Health Care Reform Update

1. Health Care ReformUpdate Presented to: Puget Sound Finance Officers Association July 23, 2013 By: Carol Wilmes AWC Trust Program Manager

2. Today’s Conversation • Incremental Change • Current State of Play • Impact to Employers in 2014 • What Local Governments Should be Doing • Planning for our Benefit Future

3. Health insurance exchanges • Individual coverage mandate • Financial assistance for exchange coverage of low-income individuals • Medicaid expansion • New health plan regulations • HIPAA wellness limit increases • Shared responsibility penalties • Free-choice vouchers • Additional reporting and disclosure • Dependent coverage to age 26 for any covered employee’s child** • No annual dollar limits** • No pre-existing condition limits** • No waiting period over 90 days** • Additional new standards for new or “non-grandfathered” health plans, including limited cost-sharing • Health insurance industry fees begin • Dependent coverage to 26 (no other employer coverage available)* • No lifetime dollar limits* • Restricted annual dollar limits* • No pre-existing condition limitations for children up to age 19* • No rescissions* • Additional standards for new or “non-grandfathered” health plans, including non-discrimination provisions for insured plans and mandatory preventive care with no cost-sharing • No health FSA/HRA/HSA reimbursement for non-prescribed drugs • Increased penalties for non-qualified HSA distributions • Voluntary long-term care “CLASS” program slated to start • Pharmaceutical manufacturers’ fees start • Medicare, Medicare Advantage benefit and payment reform • Insurers subject to medical loss ratio rules* Key Elements of Health Care Reform Key elements of health reform for employers • Change in tax treatment for over-age dependent coverage • Accounting impact of change in Medicare retiree drug subsidy tax treatment • Early retiree medical reinsurance • Medicare prescription drug “donut hole” beneficiary rebate • Auto-enrollment of full-time employees (effective TBD) • Break time/private room for nursing moms • Employers must distribute uniform benefit summaries to participants • Employers must provide 60-day advance notice of material modifications (TBD) • Form W-2 reporting for 2011 health coverage 2010 2011 2012 2013 2014 2018 • $2,500 health FSA contribution cap (indexed) • Medical device manufacturers’ fees start • Higher Medicare payroll tax on wages exceeding $200,000/ individual; $250,000/couples • New Medicare tax on net investment income for taxpayers with incomes exceeding $200,000/ individual; $250,000/couples • Research fees begin • Change in Medicare retiree drug subsidy tax treatment takes effect • Excise tax on “high cost” or Cadillac plans * Applies to all plans, including “grandfathered” plans, effective for plan years beginning on or after Sept. 23, 2010 (Jan. 1, 2011, for calendar year plans). Collectively bargained plans may have a delayed effective date. ** Applies to all plans, including grandfathered plans, effective for plan years beginning on or after Jan. 1, 2014.

4. Breaking News!Employer Mandate of 2014DELAYED • It started with the delay in U.S. DOL and IRS employer reporting process to be delayed • Without reporting, so follows employer Mandate • Delayed until 2015 • The Domino Effect • Houses passes repeal of individual mandate • And so it goes…

5. Health Care Reform: 2013 • Employer must determine FTEs to avoid ACA penalties for not offering health care coverage - DELAYED • Notice informing employees of coverage options in exchange • Limit health care FSA contributions to $2,500 (Indexed) • Elimination of deduction for expenses allocable to retiree drug subsidy (RDS) • Additional 0.9% Medicare tax on high income earners • 3.8% Medicare tax on investment income of high income earners • Addition of women’s preventive health requirements of no cost sharing and coverage for certain in-network preventive health services • PCORI fee filing and payment for 2012 due by 7/1/13 ($1 for average number of lives covered)

6. Health Care Reform: 2014 • Employer (DELAYED) and individual mandate • State/Federal insurance exchanges begin • Patient protections: • Pre-existing condition exclusions prohibited • Annual dollar limits on Essential Health Benefits prohibited • Maximum 90-day waiting period for coverage • Cost-sharing limits for all group health plans, not just HDHPs/HSA (deductibles and OOP maximum) • Employer reporting of health insurance information to government and participants (DELAYED) • HRAs must be integrated with group health plan • “Participants” must be enrolled in order for contributions to be made • Existing stand-alone HRAs must be transitioned to pension HRAs, if not tied to medical • Transitional reinsurance fees begin (proposed fee amount is $63 per covered member) & insurer fees

7. Taxes, Fees and Cost

8. 2015: Employer Pay or Play (“Shared Responsibility”) • Apply to employers with >50 full-time employees (FTE equivalents) • New full-time employee (30 hours/week) definition: • Permanent • Part-time • Seasonal or variable hour • Employee not eligible for premium tax if employee has access to minimum essential coverage • Employer-provided coverage is minimum essential if: • Coverage provides 60% of total allowed costs • Affordable coverage: employee only coverage of lowest plan option does not exceed 9.5% of household income

9. Planning for 2015: Employer Pay or Play (cont.) • Employers who do not offer coverage to 95% of employees and their dependent children and have an employee who receives a premium tax credit: • Must pay $2,000 per FTE (after subtracting the 1st 30 FTEs) • Employers who offer coverage and have an employee who receives a premium tax credit: • Must pay $2,000 per FTE OR $3,000 per FTE receiving tax credit, whichever is less

10. No No Yes Yes No Employer Penalties in 2015 The employer must pay a penalty for not offering coverage Does the employer* offer coverage to its workers? Did at least one employee receive a premium tax credit or cost sharing subsidy in an Exchange? Start Here The penalty is $2,000 annually times the number of full-time employees minus 30. The penalty is increased each year by the growth in insurance premiums. Yes Does the insurance pay for at least 60% of covered health care expenses for a typical population? Employees can choose to buy coverage in an Exchange and receive a premium tax credit. The penalty is $3,000 annually for each full-time employee receiving a tax credit, up to a maximum of $2,000 times the number of full-time employees minus 30. The penalty is increased each year by the growth in insurance premiums. The employer must pay a penalty for not offering affordable coverage. Do any employees have to pay more than 9.5% of family income for the employer coverage (employee only)? Those employees can choose to buy coverage in an Exchange and receive a premium tax credit. Yes There is no penalty payment required of the employer since it offers affordable coverage. *Assumes employer has at least 50 full-time equivalent employees.

11. What Local Governments Should be Doing Now What Decisions Do I Have to Make? • Workforce Assessment for FTE (30-hour work week, seasonal/variable hour) • Pay or Play – Consider Obligations • Unions • LEOFF Is • Ability to pay – municipal budgets & forecasting • Do I make plans affordable for everyone? What Actions Do I Have to Take? • Review plans and eligibility rules • Understand impact on those currently opting out of coverage • Understand impact of full time employee requirements • Are you set up to administer new requirements? • Use transition relief for measurement period in 2013 • Ensure plans are compliant with PPACA design regulations • Determine whether plans pass actuarial value and affordability tests • Identify any workforce planning issues that need to be dealt with before 2014 • Model cost impact to employers and employees now and into future (2018)

12. Let’s drill it down further … • Discuss strategies and labor issues related to: • “Play or Pay” penalty: fulltime/seasonal/variable hour employees • The Cadillac tax • The ACA at the bargaining table • The world is not coming to the end, but careful planning is essential

13. Assessing the Workforce • Full-time employee • 30+ hours/week • New regulations • Measurement period (3-12 months) • Stability period (at least 6 mos or match measurement period) • Administrative period (at least 90 days) • Penalties kick in when an employee receives a premium tax credit

14. ACA Employee Categories

15. Breaks in Service • Recent rules solely for determining when a rehired employee may be treated as a new hire for look-back measurement period purposes: • If the period for which no hours of service is credited is at least 26 consecutive weeks, an employer may treat an employee who has an hour of service after that period, for purposes of determining the employee’s status as a full-time employee, as having terminated employment and having been rehired as a new employee of the employer

16. Terminated Employees Employees who resign/retire/terminate are no longer subject to measurement and stability periods and need not be offered health insurance except for COBRA requirements.

17. Variable Hour Employees • “Seasonal” employees who work other positions during non-seasonal periods are not actually seasonal employees. • Variable hour employees without an annual break in employment must be carefully managed. • 12 month measurement period = 1550 maximum annual hours. • 1550 hours/52 weeks = 29.8 hours • 6 month measurement period = 775 maximum hours every 6 months. • 775 hours/26 weeks = 29.8 hours • Once a variable hour employee is determined to be a full-time employee during a measurement period, the employee will be treated as a full-time employee for the entire stability period. A subsequent decrease in hours will not immediately cause the employee to lose full-time employee status during the stability period because the employee is “locked in.”

18. Questions HR, Finance, Administration are Asking • What kind of variable hour employees do we have? • How many months of the year do they work? • How critical is the service to the community? • Are there other ways to get the job done? • Temp agency • Reduce hours • Hire additional staff • Job share • Decide to benefit • Are there other budget impacts to consider (i.e., hiring more workers may mean more equipment)

19. Breaking it down by Employee Groups – Policy ideas • Full-Time Permanent Employees (under review) • Coverage 1st of month following date of hire • 6 month measurement period • 6 month stability period • Watch out for unpaid leave of absence • Part-Time Permanent Employees • Don’t need to offer coverage • No penalty applies • Seasonal Employees • 12 month measurement period • Clearly define hours work

20. Breaking it down by Employee Groups – Policy ideas • Ongoing Variable Employee • 12 month measurement period • Watch out for lookback period starting July 1 • Clearly define hours & stick to it!

21. Health care reform issues -Finally in 2018 – Excise tax on high cost plans

22. Cadillac Tax, an Overview • Tax imposed on plans offering premium coverage. • Effective January 1, 2018. • $10,200 limit for individual plans, $27,500 for family plans. • Amounts raised to $11,850/$30,950 for retirees and high-risk professionals (police, fire, emergency medical). • 40% tax on amounts exceeding the ceiling. • Tax calculated based on actual premiums for insured plans. COBRA methodologies for self-funded plans. • Goal of tax to discourage overuse/abuse of healthcare system and help finance uninsured coverage.

23. Cadillac Tax, an Overview (cont.) • Calculation includes both employer and employee contributions. • Includes health plans, prescription drug plans, administrative fees, FSAs (capped at $2,500), HRAs, and employer-paid HAS contributions. • Dental and vision plans are not subject to tax unless bundled with a health plan. • Employers with composite plans may calculate cost based on composite rate, so long as composite rate is uniform for all employees.

24. An Example of the Cadillac Tax 2013 rates for full family coverage $1,650 employer share + $150 employee share = $1,800 per month total cost $1,800 x 12 months = $21,600 annual cost Growth of $21,600 at 8% per year 2014 $23,328 2015 $25,194 2016 $27,210 2017 $29,387 (maximum ceiling of $27,500 exceeded) 2018 $31,737 In 2018, $4,237 of “compensation” subject to 40% excise tax. Total tax paid: $1,695!

25. An Escalade-ing Cadillac Tax • Tax will increase from 40% and continue to escalate. • 2018: potential increase tied to federal employee plans. • 2019: 1% plus adjustments for inflation. • 2020: annual adjustments for inflation. • Other ACA mandates will increase cost of coverage, including increased administrative overhead. • Medical inflation continues to rise, annual trend of 8-10%

26. Strategies for Mitigating the Cadillac Tax #1 Get the Numbers Apply appropriate trend to 2013 rates. Estimate to 2018. Are totals above $10,200/$27,500? Start planning now.

27. Strategies for Mitigating the Cadillac Tax #2 Unbundle dental and vision plans Not subject to tax unless bundled with health plan.

28. Strategies for Mitigating the Cadillac Tax #3 Decrease benefits & increase deductibles… … while continuing to offer minimum essential coverage.

29. Strategies for Mitigating the Cadillac Tax • #4 Begin increasing employee cost-sharing • Cost-sharing does not avoid the tax, but… • cost-sharing may alter employee behavior and usage. • Cost-sharing helps pay for the tax, if necessary.

30. Mandatory Subject of Bargaining • Washington’s Public Employment Relations Commission (PERC) has held that health benefits and health insurance premiums are mandatory subjects of bargaining that cannot be unilaterally changed by the employer. • “The Commission consistently holds that health insurance benefits, representing a form of wages, are a mandatory subject of bargaining.” Spokane County, Decision 11627 (PECB, 2013). • Any change impacting benefit levels or employee costs must be bargained. University of Washington, Decision 10771 (PECB, 2010).

31. Bargaining Pointers • Look to definition of part-time employee to ensure no problems with full-time test. • Educate employees regarding impact of the Cadillac tax. • How to address perception, “It’s the City’s problem, not mine….” • Think from the perspective of the employee in order to “sell” new approaches to health insurance. • Unresolved issues with fire and police are subject to interest arbitration.

32. Bargaining Pointers (cont.) • Bargaining to shift more premium share to employees does not help avoid the Cadillac tax. • Employer contributions to Health Savings Accounts (HSAs) or Health Retirement Accounts (HRAs) are added to premium and may defeat philosophy of high deductible plans and costing of such plans.

33. Questions…. Carol Wilmes Program Manager AWC Employee Benefit Trust 1-800-562-8981 or (360) 753-4137 carolw@awcnet.org www.awcnet.org/employeebenefits