Just over two years ago, Congress passed, and President Obama
signed, sweeping legislation to change the health care system in
the United States. This legislation, the Patient Protection and
Affordable Care Act, as amended ("PPACA"), includes a
variety of provisions affecting employers and the health benefits
they provide to their employees. Some of these provisions were
effective within six months of passage, others have phased in more
recently, and still others are yet to be effective. Various federal
agencies have issued thousands of pages of guidance interpreting
the provisions of PPACA. Employers have spent countless hours
implementing its requirements.
Almost as soon as PPACA was enacted, plaintiffs filed cases in
courts all over the United States asserting that various provisions
of the new law violate the U.S. Constitution. Some courts have
agreed with these plaintiffs and some have disagreed. This
litigation has wound its way to the United States Supreme Court,
with highly publicized oral arguments taking place March
26–28, 2012.1 We expect the Supreme
Court's decision in June.
The Supreme Court's decision may affect whether and the extent
to which employers must comply with the requirements of PPACA.
Employers should be prepared for the various possibilities. Because
the decision will be announced in June and plan benefits are
typically determined several months in advance of the beginning of
the plan year, employers, particularly those with calendar year
plans, may have to act quickly if the decision triggers any changes
in the terms of their plan benefits. In addition, employers may
need to be prepared for changes to the taxation of certain benefits
they currently provide.
Supreme Court Review
The Supreme Court is reviewing two constitutional issues with
respect to PPACA: (i) whether the requirement that individuals have
health insurance (commonly known as the individual mandate) is a
constitutional exercise of federal powers under the Commerce Clause
and (ii) whether the requirement that states expand eligibility for
Medicaid coverage in order to continue to receive federal Medicaid
funding exceeds the federal government's enumerated powers
under the Constitution. Neither of these items directly affects the
provisions in PPACA that impact employers and their health plans.
However, if the individual mandate is found to be unconstitutional,
the Supreme Court also will need to decide what to do with the rest
of PPACA, including, perhaps, concluding that because the
individual mandate is so inextricably linked with the remainder of
the law, the whole law must be thrown out.
Most observers think that one of three things will happen when the
Supreme Court hands down its decision in June.2
Possibility Number One: The Supreme Court finds
the individual mandate to be constitutional. This decision would
mean that the law would remain in place and employers would have to
continue complying with its requirements, both those that are
currently effective and those that will become effective over the
next several years.
Possibility Number Two: The Supreme Court finds
the individual mandate is not constitutional but that it is
severable from part or all of the remainder of PPACA. The portions
of PPACA that are severable will stand, while the portions that are
not severable will cease to apply. It is possible that the Supreme
Court will detail which portions of the law are severable and which
are not. This decision would mean that some or all of the portions
of PPACA that apply to employers may remain in place, but the final
determination of which ones may not be known for several
months.
Possibility Number Three: The Supreme Court finds
the individual mandate is not constitutional but that it is not
severable from the rest of PPACA. This decision would mean that the
entire law would be voided and employers would no longer have to
continue to comply.
What If They Throw the Whole Thing Out?
If the Supreme Court decision released in June matches the
scenario described in Possibility Number Three, we will be in a
situation where employers will no longer have to comply with any of
the PPACA mandates, and various PPACA provisions that affect
employers will no longer apply. This includes portions of PPACA
that are already effective, as well as those that are becoming
effective over the next several years. Employers will need to
decide whether to make changes to their plans and, if they make
changes, when those changes will be effective. To further
complicate things, when the decision is released in June, most
employers will have only a short timeframe to make any changes in
advance of the next plan year.
If PPACA is thrown out in its entirety, the first thing that
employers can do is to stop worrying about the requirements that
are effective beginning this year, including the W-2 reporting
requirement and the requirement to distribute Summaries of Benefits
and Coverage. In addition, the prohibition on discriminating in
favor of highly compensated employees through fully insured health
benefits (currently in a nonenforcement period) will be moot. Thus,
employers need not worry about this wrinkle in providing executive
health benefits.
Next, employers may wish to revisit the already effective
requirements. Following are various requirements that are currently
effective (both for grandfathered and nongrandfathered plans) and
are most likely ones that employers will wish to revisit, along
with some thoughts on what to consider in determining how to deal
with these mandates going forward if they are no longer legally
required.
Coverage to Age 26. PPACA requires, for health
plans that provide coverage to children, that the plan must provide
that coverage to children until they reach age 26. Under PPACA,
health plan eligibility rules may not distinguish between children,
other than with respect to the child's relationship to the
employee (and for grandfathered plans, with respect to the
child's access to certain other employer-sponsored coverage).
To comply, health plan eligibility rules had to be amended, not
only to increase the age limit but also to eliminate requirements
such as those regarding financial dependence, marriage, and
full-time student status. For uniformity, many employers amended
not just their health plans but also other benefits available to
children, such as health flexible spending arrangements, dental
plans, and dependent life. PPACA also includes a change to the
Internal Revenue Code, which allows for this expanded health
coverage to be provided to children without the coverage being
treated as income to the employee. If PPACA is thrown out, the
change to the tax code disappears along with the requirement to
cover children to age 26. Employers who continue to cover children
to age 26 will have to impute income for coverage of any children
who were not eligible for tax-free coverage prior to PPACA. Because
of the imputed income issue, if PPACA is thrown out, in addition to
considering what changes to make to eligibility based on general
company policy, employers will want to consider whether any changes
are necessary, either immediately or for the next plan year, to
avoid any unwanted imputed income impact. Of course, any state
insurance laws regarding coverage through a certain age would still
apply for insured coverage. Employers will also need to consider
whether any income must be imputed for coverage already
provided.
Post-65 Retiree Drug Coverage. PPACA eliminates
the deduction for retiree prescription drug expenses for which
Medicare Part D Subsidy payments are received, effective for
taxable years beginning after December 31, 2012. While not yet
effective, this tax law change resulted in many employers taking a
charge against earnings related to the future elimination of the
deduction. If PPACA were no longer in place, the deduction would
again exist and employers would need to determine whether or when a
change to their financial statements would be required.
Early Retiree Reinsurance Program. PPACA
established a temporary program to reimburse eligible plans for a
portion of the cost of providing coverage to early retirees. Five
billion dollars was allocated to fund this program, and the program
has already received claims in excess of the maximum reimbursement
amount. If PPACA is thrown out, it is unclear how this program
would be affected. It is possible that future payments, if any, may
cease. It is not clear whether there would be any impact on
distributions made prior to the Supreme Court's decision.
No Coverage of Over-the-Counter Drugs in a Health Flexible
Spending Arrangement or Health Reimbursement Account Without a
Prescription. PPACA eliminated reimbursements for
over-the-counter drugs from a health flexible spending arrangement
or health reimbursement account, unless the drug was filled with a
prescription. If PPACA is overturned, employers may consider
whether or not to again allow reimbursement for these items.
$2,500 Maximum Annual Contribution to Health Flexible
Spending Arrangement. PPACA caps the annual contribution
to health flexible spending arrangements at $2,500, beginning with
the 2013 calendar year. If PPACA is overturned, employers should
consider whether they wish to increase the permitted annual maximum
contribution. Before PPACA, there was no statutory maximum;
however, because of the requirement that every dollar that a
participant elects to contribute to an account be available to
reimburse health expenses on the first day of the plan year,
employers generally imposed a limitation.
Coverage of Certain Preventive Care with No Cost Sharing
(nongrandfathered plans only). PPACA mandates coverage of
certain preventive care with no cost sharing for nongrandfathered
plans. Because of the way the guidance was drafted, there is some
ambiguity regarding exactly which preventive care services are
subject to the mandate. Employers have been addressing this
ambiguity, in part, by cross-referencing the legal requirement in
their plan documents. If this PPACA mandate is eliminated,
employers should define the scope of the preventive care services
being covered by their health plan and the respective cost-sharing
for these services, and reflect the exact coverage in their plan
documents, including in particular, the summary plan
description.
No Pre-Existing Condition Exclusions for Children Under Age
19. Employers that have pre-existing condition limitations
may consider adding those back for children under age 19.
No Annual or Lifetime Dollar Limits on Essential Health
Benefits. Employers who eliminated annual or lifetime
dollar limits in order to comply with PPACA may consider whether it
is appropriate to reinstate some or all of those limits.
Expanded Claims and Appeals Procedures, including External
Review Requirement (nongrandfathered plans only).
Employers may wish to work with their claims administrators to
eliminate additional claims and appeals processes added by PPACA,
including the external review requirement. It is possible, however,
that some of these requirements will eventually be added to the
ERISA requirements for claims procedures. Employers should be on
the lookout for future changes to the requirements in the claims
area.
Other currently effective PPACA requirements that employers may
wish to revisit are:
- No rescissions (retroactive terminations of coverage);
- Patients' rights to designate their own primary care physician (including a pediatrician) and see an OB/GYN without a referral (nongrandfathered plans only); and
- Coverage of out-of-network emergency room services with same cost-sharing as in-network (nongrandfathered plans only).
Conclusion
If the Supreme Court decision handed down in June results in
PPACA being overturned, or some or all of its requirements being
eliminated, employers will have much to consider regarding
potential changes to their health plans. Further, employers may
need to act quickly in order to address any changes that they want
to make effective for the current or next plan year.
This is one in a series of Commentaries Jones Day intends
to provide to our clients and friends on the provisions of PPACA.
We will provide additional guidance on how the provisions of PPACA,
and the developing regulatory framework, affect employer-sponsored
health plans and their sponsoring employers as developments
occur.
Footnotes
1. Jones Day represented the private challengers in the Supreme Court litigation.
2. A fourth possibility, currently viewed as unlikely, is that the Court will decide that it cannot hear a case regarding the individual mandate until such time as an individual violates the mandate and pays the associated penalty, and therefore cannot decide this issue until 2015.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.