California Health Insurance Reform Update: March 2012

There’s been a lot of talk about health insurance reform during the last few years. Passage of the Federal reform legislation in March 2010 accelerated the discussion – and confusion. To help make sense of the new law and to help people navigate the ever-changing landscape of health insurance, we’ve made a list of the most important items that individuals and small businesses in California should know about the Patient Protection & Affordable Care Act, signed March 23, 2010 and the Health Care & Education Affordability Reconciliation Act, signed into law March 30, 2010. Collectively the new law is referred to as “PPACA.”

The health insurance companies are complying with the new law. There is nothing specifically that a small business owner or individual with his/her own health insurance needs to do as of March 2012 to comply with the new law.

Changes to occur in 2014:

  • Guarantee Issue for individuals
    All insurance companies selling health insurance to individuals must offer it to everyone – even those with serious pre-existing conditions. There will be no medical questions asked – except that insurance premiums can be higher for tobacco smokers. Geographic location, age and dependent coverage are the only other factors that can be used in setting rates.
  • Individual Mandate to purchase coverage
    Everyone in the United States will be required to have health insurance. Low income people will either enroll in Medicaid (called “Medi-Cal” in California) or the Federal government will give them a subsidy to purchase private health insurance. People who do not obtain health insurance must pay a fine. Currently, the fines for not purchasing health insurance are the greater of $95/year or 1 percent of household income in 2014, $325/year or 2% of household income in 2015, and $695 or 2.5% of household income in 2016 and thereafter. Compared to the approximately $5,000 – $7,000/year cost of a health plan, the penalties seem very weak. No enforcement procedures have been announced. In fact “individuals who fail to pay the penalty will not be subject to any criminal prosecution or penalty for such failure. The Secretary cannot file notice of lien or file a levy on any property for a taxpayer who does not pay the penalty.” (page 7 of the above link.) Many fear that “free riders” will pay the penalty and only enroll when they get seriously sick or injured. Despite the weak penalty and lack of enforcement; the “individual mandate” is the main basis for the legal challenge to PPACA before the Supreme Court.
  • Employer penalties for companies with 51+ employees (EEs) that do not pay for coverage
    Currently, there is no Federal or State requirement for any company – no matter the number of employees – to offer health insurance to employees. Beginning in 2014 however, companies with more than 50 employees that do not pay for their employees’ health insurance must pay a penalty of $2,000/EE/year. Again, considering that an employer pays $5,000 – $7,000/year; the penalty seems extremely low. Page 11 of this Congressional Research Service paper describes the employer requirements of PPACA.
  • Essential Health Plan Benefits
    PPACA requires a specific set of benefits (called “essential health plan benefits) for all plans sold. Here is an excellent description of the current (February 2012) state of affairs regarding “essential health plan benefits” from Tom Epstein, chief counsel for Blue Shield of California:

    “Beginning in 2014, PPACA requires that every policy sold in the individual and small group markets cover, at a minimum, a specified set of benefits. The legislative drafters of PPACA were keenly aware that determining what would and wouldn’t be covered would be politically contentious, so they kicked the task to federal regulators.
    The law specified 10 broad categories of benefits that have to be included, but left it to the Department of Health and Human Services to determine exactly what benefits had to be covered.Given the far-reaching implications of this decision, it has been the most intensely and anxiously anticipated health reform regulatory determination yet. But last month, federal regulators gave notice that they would actually decide very little. Instead, they indicated they would do what their congressional overseers did to them: pass the hot political potato on. Instead of making the hard choices themselves, they intend to force the states to make those decisions.
    According to the notice they issued in December (2011), the regulators plan allow each state to designate an existing group insurance product (offered in the state) to be the state’s essential benefits package. States would be required to select one plan from among the following:

• Any of the state’s three small group insurance plans with the greatest enrollment.
• Any of the three state’s employee benefits plans with the greatest enrollment.
• Any of the three largest Federal Employees Health Benefits Plan (FEHBP) plans with the greatest enrollment.
• The largest commercial non-Medicaid HMO in the state.

If a state fails to select a benchmark plan, the default would be the largest small group plan in the state.”

So, the bench mark health care plan in California will likely be an existing small group plan.

  • Modified Community Rating:
    PPACA requires that the cost of a health insurance policy for the youngest person be no more than three times the cost of a plan for the oldest person. This results in a 3 to 1 ratio for the maximum difference in premium for oldest to youngest age category. Currently the ratio is about 6 to 1. Accordingly, anticipate premiums increasing for younger EEs and falling for older EEs due to the “modified community rating” requirements.
  • California-run “Exchange” for individuals and small groups
    California was the first state in the Union to pass legislation to establish a health insurance “exchange.” Other states have either refused to set them up or delayed action. California is charging ahead. According to the
    California Exchange’s web site:“Starting in 2014, the California Health Benefit Exchange will make it easier for individuals and small businesses to compare plans and buy health insurance on the private market.

    The Exchange will enhance competition and provide the same advantages available to large employer groups by organizing the private insurance market, including a more stable risk pool, greater purchasing power, more competition among insurers and detailed information regarding about the price, quality and service of health coverage.

    The Exchange will support consumer choice by making comprehensive information about health plans available in an objective, easy-to-understand format, including:

    • a website that provides standardized comparison information on qualified health plan benefit plans/options
    • a calculator for applicants to compare costs across plan options
    • a web-based eligibility portal to help link individuals to health coverage options available to them
    • a toll-free consumer assistance hotline”
    A lot of this work is currently done by licensed agents. Look at and you are able to do all of the items listed above. The government’s web site will also qualify and enroll people into the Medi-Cal and Healthy Families programs. The “Small Employer Health Options Program (SHOP)” is the name for the exchange for small businesses. The exchange must be up and running by January 1, 2013 to work out the bugs before they open their doors to the 33 million Californians on January 1, 2014.It is odd to see and hear a government entity talk about “business models,” “branding,” and other items that private industry does. It is odd to compete with the government for the sale of a private product, health insurance. We’ll see how this works out.
  • Expansion of Medicaid/Medi-Cal to more people
    PPACA will enable a family of 4 earning $31,900/year to enroll in Mediaid/Medi-Cal (133% of the Federal Poverly Limit.) Individuals and families with and with out children will be able to enroll in Medi-Cal. The current eligibility guidelines limit enrollment to parents with children.
  • Premium subsidies for individuals who earn 133%-400% of Fed. Poverty Limit
    PPACA will partially subsidize coverage for families that earn up to 4 times the Federal Poverty Limit or $88,200/year for a family for four. The subsidy will be in the form of an “advancable, refundable tax credit.” This will allow people who have no tax payment obligation to obtain the government subsidy. Also the subsidy will be paid when the health insurance premium is due so that people will not have to wait until they file their income taxes.
  • New “fees” on hospitals, insurance & pharmaceutical companies and taxes on medical devices, tanning salons and individuals and families.
    In 2013 PPACA increases taxes by 0.9% on wages earned by individuals earning $200,000 or more and joint filers earning $250,000/year or more. An additional tax of 3.8% will apply to net investment income for individuals whose adjusted gross income exceeds $200,000 or $250,000 for a married couple filing jointly, or $125,000 for a married person filing separately.