after. So far, these efforts have not been successful, facing the challenge of a Democrat-controlled Senate and the promise of a veto by President Obama.

Benefit Logic, Inc.  is monitoring the health care reform debate and will alert you to any significant changes in the law.  

Attempts to Repeal the Health Care Reform Law

In January, the House passed repeal legislation by a vote of 245 to 189, with three Democrats crossing the aisle to vote with their Republican colleagues. The Senate also voted on repeal in February. However, that attempt was defeated, with Senators voting along party lines. Sixty votes were required for repeal; the measure failed 47 to 51.

It is possible that further attempts to repeal the health care reform law will be introduced in Congress. If any of these attempts are successful, Benefit Logic, Inc. will provide you with information on the status of the law. 

Potential Health Care Reform Changes

Because full repeal of the health care reform law will be difficult, Republicans have indicated that they will use other strategies to prevent the law from being fully implemented in its current form. These strategies include replacing, rather than repealing, parts of the law, or repealing the law “piece by piece,” using approaches like blocking funding or regulations.  

Provisions of the law that may be revised or repealed include:

1. The requirement for businesses to report payments in excess of $600 on a Form 1099;
2. The employer responsibility provisions, which provide that employers can face penalties for not providing a certain level of health coverage to employees;
3. The individual responsibility requirement, which imposes penalties on individuals who do not obtain coverage;
4. The Cadillac Plan tax on high-cost, employer-sponsored health plans;
5. The tax on manufacturers of medical devices; and
6. Cuts to Medicare.

Republicans have also suggested changes to the planned health insurance exchanges, which will take effect in 2014, to give states more power in designing the exchanges. However, members of the GOP have also said that they may want to keep some of the law’s provisions that are popular with consumers. Some experts have warned that keeping some parts of the law while repealing others may not be practical. 

Democrats are standing behind the health care package and some exit polls show that the public is split on whether health care reform should be repealed. However, party leaders, such as President Obama and Senate Majority Leader Harry Reid (D-Nevada) have indicated a willingness to revise some portions of the law, especially if changes will bring faster and more effective reform to the health care system.

What’s Next?

Despite the various attempts to repeal the law, and potential future changes, the health care reform law as we know it is the law. Employers and health plan sponsors should make sure they are implementing the requirements as they become effective. If any changes are made to parts of the law that have already taken effect, there will likely be time for employers and plan sponsors to put changes into place.

 Benefit Logic, Inc. will continue to update you on developments related to the health care reform legislation.

The Court Ruling

On January 31, 2011, a federal court in Florida struck down the entire health care reform law, ruling that Congress does not have the authority to require individuals to buy insurance. Judge Roger Vinson stated that a refusal to buy health insurance should not be considered “economic activity” that can be regulated by Congress under the Constitution’s commerce clause. He also ruled that Congress did not have authority to pass the law under its power to make all laws that are “necessary and proper” in carrying out its constitutional powers.

The Florida court also addressed an argument that the health care reform law’s expansion of Medicaid infringed on state sovereignty. However, the court agreed with the federal government on this issue, holding that the law does not infringe on state’s rights because state participation in Medicaid is optional.

This court went further than others that have reviewed the law, holding that the individual insurance mandate cannot be separated from the rest of the law, so the entire statute is invalid. Judge Roger Vinson stated that the law has “too many moving parts” to be able to distinguish the pieces that can stand alone.

Despite this ruling, the court did not grant the plaintiffs’ request for an injunction to prevent the law from being implemented while the case is appealed. This part of the judge’s decision has led to some controversy about the effects of the court’s ruling.

Other Legal Challenges

A number of legal challenges have been filed in various federal courts since the health care reform law was passed in March 2010. There are a total of 25 lawsuits in progress, including the Florida case. One federal court in Virginia ruled that the individual mandate portion of the law is unconstitutional. However, that court did not address other portions of the law and also did not grant an injunction to stop the law’s implementation. Two other federal courts – one in Michigan and another Virginia court – have found that the law is constitutional.

What’s Next?

In this case, 26 states have joined together to challenge the law. The uncertainty about the effect of the judge’s ruling raises questions about those states’ obligations to implement certain health care reform requirements. Attorneys for the states have said that things like the individual mandate and the requirement to establish health insurance exchanges, which take effect in 2014, are “dead with regard to these 26 states.” However, government officials are of the opposite opinion, stating that implementation of the law will proceed as planned.

The Justice Department has announced that it will appeal the decision to the U.S. Court of Appeals for the 11^th Circuit. It is also analyzing the steps that may be necessary to continue implementing the law. Ultimately, the constitutionality of the health care reform law is expected to be settled by the Supreme Court.

Benefit Logic will continue to monitor the status of the health care reform law and its impact on you and your employees.

This Benefit Logic Legislative Brief is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.

Executive Summary

The Patient Protection and Affordable Care Act (PPACA) enacted in 2010 includes employer and individual responsibility requirements for health coverage. Certain employers will face penalties if one or more of their full-time employees obtain a premium credit through an exchange, regardless of whether that employer provides health insurance. The individual requirement requires individuals to obtain coverage for themselves and their family members. Both requirements are set to become effective Jan. 1, 2014.

This Benefit Logic, Inc. Legislative Brief will provide an overview of the employer and individual responsibility requirements.

Large Employer Pay or Play Rules

Employer Penalty – For Employers Not Offering Coverage

Beginning in 2014, individuals who are not offered employer-sponsored coverage and who are not eligible for Medicaid or other programs may be eligible for premium credits for coverage through an exchange. Generally, these individuals will have income between 138 percent and 400 percent of the federal poverty level (FPL).

Large employers (those with at least 50 full-time equivalent employees) that do not offer coverage will be subject to a penalty only if any of their full-time employees receives a premium credit toward an exchange plan. In 2014, the monthly penalty assessed on employers that do not offer coverage will be equal to the number of full-time employees (minus 30), multiplied by 1/12 of $2,000 for any applicable month.

Employer Penalty – For Employers Offering Coverage

Individuals who are offered employer-sponsored coverage can only obtain premium credits for exchange coverage if, in addition to the FPL limits above, they are also not enrolled in their employer’s coverage, and their employer’s coverage meets either of the following criteria: it is not “affordable” or does not provide “minimum value.”  Specifically, the plan will not be affordable or provide minimum value if the individual’s required contribution toward the plan premium for self only coverage exceeds 9.5 percent of their household income OR the plan pays for less than 60 percent, on average, of covered health expenses.

Large employers that do offer coverage may still be subject to penalties only if at least one full-time employee obtains a premium credit in an exchange, as described above. In 2014, the monthly penalty assessed on an employer for each full-time employee who receives a premium credit will be 1/12 of $3,000 for any applicable month. However the total penalty for an employer would be limited to the total number of the company’s full-time employees (minus 30), multiplied by 1/12 of $2,000 for any applicable month.

Individual Requirement and Penalties

Employees may satisfy the individual mandate by purchasing acceptable coverage through their workplace or an insurance exchange. If coverage is not purchased, the individual penalty will be imposed. This penalty is the greater of 1.0 percent of AGI or $95 per person in 2014, 2.0 percent or $325 per person in 2015, 2.5 percent or $695 per person in 2016. The family penalty cap is 300 percent of the individual penalty, or $2,100 by 2016. The penalty for dependent children without coverage is half the amounts listed above. Exemptions to mandatory coverage and penalties apply if the premium for an employee’s employer-provided health coverage is more than 8 percent of the employee’s modified household income, and to individuals exempt from filing an income tax return, members of Indian tribes, and those with short coverage gaps and hardships. 

Determining If an Employer Will Pay a Penalty

Health care reform changes the rules for reimbursement of over-the-counter drugs through HSAs, HRAs, MSAs and FSAs. These questions and answers from the IRS clarify the new rules.

Q. How are the rules changing for reimbursing the cost of over-the-counter medicines and drugs from health flexible spending arrangements (health FSAs) and health reimbursement arrangements (HRAs)? 

A. Section 9003 of the Affordable Care Act established a new uniform standard for medical expenses. Effective Jan. 1, 2011, distributions from health FSAs and HRAs will be allowed to reimburse the cost of over-the-counter medicines or drugs only if they are purchased with a prescription. This new rule does not apply to reimbursements for the cost of insulin, which will continue to be permitted without a prescription.

Q. How are the rules changing for distributions from health savings accounts (HSAs) and Archer Medical Savings Accounts (Archer MSAs) that are used to reimburse the cost of over-the-counter medicines and drugs?

A. In accordance with Section 9003 of the Affordable Care Act, only prescribed medicines or drugs (including over-the-counter medicines and drugs that are prescribed) and insulin (even if purchased without a prescription) will be considered qualifying medical expenses and subject to preferred tax treatment.

Q. When will the changes become effective?

A. The changes are effective for purchases of over-the-counter medicines and drugs without a prescription after Dec. 31, 2010. The changes do not affect purchases of over-the-counter medicines and drugs in 2010, even if they are reimbursed after Dec. 31, 2010.

Q. How do I prove that I have purchased an over-the-counter medicine or drug with a prescription so that I can get reimbursed from my employer’s health FSA or an HRA?

A. If your employer’s health FSA or HRA reimburses these expenses, you would provide the prescription (or a copy of the prescription or another item showing that a prescription for the item has been issued) and the customer receipt (or similar third-party documentation showing the date of the sale and the amount of the charge). For example, documentation could consist of a customer receipt issued by a pharmacy that reflects the date of sale and the amount of the charge, along with a copy of the prescription; or it could consist of a customer receipt that identifies the name of the purchaser (or the person for whom the prescription applies), the date and amount of the purchase, and an Rx number.

Q. How does this change affect over-the-counter medical devices and supplies?

A. The new rule does not apply to items for medical care that are not medicines or drugs. Thus, equipment such as crutches, supplies such as bandages, and diagnostic devices such as blood sugar test kits will still qualify for reimbursement by a health FSA or HRA if purchased after Dec. 31, 2010, and a distribution from an HSA or Archer MSA for the cost of such items will still be tax-free, even without a prescription. 

Q. Will I need a prescription to use my health FSA, HRA, HSA or Archer MSA funds for 

insulin purchases after Dec. 31, 2010?

A. No. You can continue to use your health FSA, HRA, HSA or Archer MSA funds to purchase insulin without a prescription after Dec. 31, 2010.

Q. I use health FSA funds for my copays and deductibles. Will I still be able to reimburse those expenses with health FSA funds after Dec. 31, 2010?

A. Yes. Copays and deductibles continue to be reimbursable from a health FSA after Dec. 31, 2010.  Similarly, funds from an HRA can continue to be used for these expenses and a distribution from an HSA or Archer MSA for these purposes will be tax-free.

Q. My company gives me two extra months beyond the end of the year to submit claims for health FSA expenses incurred during the year. What happens if I purchase over-the-counter medicines or drugs without a prescription in 2010 but do not submit the claim for those expenses until January 2011? Will they qualify for reimbursement?

A. Yes. The new restriction on plan reimbursements for the cost of over-the-counter drugs without a prescription applies only to purchases that are made after 2010.

Q. My company’s health FSA includes a provision for a grace period, so that if I don’t spend all of the money in my health FSA by Dec. 31, I can still use the amount left at the end of the year to reimburse expenses I incur during the first 2 ½ months of the following year.  If I buy over-the-counter medicines or drugs without a prescription during the 2 ½ month grace period of 2011, can I still use the amount left in my health FSA from 2010 to reimburse those expenses?

A. No. The change applies to any purchases made on or after Jan. 1, 2011. Thus, even if your employer’s plan includes the 2 ½ month grace period provision, the cost of over-the-counter medicines and drugs purchased without a prescription during that grace period in 2011 will not be eligible to be reimbursed by a health FSA.

Q. If my health FSA or HRA issues a debit card that I use to pay for over-the-counter medicines or drugs, will I still be able to use the card to purchase over-the-counter medicines or drugs after Dec. 31, 2010?

A. Generally, yes, if you have a prescription for the medicine or drug. For expenses incurred in 2010, you may continue to use an FSA or HRA debit card to purchase over-the-counter medicines or drugs (whether or not you have a prescription) at pharmacies and from mail order and web-based vendors that sell prescription drugs. Starting after Jan. 15, 2011, you may continue to use an FSA or HRA debit card to purchase over-the-counter medicines or drugs at these vendors, so long as you obtain a prescription for the medicine or drug, the prescription is presented to the pharmacist, and the medication is dispensed by the pharmacist and given an Rx number.

For further information, including guidance on purchases of over-the-counter medicines and drugs from health care providers other than pharmacies and mail order and web-based vendors (such as physicians or hospitals), see IRS Notice 2011-5. For guidance on debit card purchases at “90 percent pharmacies,” see IRS Notice 2010-59.

Q. If I use HSA or Archer MSA funds to reimburse the cost of over-the-counter medicines or drugs purchased after Dec. 31, 2010, without a prescription, what taxes will I incur?

A. If you have an HSA or Archer MSA, the amount of the distribution for expenses that are not qualifying medical expenses will be includable in your gross income and subject to an additional tax of 20 percent.

This brochure is for informational purposes only and is not intended to replace the advice of an insurance professional.

Know Your Employee Benefits is written and produced for Benefit Logic, Inc. Source: www.irs.gov. This is a work of the U.S. Government and is not subject to copyright protection in the United States. Foreign copyrights may apply. Design © 2011 Zywave, Inc. All rights reserved.

The Patient Protection and Affordable Care Act (PPACA) states that Americans can keep their current health benefits if they choose – the law will not force a change in plans or doctors. PPACA also adds new required benefits that plans must cover regardless of grandfathered status.

Required Benefits

All health plans – whether or not they are grandfathered plans – must provide the following benefits to enrollees for plan years starting on or after Sept. 23, 2010:

1. No lifetime limits on coverage
2. No rescissions of coverage, except in cases of fraud or misrepresentation
3. Extension of dependent coverage to young adults up to age 26

For those who have employer-sponsored health plans, additional benefits will be offered, regardless of grandfathered status as well:

1. No coverage exclusions for children with pre-existing conditions
2. No “restricted” annual dollar limits

Large Employer Plans

Those who have employer-sponsored health insurance through large employers (100 or more workers) may not see major changes to their coverage as a result of the regulation. Many plans are expected to remain grandfathered in 2011 based on cost sharing changes made from 2008-2009. And most of these plans already offer required benefits for grandfathered plans, such as no pre-existing condition exclusions for children and no rescissions of coverage.

Small Business Plans

Those insured through small businesses will likely transition from their current plan to one with the new protections over the next few plan years. Small plans typically make substantial changes to cost-sharing, employer contributions and health insurance issuers more frequently than larger plans. An estimated 70 percent of plans are expected to remain grandfathered in 2011, but that number could drop depending on the changes employers make. The small business health care tax credit is designed to help sustain coverage. Regardless of grandfathered status, small business plans will need to cover the required benefits listed previously.  

Individual Health Market

In the individual health insurance market, switching of plans and substantial changes in coverage are common. Between 40 and 66 percent of individual market enrollees change plans within a given year. Those covered in the individual market whose plan changes and is no longer grandfathered will have access to free preventive services, protections against restricted annual limits and patient protections such as improved access to emergency rooms. The health insurance exchanges that will be established in 2014 will offer greater plan choices as well. 

Other Health Plans

Fully-insured health plans subject to collective bargaining agreements will maintain their grandfathered status until their agreement terminates. After that, these plans are subject to the same rules as other health plans, and will lose grandfathered status if substantial changes are made. Retiree-only and “excepted health plans” such as dental plans, long-term care insurance or Medigap policies are exempt from the PPACA requirements.

This brochure is for informational purposes only and is not intended to replace the advice of an insurance professional.

Source: Healthcare.gov. This is a work of the U.S. Government and is not subject to copyright protection in the United States. Foreign copyrights may apply. Know Your Employee Benefits is written and produced for Benefit Logic. Design © 2010 Zywave, Inc. All rights reserved.

The health care reform legislation brings changes to what is considered a qualified medical expense for reimbursement purposes from FSAs, HSAs, HRAs and Archer MSAs starting on Jan. 1, 2011.  

For the purposes of reimbursements from account-based health plans including health flexible spending arrangements (FSAs) or health reimbursement arrangements (HRAs), as well as distributions from health savings accounts (HSAs) or Archer medical savings accounts (Archer MSAs), qualified medical expenses will refer only to medication or a drug prescribed by a physician starting on Jan. 1, 2011, with the exception of insulin and diabetic supplies.

Insulin and diabetic supplies will not require a prescription to be considered a qualified medical expense. If a medication or drug is available over-the-counter (without a prescription), but it is prescribed by a physician, it will be considered a qualified medical expense.  

Items that do NOT require a prescription

Examples include, but are not limited to: insulin and diabetic supplies, adhesive bandages, first aid supplies, braces and supports, contact lens supplies and solution, reading glasses, wheelchairs, walkers, canes and denture adhesives. 

Items that DO require a prescription

Examples include, but are not limited to: acid controllers, allergy and sinus, antibiotics, anti-itch and insect bite, baby rash ointments/creams, cold sore remedies, cough, cold and flu medications, pain relief and sleep aids.

Changing how you use your health spending account

When purchasing over-the-counter medications with a prescription from your doctor, how you use your health spending account will depend on what type you have.

FSAs: You need to submit your prescription from your doctor and your store receipt with the reimbursement request form.

HRAs: If your HRA allows over-the-counter expenses, submit your prescription from your doctor and your store receipt with the reimbursement request form.

HSAs or Archer MSAs: Keep a copy of your prescription and your store receipt for proof that you used your HSA for an eligible expense should the IRS audit your income tax return.

This brochure is for informational purposes only and is not intended to replace the advice of an insurance professional.

The Patient Protection and Affordable Care Act (PPACA) was enacted on March 23, 2010, and amended by the Health Care and Education Reconciliation Act of 2010 on March 30, 2010. The health care reform legislation includes many changes related to health care coverage and raises a number of questions for employers.

The Department of Labor (DOL) has previously issued three sets of Frequently Asked Questions to assist in implementing these changes. On November 1, 2010, the DOL issued additional FAQs regarding grandfathered plans and essential health benefits.

This Legislative Brief sets out the most recent FAQs issued by the DOL. For a copy of the guidance, see http://www.dol.gov/ebsa/faqs/faq-aca4.html.

AFFORDABLE CARE ACT IMPLEMENTATION FAQs – PART IV

Q1:

The Departments’ interim final grandfather regulations provide that, to maintain status as a grandfathered health plan, a group health plan or health insurance coverage must include a statement, in any plan materials provided to a participant or beneficiary describing the benefits provided under the plan or health insurance coverage, that the plan or coverage believes it is a grandfathered health plan. Must a grandfathered health plan provide the disclosure statement every time it sends out a communication, such as an EOB (explanation of benefits), to a participant or beneficiary? If not, how does a grandfathered health plan comply with this disclosure requirement?

A grandfathered health plan will comply with this disclosure requirement if it includes the model disclosure language provided in the Departments’ interim final grandfather regulations (or a similar statement) whenever a summary of the benefits under the plan is provided to participants and beneficiaries. For example, many plans distribute summary plan descriptions upon initial eligibility to receive benefits under the plan or coverage, during an open enrollment period, or upon other opportunities to enroll in, renew, or change coverage. While it is not necessary to include the disclosure statement with each plan or issuer communication to participants and beneficiaries (such as an EOB), the Departments encourage plan sponsors and issuers to identify other communications in which disclosure of grandfather status would be appropriate and consistent with the goal of providing participants and beneficiaries information necessary to understand and make informed choices regarding health coverage.

Q2:

If an individual health insurance policy that was in place on March 23, 2010, included a feature that allowed a policy holder to elect an option under which he or she would pay a reduced premium in exchange for higher cost sharing, could such an election be made after March 23 without affecting the policy’s grandfather status even if the increase in cost sharing for the individual would exceed the limits under the grandfather rule on increases in cost sharing?

Yes. The cost-sharing level that would apply under this option would be grandfathered as part of the policy in place on March 23, 2010, even if it did not apply for the particular individual at that time. As long as the policy holder had that option available on March 23 under the policy, he or she could exercise the option after March 23 without affecting grandfather status, even if the result would be that the particular individual’s cost-sharing would increase as a result of electing this option by an amount in excess of the grandfather rule limits.

Q3:

An employer has maintained a plan since before enactment of the Affordable Care Act that reimburses expenses for special treatment and therapy of eligible employees’ children with physical, mental or developmental disabilities. The treatment or therapy is not covered by the employer’s primary medical plan or plans. Reimbursable expenses may include expenses for special treatment or therapy from licensed clinics or practitioners, day or residential special care facilities, special education facilities for learning-disabled children, or camps offering medically oriented programs that are part of a child’s continued treatment, or for special devices. The plan is operated separately from the employer’s primary medical plans; employees who are otherwise eligible may participate in the plan without participating in those primary medical plans. The plan limits the total benefits for any eligible child to a specified lifetime dollar limit.

Would it be a reasonable good faith interpretation of the Affordable Care Act and the regulations thereunder for the plan sponsor to take the position that the plan does not violate the prohibition, under section 2711 of the Public Health Service Act (PHS Act) and the related interim final regulations, on imposing a lifetime dollar limit on “essential health benefits,” as defined in section 1302(b) of the Affordable Care Act (the lifetime limit prohibition)?

Yes. In accordance with the preamble to the Departments’ interim final regulations implementing PHS Act section 2711, for plan years beginning before the issuance of final regulations defining “essential health benefits,” for purposes of enforcement, the Departments will take into account good faith efforts to comply with a reasonable interpretation of the term “essential health benefits.” (Of course, the regulations may differ in their definition of “essential health benefits” from reasonable interpretations used before the regulations are issued.) Accordingly, in the case of plans described above, for such plan years: (i) the Departments will treat as a reasonable good faith interpretation of section 2711 of the PHS Act and the regulations thereunder the position that the imposition of the per-child lifetime dollar limit on benefits provided under such plans does not violate the lifetime limit prohibition, and (ii) the imposition by such plans of such a limit will not result in an enforcement action by the Departments against such plans under PHS Act section 2711.