Text: Senate Finance Committee’s America’s Healthy Future Act of 2009

September 16, 2009

Chairman’s Mark
America’s Healthy Future Act of 2009
Scheduled for Markup By the Senate Committee on Finance
On September 22, 2009

America’s Healthy Future Act of 2009
Rating Rules in the Individual Market
Current Law
The individual market is currently where individuals and dependents without employer-sponsored coverage or access to a public program purchase health insurance. Some states impose rating rules on insurance carriers in the individual market. Existing state rating rules restrict an insurer’s ability to price insurance policies according to the risk of the person or group seeking coverage, and vary from state to state. Such restrictions may specify the case characteristics (or risk factors) that may or may not be considered when setting a premium, such as gender. The spectrum of existing state rating limitations ranges from pure community rating, to adjusted (or modified) community rating, to rate bands, to no restrictions. Pure community rating means that premiums cannot vary based on any characteristic, including health. Adjusted community rating means that premiums cannot vary based on health, but may vary based on other key risk factors, such as age.
Rate bands allow premium variation based on health, but such variation is limited according to a range specified by the state. Rate bands are typically expressed as a percentage above and below the index (i.e., the midpoint in the allowed rating band). For example, if a state establishes a rate band of +/- 25 percent, then insurance carriers can vary premiums, based on health factors, up to 25 percent above and 25 percent below the index. Both adjusted community rating and rate bands allow premium variation based on any other permitted case characteristic, such as gender. For each characteristic, the state typically specifies the amount of allowable variation, as a ratio. For example, a 5:1 ratio for age would allow insurers to charge an individual no more than five times the premium charged to any other individual, based on age differences. As of January 2009, one state has pure community rating, seven have adjusted community rating rules, and eleven have rating bands in the individual market. The remaining states have no limitations on rating set in law.
The Federal Health Insurance Portability and Accountability Act of 1996 (HIPAA, P.L. 104-191) established Federal rules regarding guaranteed availability, guaranteed renewability, and coverage for pre-existing health conditions in the individual market for certain persons eligible for HIPAA protections. HIPAA guarantees that each issuer in the individual market make at least two policies available to all ―HIPAA eligible‖ individuals, and renewal of individual coverage is at the option of such individuals, with some exceptions. HIPAA also prohibits individual issuers from excluding coverage for pre-existing health conditions for HIPAA eligibles. In addition, a number of states have enacted guaranteed issue and pre-existing condition exclusion rules. Guaranteed issue refers to the requirement that an issuer must accept every applicant for coverage. Guaranteed issue does not affect (and is not affected by) rating or benefits. As of January 2009, 14 states require issuers to offer some or all of their individual insurance products on a guaranteed issue basis. Moreover, 42 states reduce the period of time when coverage for pre-existing health conditions may be excluded.
Chairman’s Mark
The Chairman’s Mark would establish Federal rating, issue, renewability, and pre-existing condition rules for the individual market. Issuers in the individual market could vary premiums based only on the following characteristics: tobacco use, age, and family composition. Specifically, premiums could vary no more than the ratio specified for each characteristic:
 Tobacco use – 1.5:1
 Age – 5:1
 Family composition:
o Single – 1:1
o Adult with child – 1.8:1
o Two adults – 2:1
o Family – 3:1
Premiums could also vary among, but not within, rating areas to reflect geographic differences. States would define geographic rating areas. Taking together all permissible risk factors, premiums within a family category could not vary by more than a 7.5:1 composite ratio.
Issuers in the individual market would be required to offer coverage on a guaranteed issue basis. Under guaranteed issue, if a plan has a capacity limit and the Secretary determines that the number of individuals who elect that plan would exceed the limit, the issuer would be allowed to limit the number of enrollees according to specified rules. Also, issuers would be required to offer coverage on a guaranteed renewability basis, and rate those policies on the same factors used when initially issuing such policies. Issuers would be prohibited from excluding coverage for pre-existing health conditions and from rescinding health coverage.
Immediate Assistance for Those with Pre-existing Conditions
Current Law
No provision.
Chairman’s Mark
Within a year of enactment, any uninsured individual who has been denied health care coverage due to a pre-existing condition can enroll in a high-risk pool. Premiums in the high-risk pool will be calculated based on the same rating factors described above and will be 100 percent of the standard premium rate for a Bronze plan (described below). Currently covered individuals must be uninsured for six months before gaining access to the high-risk pool. The high-risk pool will exist until 2013 and $5 billion in funding will be provided to subsidize premiums in the pool.
Rating Rules for Small Group Market
Current Law
The small group market is where small businesses, typically 2-50 employees but up to 100 employees in some states, purchase health care coverage. Similar to the individual market, some states currently impose rating rules on insurance carriers in the small group market. As of January 2009, two states have pure community rating rules, ten have adjusted community rating rules, and 35 have rate bands in the small group market. In the states with rate bands, many exceed variation of 25:1.
HIPAA established Federal rules regarding guaranteed issue, guaranteed renewability, and coverage for pre-existing health conditions for certain persons and groups. HIPAA requires that coverage sold to firms with 2-50 employees must be sold on a guaranteed issue basis. That is, the issuer must accept every small employer that applies for coverage. HIPAA also guarantees renewal of both small and large group coverage at the option of the plan sponsor (e.g., employer), with some exceptions. And HIPAA limits the duration that coverage for pre-existing health conditions may be excluded for ―HIPAA eligible‖ individuals with group coverage. In addition, a number of states have enacted their own guaranteed issue and pre-existing condition exclusion rules, sometimes exceeding Federal rules. All states require issuers to offer policies to firms with 2-50 workers on a guaranteed issue basis and limit the period of time when coverage for pre-existing health conditions may be excluded, in compliance with HIPAA. As of January 2009, 13 states also require issuers to offer policies on a guaranteed issue basis to self-employed ―groups of one,‖ and 21 states had pre-existing condition exclusion rules that provided consumer protection above the Federal standard.
Chairman’s Mark
The rules for the small group market would be the same as those for the individual market, except that they would be phased in over a period of up to five years beginning January 1, 2013, as determined by each state with approval from the Secretary.
Cafeteria Plans for Small Employers
Current Law
Definition of a Cafeteria Plan. If an employee receives a qualified benefit based on the employee’s election between the qualified benefit and a taxable benefit under a cafeteria plan, the qualified benefit generally is not includable in gross income.1 However, if a plan offering an employee an election between taxable benefits (including cash) and nontaxable qualified benefits does not meet the requirements for being a cafeteria plan, the election between taxable and nontaxable benefits results in gross income to the employee, regardless of what benefit is elected and when the election is made.2 A cafeteria plan is a separate written plan under which all
1 Sec. 125(a).
2 Proposed Treas. Reg. sec. 1.125-1(b)
participants are employees, and participants are permitted to choose among at least one permitted taxable benefit (for example, current cash compensation) and at least one qualified benefit. Finally, a cafeteria plan must not provide for deferral of compensation, except as specifically permitted in sections 125(d)(2)(B), (C), or (D).
Qualified Benefits. Qualified benefits under a cafeteria plan are generally employer provided benefits that are not includable in gross income under an express provision of the Code. Examples of qualified benefits include employer provided health insurance coverage, group term life insurance coverage not in excess of $50,000, and benefits under a dependent care assistance program. In order to be excludible, any qualified benefit elected under a cafeteria plan must independently satisfy any requirements under the Code section that provides the exclusions. However, some employer provided benefits that are not includable in gross income under an express provision of the Code are explicitly not allowed in a cafeteria plan. These benefits are generally referred to as nonqualified benefits. Examples of nonqualified benefits include scholarships;3 employer-provided meals and lodging;4 educational assistance;5 and fringe benefits.6 A plan offering any nonqualified benefit is not a cafeteria plan.7
Flex-credits Under a Cafeteria Plan. Employer flex-credits are non-elective employer contributions that an employer makes available for every employee eligible to participate in the cafeteria plan, to be used at the employee’s election only for one or more qualified benefits (but not as cash or other taxable benefits).
Employer Contributions Through Salary Reduction. Employees electing a qualified benefit through salary reduction are electing to forego salary and instead to receive a benefit which is excludible from gross income because it is provided by employer contributions. Section 125 provides that the employee is treated as receiving the qualified benefit from the employer in lieu of the taxable benefit. For example, active employees participating in a cafeteria plan may be able to pay their share of premiums for employer provided health insurance on a pre-tax basis through salary reduction.8
Nondiscrimination Requirements. Cafeteria plans and certain qualified benefits (including group term life insurance, self insured medical reimbursement plans, and dependent care assistance programs) are subject to nondiscrimination requirements to prevent discrimination in favor of highly compensated individuals generally as to eligibility for benefits and as to actual contributions and benefits provided. There are also rules to prevent disproportionate benefits to key employees (within the meaning of section 416(i)).9 In general, the failure to satisfy the
3 Sec. 117
4 Sec. 119
5 Sec.127
6 Sec. 132
7 Proposed Treas. Reg. sec. 1.125-1(q). Long-term care services are also not qualified benefits. Contributions to Archer Medical Savings Accounts (sections 220, 106(b)), group term life insurance for an employee’s spouse, child or dependent, and elective deferrals to section 403(b) plans are also nonqualified benefits.
8 Sec. 125.
9 A key employee generally is an employee who, at any time during the year is (1) a five-percent owner of the employer, or (2) a one-percent owner with compensation of more than $150,000 (not indexed), or (3) an officer with
nondiscrimination rules results in a loss of the tax exclusion by the highly compensated individuals. Although the basic purpose for the nondiscrimination rules is the same, the specific rules for satisfying the relevant nondiscrimination requirements, including the definition of highly compensated individual,10 vary for cafeteria plans generally and for each qualified benefit. An employer maintaining a cafeteria plan in which any highly compensated individual participates must make sure that both the cafeteria plan and each qualified benefit satisfies the relevant nondiscrimination requirements, or the participating highly compensated employees may not be able to exclude from income the otherwise qualified benefits.
Chairman’s Mark
The Chairman’s Mark would provide for a safe harbor from the nondiscrimination requirements for cafeteria plans for an eligible small employer. The safe harbor under the Mark also applies to the nondiscrimination requirements for specified qualified benefits offered under the cafeteria plan, including group term life insurance, coverage under a self insured group health plan, and benefits under a dependent care assistance program. The safe harbor requires that the cafeteria plan satisfy minimum eligibility and participation requirements and minimum flex-credit contribution requirements.
Eligibility Requirement. The eligibility requirement is met only if all employees (other than excludible employees) are eligible to participate, and each employee eligible to participate is able to elect any benefit available under the plan (subject to the terms and conditions applicable to all participants). However, a cafeteria plan will not fail to satisfy this eligibility requirement merely because the plan excludes employees who: (1) have not attained the age of 21 (or a younger age provided in the plan) before the close of a plan year; (2) had fewer than 1,000 hours of service for the preceding plan year; (3) have less than one year of service with the employer as of any day during the plan year; (4) are covered under an agreement which the Secretary of Labor finds to be a collective bargaining agreement if there is evidence that the benefits covered under the cafeteria plan were the subject of good faith bargaining between employee representatives and the employer; or (5) are described in section 410(b)(3)(C) (relating to nonresident aliens working outside the United States).
compensation more than $160,000 (for 2009). A special rule limits the number of officers treated as key employees. If the employer is a corporation, a five-percent owner is a person who owns more than five percent of the outstanding stock or stock possessing more than five percent of the total combined voting power of all stock. If the employer is not a corporation, a five-percent owner is a person who owns more than five percent of the capital or profits interest. A one-percent owner is defined by substituting one percent for five percent in the preceding definitions. Attribution applies in determining ownership.
10 Under section 125, a cafeteria plan must not discriminate in favor of a ―highly compensated individual‖ with respect to eligibility to participate in the cafeteria plan or in favor of a ―highly compensated participant‖ with respect to benefits under the plan.10 For cafeteria plan purposes, a ―highly compensated individual‖ is (1) an officer, (2) a five-percent shareholder, (3) an individual who is highly compensated, or (4) the spouse or dependent of any of the preceding categories.10 A ―highly compensated participant‖ is a participant who falls in any of those categories. ―Highly compensated‖ is not defined for this purpose. Under section 105(h), a self-insured health plan must not discriminate in favor of a ―highly compensated individual,‖ defined as (1) one of the five highest paid officers, (2) a 10-percent shareholder, or (3) an individual among the highest paid 25 percent of all employees. Under section 129 for a dependent care assistance program, eligibility for benefits, and the benefits and contributions provided, generally must not discriminate in favor of highly compensated employees within the meaning of section 414(q).
Minimum Contribution Requirement. The minimum contribution requirement is met if: (1) the employer provides flex-credits available for use during the plan year equal to at least two percent of each eligible employee’s compensation for the plan year; or (2) the value of employer-paid benefits is at least six percent of each eligible employee’s compensation for the plan year or, if less, twice the amount of the salary reduction amount for the year of each eligible employee who is not a highly compensated (within the meaning of section 414(q))11 or a key employee (within the meaning of section 416(i)) and who participates in the plan.
An employer is permitted to provide flex credits under the cafeteria plan in addition to the minimum required matching or non-elective contributions. However, the contribution requirement is not satisfied if the matching contributions for any highly compensated or key employee are at a greater rate than matching contributions for any employee who is not a highly compensated or key employee, with respect to salary reduction contributions.
Eligible Employer. An eligible small employer under the Chairman’s Mark is, with respect to any year, an employer who employed an average of 100 or fewer employees on business days during either of the two preceding years. For purposes of the Mark, a year may only be taken into account if the employer was in existence throughout the year. If an employer was not in existence throughout the preceding year, the determination is based on the average number of employees that it is reasonably expected such employer will employ on business days in the current year. If an employer was an eligible employer for any year and maintained a simple cafeteria plan for its employees for such year, then, for each subsequent year during which the employer continues, without interruption, to maintain the cafeteria plan, the employer is deemed to be an eligible small employer until the employer employs an average of 200 or more employees on business days during any year preceding any such subsequent year.
The determination of whether an employer is an eligible small employer is determined by applying the control group rules of section 52 (a) and (b) under which all members of the controlled group are treated as a single employer. In addition, the definition of employee includes leased employees within the meaning of section 414(n) and (o). 12
Effective Date
This section is effective for taxable years beginning after December 31, 2010.
11 Section 414(q) generally defines a highly compensated employee as an employee: (1) who was a five-percent owner during the year or the preceding year; or (2) who had compensation of $110,000 (for 2009) or more for the preceding year. An employer may elect to limit the employees treated as highly compensated employees based upon their compensation in the preceding year to the highest paid 20 percent of employees in the preceding year. Five-percent owner is defined by cross-reference to the definition of key employee.
12 Section 52(b) provides that, for specified purposes, all employees of all corporations which are members of a controlled group of corporations are treated as employed by a single employer. However, section 52(b) provides certain modifications to the control group rules including substituting 50 percent ownership for 80 percent ownership as the measure of control. There is a similar rule in section 52(c) under which all employees of trades or businesses (whether or not incorporated) which are under common control are treated under regulations as employed by a single employer. Section 414(n) provides rules for specified purposes when leased employees are treated as employed by the service recipient and section 414 (o) authorizes the Treasury to issue regulations to prevent avoidance of the requirements of section 414(n).
Qualified Long Term Care Insurance
Current Law
A plan of an employer providing coverage under a qualified long-term care insurance contract generally is treated as an accident or health plan. Thus, employer contributions for qualified long-term care insurance for the employee, his or her spouse, and his or her dependents are excludible from gross income and from wages for employment tax purposes. Employees participating in a cafeteria plan, however, are not able to pay the portion of premiums for long-term care insurance not otherwise paid for by their employers on a pre-tax basis through salary reduction because, under current law, any product that is advertised, marketed, and offered as long-term care is a nonqualified benefit specifically not permitted to be offered under a cafeteria plan.13
Similarly, employee expenses for long-term care services cannot be reimbursed under a flexible spending arrangement for health coverage on a tax-free basis. A flexible spending arrangement for health coverage generally is defined as a benefit program which provides employees with coverage under which specific incurred medical care expenses may be reimbursed (subject to reimbursement maximums and other conditions) and the maximum amount of reimbursement reasonably available is less than 500 percent of the value of such coverage.14
A qualified long-term care insurance contract is defined as any insurance contract that provides only coverage of qualified long-term care services and that meets other requirements. The other requirements include: (1) the contract is guaranteed renewable; (2) the contract does not provide for a cash surrender value or other money that can be paid, assigned, pledged or borrowed; (3) refunds (other than refunds on the death of the insured or complete surrender or cancellation of the contract) and dividends under the contract may be used only to reduce future premiums or increase future benefits; (4) the contract generally does not pay or reimburse expenses reimbursable under Medicare (except where Medicare is a secondary payor, or the contract makes per diem or other periodic payments without regard to expenses); and (5) the contract satisfies certain consumer protection requirements.15
A contract does not fail to be treated as a qualified long-term care insurance contract solely because it provides for payments on a per diem or other periodic basis without regard to expenses incurred during the period.
Chairman’s Mark
The Chairman’s Mark would allow a cafeteria plan to offer as a qualified benefit contributions to a qualified long-term care insurance contract (as defined in section 7702B) to the extent the amount of such contributions does not exceed the eligible long-term care premiums (as defined in section 213(d)(10)) for such contract. Under the Mark, reimbursement for employee-paid
13 Sec. 125(f).
14 Sec. 106(c)(2) and proposed Treas. Reg.1.125-5(a).
15 Sec. 7702B(b).
premiums for a qualified long-term care insurance contract through a flexible spending arrangement (whether or not under a cafeteria plan) is similarly excludible from gross income.
Effective Date
The provision is effective for taxable years beginning after December 31, 2010.
Pooling Requirements for Individual and Small Group Markets
Current Law
Pooling refers to the industry practice of pooling the insurance risk of individuals or groups in order to determine premiums. In the individual market premiums are typically based on the risk of the applicant, such as an individual or family. In the small group market, premiums are typically based on the collective risk of the small group.
HIPAA defines small group size as those firms with 2-50 employees. Moreover, states have defined small group for health insurance purposes. As of December 2008, 12 states define small group size as those with 1-50 employees, including self-employed. The rest of the states and the District of Columbia define small groups in keeping with the Federal standard.
As part of its comprehensive health reform plan, Massachusetts merged its small and individual markets. The practical effect is that insurance risk is now spread across the larger combined pool, upon which premiums are determined.
Chairman’s Mark
States would be required to apply the new Federal rating rules to two distinct markets (1) the individual market and (2) the small group market, defined as groups of 1-50 or up to 100 at state option. States would have the option to merge the pooling and rating requirements for the individual and small group markets.
Risk-adjustment. All plans in the individual and small group markets would be subject to the same system of risk-adjustment. Risk-adjustment will be applied within rating areas (described below).
The Secretary would be required to pre-qualify entities capable of conducting risk-adjustment and the states would have the option to pick among those entities. The entities pre-qualified by the Secretary cannot be owned or operated by insurance carriers. The Secretary of HHS would define qualified risk-adjustment models which can be used by states. States can also choose to develop their own risk-adjustment model but it must produce similar results and not increase Federal costs. After risk-adjustment is applied, reinsurance and risk corridors (described below) would apply.
Reinsurance. As a condition of issuing commercial, major medical health insurance policies or administering benefit plans for major medical coverage in years 2013, 2014, and 2015, all health insurance issuers would be required to contribute to a reinsurance program for individual policies
that is administered by a non-profit reinsurance entity that would function as described below. This requirement would be enforced at the state level in a manner consistent with new the insurance market reforms. National Association of Insurance Commissioners (NAIC) would be directed to develop a model for states to adopt. If the NAIC does not act or a state does not adopt the new requirements, new Federal regulations would preempt state laws that conflict with the new reinsurance requirements.
In order to meet the requirement above, insurers shall contribute to a reinsurance entity that is a non-profit entity (referred to as the ―Non Profit‖). The purpose of the Non Profit must be to help stabilize premiums for individual coverage during the first few years of operation of the state exchanges when the risk of adverse selection related to new rating rules and market changes is greatest. A duty of the Non Profit must be to coordinate the funding and operation of a risk spreading mechanism that takes the form of reinsurance.
The Non Profit must use funds collected to support a reinsurance mechanism applied to individuals (individual) enrolled in plans offered within the state exchange. The mechanism would be invisible to the individual and take the form of reinsurance for those defined as ―high risk.‖ Individuals for whom reinsurance payments are applicable must be objectively identified using a limited list of 50-100 high-risk conditions or other comparable objective method recommended by the American Academy of Actuaries (the ―Academy‖). The formula for reinsurance payments must be designed on a per condition basis or other comparable method recommended by the Academy that encourages the use of care coordination and care management programs for high-risk conditions. The formula shall equitably allocate the available funds through reconciliation (e.g., at year-end).
Contributions collected by the Non Profit must total $20 billion in 2013 to 2015 in order for insurers to meet the requirement. Contributions could be collected in advance or on a periodic basis throughout each applicable year as long as $10 billion in reinsurance payments could be made by the Non Profit for individual policies sold in the state exchanges for 2013, $6 billion for 2014, and $4 billion for 2015. In the event that all funds are not expended in the three year period, the non-profits may continue to make payments through 2017, but no new funds would be collected beyond 2015. The contribution amounts allocated and used in any of the three years may vary based on the reinsurance needs of a particular year or to reflect experience in the prior year. The contribution amount must proportionally reflect each entity’s fully insured commercial book of business for all major medical products and third-party administrators (TPA) fees (e.g., based on percentage of revenue or flat, per enrollee amount). Separate contributions from insurers would fund the administrative expenses of the Non Profit. Nothing would preclude the Non Profit from collecting additional funding on a voluntary basis or in conjunction with state requirements applicable to new individual polices offered outside the state exchanges.
State insurance commissioners would be able to review the actuarial soundness of the risk spreading activities conducted by and the contributions made by the Non Profit.
Risk Corridors. After reinsurance is applied, in the case of a plan that offers coverage in the individual and small group market in 2013, 2014, and 2015, risk corridors modeled after that applied to regional Participating Provider Organizations in Medicare Part D will be provided if a
plan chooses to participate. For the purpose of this provision, allowable costs means the total amount of costs that the plan incurred in providing benefits covered by the plan reduced by the portion of such costs attributable to administrative expenses. The term ‗target amount’ means an amount equal to the total annual premium (including any premium subsidies) collectable for the enrollees for the year reduced by the amount of administrative expenses.
If the allowable costs for the plan for the year are at least 97 percent, but do not exceed 103 percent, of the target amount for the plan and year, there would be no payment adjustment for the plan and year. If the allowable costs for the plan for the year are greater than 103 percent, but not greater than 108 percent, of the target amount for the plan and year, the Secretary would make a payment to the plan equal to 50 percent of the difference between the allowable costs and 103 percent of the target amount. If the allowable costs for the plan for the year are greater than 108 percent of the target amount for the plan and year, the Secretary would make a payment to the plan equal to the sum of 2.5 percent of the target amount and 80 percent of the difference between the allowable costs and 108 percent of the target amount.
If the allowable costs for the plan for the year are less than 97 percent, but greater than or equal to 92 percent, of the target amount for the plan and year, the Secretary would receive a payment from the plan equal to 50 percent of the difference between 97 percent of the target amount and the allowable costs. If the allowable costs for the plan for the year are less than 92 percent of the target amount for the plan and year, the Secretary would receive a payment from the plan equal to the sum of 2.5 percent of the target amount; and 80 percent of the difference between 92 percent of such target amount and such allowable costs.
State Insurance Commissioners
Current Law
State insurance commissioners are responsible for protecting the interests of insurance consumers by performing functions such as antifraud efforts, addressing consumer complaints, market analysis, producer licensing, and regulatory interventions. They are responsible for enforcing the general rules governing insurance, which include licensing insurers and rules for brokers and agents activities.
HIPAA guarantees the availability of a plan and prohibits pre-existing condition exclusions for certain eligible individuals who are moving from group health insurance to insurance in the individual market. States have the choice of either enforcing the HIPAA individual market guarantees, referred to as the ―Federal fallback,‖ or they may establish an ―acceptable alternative state mechanism.‖ In states using the Federal fallback approach, HIPAA requires all health insurance issuers operating in the individual market to offer coverage to all eligible individuals and prohibits them from placing any limitations on the coverage of any pre-existing medical condition. Insurers have options for complying, such as offering the two most popular products, and they can refuse to cover individuals seeking portability from the group market if financial or provider capacity would be impaired
Chairman’s Mark
Roles and Responsibilities. State insurance commissioners would continue to provide oversight of plans with regard to consumer protections (e.g., grievance procedures, external review, agent practices and training, market conduct), rate reviews, solvency, reserve requirements, premium taxes, and all requirements imposed on insured plans as specified in this Mark. They would provide oversight of plans with regards to Federal rating rules and any additional state rating rules, facilitate risk-adjustment within service areas, and establish rate schedules for broker commissions in the state exchanges.
Enforcement Mechanism. The National Association of Insurance Commissioners (NAIC) will devise an NAIC Model Regulation within 12 months of enactment that is consistent with the new Federal law with regards to Federal health insurance rating, issuance and marketing requirements. This model becomes the new Federal minimum standard without any further Congressional action. The new model should be developed by NAIC with input from all NAIC members, health insurance issuers, consumer groups and other qualified individuals. Representatives shall be selected in a manner so as to assure balanced representation among the interested parties.
Once completed, the NAIC Model is written into Federal regulation. If NAIC does not act with the 12 month time period, the Secretary of HHS promulgates regulations within six months in a manner consistent with the new Federal law. Once the Model is completed, states must adopt the new NAIC Model (or adopt the HHS Model if the NAIC did not act in the specified time period) through changes in state regulation and/or legislation. States may also, with approval from the Secretary of HHS, implement a rule or provision differently as long as it is still consistent with the intent of the new Federal law and provides the same level of consumer protections.
If a state fails to adopt the changes in conformance with the new Federal minimum standards either by adopting the NAIC Model or through Secretarial approval, conflicting state laws would be preempted. In such a case, insurers would then offer coverage under Federal law and be overseen by HHS until the state adopts the necessary changes.
States must establish an exchange that complies with the requirements set forth in the Federal law. If a state does not establish an exchange within 24 months of enactment, the Secretary of HHS shall contract with a non-governmental entity to establish a state exchange that complies with the Federal legislation.
Rating Areas
Current Law
There are no Federally-established rating areas in the private health insurance market. However, some states have enacted rating rules in the individual and small group markets that include geography as a characteristic on which premiums may vary. In these cases, the state has established rating areas. Typically, states use counties or zip codes to define those areas.
Chairman’s Mark
Rating areas would be defined by state insurance commissioners and reviewed by the Secretary for adequacy. Rating areas (1) could allow for exceptions (e.g., a high-quality plan that does not have the capacity to serve the entire rating area could be allowed to serve less than a full rating area), (2) would be required to allow for pooling of similar cost people, and (3) would be risk adjusted within each area and across all plans in each market (individual and small group).
Grandfathered Plans
Current Law
No provision.
Chairman’s Mark
Individuals and groups who wish to renew coverage in an existing policy would be permitted to do so. Plans could continue to offer coverage in a grandfathered policy, but only to those who were currently enrolled, dependents, or in the case of an employer, to new employees and their dependents. No tax credits would be offered for grandfathered plans.
Beginning January 1, 2013, Federal rating rules would be phased in for grandfathered policies in the small group market, over a period of up to five years, as determined by the state with approval from the Secretary. These plans could continue to exist after the transition period, but would be subject to the new rating rules.
Interstate Sale of Insurance
Current Law
No provision.
Chairman’s Mark
No later than 2013, the National Association of Insurance Commissioners (NAIC) shall develop model rules for the creation of ―health care choice compacts.‖ Starting in 2015, states may form ―health care choice compacts‖ to allow for the purchase of individual health insurance across state lines. ―Health care choice compacts‖ may exist between two or more states. Once compacts have been agreed to, insurers would be allowed to sell policies in any state participating in the compact. Insurers selling policies through a ―health care choice compact‖ would only be subject to the laws and regulations of the state where the policy is written or issued.
Compacts shall provide that the state where the consumer lives retains authority to address market conduct, unfair trade practices, network adequacy and consumer protection standards, including addressing disputes as to the performance of the contract. Insurers either must be
licensed in both states or submit to the jurisdiction of each state with regard to these issues (including allowing access to records as if the insurer were licensed in the state.) Before selling a individual policy through a ―health care choice compact,‖ insurers must clearly notify consumers that the policy may not be subject to all the laws and regulations of the state is which the purchaser resides.
Effective Date
The effective date for this subtitle is January 1, 2013 unless otherwise indicated.
National Plans
Current Law.
No provision.
Chairman’s Mark
The Chairman’s Mark would allow national plans, with uniform benefit packages that are offered across state lines. These national plans must be licensed in every state that they choose to operate and would be regulated by the states in terms of solvency and other key consumer protections and would offer coverage through the state exchanges.
Such national plans must be compliant with the benefit levels and categories detailed in the Mark, but would preempt state benefit mandates- thereby allowing these national plans to offer a single, uniform benefit package. The National Association of Insurance Commissioners (NAIC), in consultation with consumer groups, business interests, including small businesses, the insurance industry, federal regulators, and benefit experts, will develop standards as to how benefit categories should be implemented (e.g., what constitute prescription drug coverage) taking into consideration how each benefit is offered in a majority (26) of the states. After NAIC publishes these standards, the state insurance commissioners will ensure that insurance companies offering national plans are providing plans that are compliant.
Premiums for national plans will be determined based on rating rules in each state and will reflect geographic variation among rating areas. National plans would be subject to the requirement to offer silver and gold benefit levels. If an insurer offers a national plan(s) in one state, it must offer the same plan(s) in any other state in which it chooses to participate. For national plans, the NAIC will also develop harmonization standards for processes of state insurance regulation that pertain to form filing and rate filing.
State Exchanges and Marketing Requirements
Current Law
No specific provision exists in Federal law today regarding a health insurance exchange. At the state level, however, Massachusetts established a health insurance Connector, which is described below for illustrative purposes.
In 2006, in tandem with substantial private health insurance market reforms, Massachusetts created the Health Insurance Connector Authority, governed by a Board of Directors, to serve as an intermediary that assists individuals in acquiring health insurance. In this role, the Health Connector manages two programs. The first is Commonwealth Care, which offers a government-subsidized plan at three benefit levels from a handful of health insurers to individuals up to 300 percent of the Federal poverty level (FPL) who are not otherwise eligible for traditional Medicaid or other coverage (e.g., job-based coverage). The second is Commonwealth Choice, which offers an unsubsidized selection of four benefit tiers (gold, silver, bronze, and young adult) from six insurers to individuals and small groups.
Under state law, the Board of Directors, with its 11 board members, has numerous responsibilities, including the following: determining eligibility for and administering subsidies through the Commonwealth Care program, awarding a seal of approval to qualified health plans offered through the Connector’s Commonwealth Choice program, developing regulations defining what constitutes ―creditable coverage,‖ constructing an affordability schedule to determine if residents have access to ―affordable‖ coverage and may therefore be subject to tax penalties if they are uninsured, and developing a system for processing appeals related to eligibility decisions for the Commonwealth Care program and the individual mandate.
Chairman’s Mark
Plan Participation. All private insurers in the individual and small group markets that operate nationally, regionally, statewide, or locally must be available in a newly established state exchanges, if the insurers are licensed by a state (that is, a state has determined that the plans meet all the market-reform requirements).
Establishment of State Exchanges. States would be required to establish an exchange for the individual market and a Small Business Health Options Program (SHOP) exchange for the small group market, with technical assistance from the Secretary, in 2010. This requirement may encompass a single exchange with separate resources for individual and small-group customers. The Secretary would be required to establish and maintain a database of plan offerings for use by state exchanges. The database would enable the review of state-specific information. The Secretary could contract out to a private entity for the operation of the plan database.
In 2010, 2011 and 2012, so-called ―mini-medical‖ plans with limited benefits and low annual caps would be prohibited from being offered in the state exchanges. All other policies would be
offered in the state exchange. Beginning January 1, 2013, all plans offered in the individual and small group market, whether through the exchange or outside of the exchange, would have to comply with the rating reforms and benefit options detailed in the Chairman’s Mark.
Legal U.S. residents will be able to obtain insurance through the state exchanges. Parents who are in the country illegally will not be able to buy personal insurance coverage through the state exchange but will be able to buy insurance for their U.S. citizen or lawfully present children.
Functions Performed by Secretary and/or States. The Secretary and/or states would do the following:
1. After consultation with state insurance commissioners, develop a standard enrollment application for eligible individuals and small businesses seeking health insurance through the state exchange, whether done electronically or on paper;
2. Provide a standardized format for presenting insurance options in the state exchange, including benefits, premiums, and provider networks (allowing for customized information so that individuals could sort by factors such as ZIP code or providers);
3. Develop standardized marketing requirements consistent with the NAIC model regulation;
4. Maintain call center support for customer service that includes multilingual assistance — the center would have the ability to mail relevant information to residents based on their inquiry and ZIP code;
5. Enable consumers to enroll in health care plans in local hospitals, schools, Departments of Motor Vehicles, local Social Security offices, and any other offices designated by the state;
6. Develop a model template for a Web portal for use by the states that directs individuals and small businesses to available insurance options in their state, provides a tax credit calculator so individuals and small businesses can determine their true cost of coverage, informs individuals of eligibility for public programs, and presents standardized information related to insurance options, including quality ratings;
7. Conduct eligibility determinations for tax credits and subsidies (as performed by a Federal agency that also reports the information to the Internal Revenue Service (IRS) for end-of-year reconciliation) and enable enrollment of individuals and small businesses;
8. Establish procedures for granting an annual certification upon request of a resident who has sought health insurance coverage through the state exchange, attesting that, for the purposes of enforcing the individual requirement, no health benefit plan which meets the definition of creditable coverage was deemed affordable by the exchange for that individual—and maintain a list of individuals for whom certificates have been granted
and share this information with the Secretary and Treasury Secretary in order for the IRS to effectively enforce the personal responsibility requirement;
9. Establish procedures for appeals of eligibility decisions for subsidies; and
10. Establish a plan for publicizing the existence of the state exchange and the annual open-enrollment period.
State Exchange Related Functions Performed by State Insurance Commissioners. State insurance commissioners would establish procedures for reviewing plans to be offered through the state exchanges and would develop criteria for determining whether certain health benefit plans can be available for sale in the market.
Multiple Exchanges. After states adopt Federal rating rules and the exchange is functional for at least three years, states could permit other entities to operate an exchange — but only if it met specified requirements, and subject to approval by the Secretary.
Regional Exchanges. States could, through interstate compacts, form regional exchanges, subject to approval by the Secretary.
SHOP Exchange. States would assist small employers that opt to use the SHOP exchange as the enrollment option for their employees. Small firms offering through the exchange could not self-insure. Small employers that made age-adjusted contributions on behalf of their employees would be granted a safe harbor from non-discrimination rules.
Administrator. The Secretary of HHS would designate an office within the Department to provide technical assistance to states on incorporating small businesses into SHOP exchanges.
Large Employers. In 2017, states must develop and submit to the Secretary a phase-in schedule (not to exceed five years), including applicable rating rules, for incorporating firms with 50 or more (or 100 or more for those states that already included firms with 51-100 employees) into the state exchanges. The Secretary must develop regulations to address the potential for any risk selection issues associated with allowing larger employers into the state exchanges. Initial phase in for these firms would begin in plan years in 2018 and beyond.
Funding for Operation of the Exchanges. The state exchanges would receive initial Federal funding but then would be self-sustaining in future years.
Effective Date
The effective date for this subtitle is July 1, 2010 unless otherwise indicated.
Benefit Options
Current Law
Generally, Federal law has certain requirements regarding actuarially equivalent benefit options only in the context of private plan offerings through Federal health insurance programs (e.g., Medicare Parts C and D, the State Children’s Health Insurance Program). There is no Federal law regarding actuarially equivalent benefit options in group and individual private health insurance. However, states may have such standards.
For example, Massachusetts defines a standard gold benefit package for private health insurance available in its Connector. According to the states’ 2006 guidance to health insurers, a plan with a different design could be qualified as ―gold‖ if it had an actuarial value within five percent of the standard gold’s value. The state permits two other benefit packages available to all individuals in the Connector: Insurers were instructed that ―silver‖ benefit packages were to be 80 percent of gold (plus or minus 7.5 percent), and ―bronze‖ packages were to be 60 percent of gold (plus or minus two percent). However, these amounts were not set in statute and have changed somewhat over time. An additional option is available to young adults in Massachusetts; plans may exclude prescription drugs and/or limit annual plan benefit payments.
Federal law does not define a minimum creditable coverage (MCC) benefit package for purposes of individual (individual), small group (employers with 2-50 workers (1-50 in some states) or up to 100 in some states), and other group private health insurance. States have the primary responsibility of regulating the business of insurance and may define what qualifies as minimum creditable coverage. However, Federal law requires that private health insurance include certain benefits and protections. HIPAA and subsequent amendments require, for example, that group health plans and insurers cover minimum hospital stays for maternity care, provide parity in annual and lifetime mental health benefits, and offer reconstructive breast surgery if the plan covers mastectomies.
Chairman’s Mark
Definition of Four Benefit Categories. Four benefit categories would be available: bronze, silver, gold and platinum. No policies could be issued in the individual or small group market (other than grandfathered plans) that did not meet the actuarial standards described below. All health insurance plans in the individual and small group market would be required, at a minimum, to offer coverage in the silver and gold categories.
All plans must provide preventive and primary care, emergency services, hospitalization, physician services, outpatient services, day surgery and related anesthesia, diagnostic imaging and screenings (including x-rays), maternity and newborn care, pediatric services (including dental and vision), medical/surgical care, prescription drugs, radiation and chemotherapy, and mental health and substance abuse services that at least meet minimum standards set by Federal and state laws. In addition, plans could charge no cost-sharing (e.g., deductibles, copayments)
for preventive care services, except in cases where value-based insurance design16 is used. Plans could also not include lifetime limits on coverage or annual limits on any benefits. Any insurer that rates on tobacco use must also provide coverage for comprehensive tobacco cessation programs including counseling and pharmacotherapy (prescription and non-prescription). The provisions in this paragraph would all be within the actuarial value of the appropriate benefit level.
Each plan design for products in the state exchanges would be required to apply parity for cost-sharing for treatment of conditions within each of the following categories of benefits: (1) inpatient hospital; (2) outpatient hospital; (3) physician services; and (4) other items and services, except in cases where value-based insurance design is used. Each plan design would also be required to meet the class and category of drug coverage requirements specified in Medicare Part D. (Generally, Part D plans must offer two drugs in each class or category.) States may permit some flexibility in plan design to encourage widely agreed upon cost and quality effective services. These requirements would not add to or change the actuarial value of the benefit designs.
Insurers participating in the state exchanges would be required to charge the same price for the same products in the entire service area as defined by the state regardless of how an individual purchases the policy (i.e., whether the policy is purchased inside or outside the state exchange from the carrier or an agent).
Definition of Levels. The bronze benefit package, which would represent minimum creditable coverage (MCC), would be equal to the actuarial value of 65 percent with an out-of-pocket limit up to the Health Savings Account (HSA) current law limit ($5,950 for individuals and $11,900 for families in 2010) indexed to the per capita growth in premiums for the insured market as determined by the Secretary of HHS. The silver benefit package would have an actuarial value of 70 percent with the out-of-pocket limits for MCC. The gold benefit package would have an actuarial value of 80 percent with the out-of-pocket limits for MCC. The platinum benefit package would have an actuarial value of 90 percent with the out-of-pocket limits for MCC. A separate ―young invincible‖ policy would be available for those 25 years or younger. This plan would be a catastrophic only policy in which the catastrophic coverage level would be set at the HSA current law limit, but prevention benefits would be exempt from the deductible.
For those between 100-200 percent of FPL, the benefit will include an out-of-pocket limit equal to one-third of the HSA current law limit. For those between 200-300 percent of FPL, the benefit will include an out-of-pocket limit equal to one-half of the HSA current law limit.
State insurance commissioners are permitted to allow de minimus variation around the benefit target valuations to account for differences in actuarial estimates.
16 Value-based insurance design (VBID) — A benefit design that identifies clinically beneficial preventive screenings, lifestyle interventions, medications, immunizations, diagnostic tests and procedures, and efficacious treatments for which cost-sharing (co-payments or coinsurance and deductibles) should be eliminated or reduced due to their high value and effectiveness.
Health Care Affordability Tax Credits
Current Law
Currently there is no tax credit that is generally available to low or middle income individuals or families for the purchase of health insurance. Some individuals may be eligible for health coverage through state Medicaid programs which consider income, assets, and family circumstances. However, these Medicaid programs are not in the tax code.
Health Coverage Tax Credit. Certain individuals are eligible for the health coverage tax credit (HCTC). The HCTC is a refundable tax credit equal to 80 percent of the cost of qualified health coverage paid by an eligible individual. In general, eligible individuals are individuals who receive a trade adjustment allowance (and individuals who would be eligible to receive such an allowance but for the fact that they have not exhausted their regular unemployment benefits), individuals eligible for the alternative trade adjustment assistance program, and individuals over age 55 who receive pension benefits from the Pension Benefit Guaranty Corporation. The credit is available for ―qualified health insurance,‖ which includes certain employer-based insurance, certain State-based insurance, and in some cases, insurance purchased in the individual market.
The credit is available on an advance basis through a program established and administered by the Treasury Department. The credit generally is delivered as follows: the eligible individual sends his or her portion of the premium to the Treasury, and the Treasury then pays the full premium (the individual’s portion and the amount of the refundable tax credit) to the insurer. Alternatively, an eligible individual is also permitted to pay the entire premium during the year and claim the credit on his or her income tax return.
Individuals entitled to Medicare and certain other governmental health programs, covered under certain employer-subsidized health plans, or with certain other specified health coverage are not eligible for the credit.
COBRA Continuation Coverage Premium Reduction. The Consolidated Omnibus Reconciliation Act of 1985 (COBRA, P.L. 99-272) requires that a group health plan must offer continuation coverage to qualified beneficiaries in the case of a qualifying event (such as a loss of employment). A plan may require payment of a premium for any period of continuation coverage. The amount of such premium generally may not exceed 102 percent of the ―applicable premium‖ for such period and the premium must be payable, at the election of the payor, in monthly installments.
Section 3001 of the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5) provides that, for a period not exceeding nine months, an assistance eligible individual is treated as having paid any premium required for COBRA continuation coverage under a group health plan if the individual pays 35 percent of the premium. Thus, if the assistance eligible individual pays 35 percent of the premium, the group health plan must treat the individual as having paid the full premium required for COBRA continuation coverage, and the individual is entitled to a subsidy for 65 percent of the premium. An assistance eligible individual generally is any qualified beneficiary who elects COBRA continuation coverage and the qualifying event with respect to the covered employee for that qualified beneficiary is a loss of group health plan
coverage on account of an involuntary termination of the covered employee’s employment (for other than gross misconduct). In addition, the qualifying event must occur during the period beginning September 1, 2008, and ending December 31, 2009.
The low income tax credit also applies to temporary continuation coverage elected under the Federal Employees Health Benefits Program (FEHBP) and to continuation health coverage under State programs that provide coverage comparable to continuation coverage. The subsidy is generally delivered by requiring employers to pay the subsidized portion of the premium for assistance eligible individuals. The employer then treats the payment of the subsidized portion as a payment of employment taxes and offsets its employment tax liability by the amount of the low-income tax credit. To the extent that the aggregate amount of the subsidy for all assistance eligible individuals for which the employer is entitled to a credit for a quarter exceeds the employer’s employment tax liability for the quarter, the employer can request a tax refund or can claim the credit against future employment tax liability.
There is an income limit on the entitlement to the low-income tax credit. Taxpayers with modified adjusted gross income exceeding $145,000 (or $290,000 for joint filers), must repay any subsidy received by them, their spouse, or their dependant, during the taxable year. For taxpayers with modified adjusted gross incomes between $125,000 and $145,000 (or $250,000 and $290,000 for joint filers), the amount of the subsidy that must be repaid is reduced proportionately. The subsidy is also conditioned on the individual not being eligible for certain other health coverage. To the extent that an eligible individual receives a subsidy during a taxable year to which the individual was not entitled due to income or being eligible for other health coverage, the subsidy overpayment is repaid on the individual’s income tax return as additional tax. However, in contrast to the HCTC, the subsidy for COBRA continuation coverage may only be claimed through the employer and cannot be claimed at the end of the year on an individual tax return.
Chairman’s Mark
Premium Credit. The Chairman’s Mark would provide a refundable tax credit for eligible individuals and families who purchase health insurance through the state exchanges. The premium tax credit will subsidize the purchase of certain health insurance plans through the state exchanges and will be refundable and payable in advance directly to the insurer. The tax credit would be available for individuals (single or joint filers) with Modified Adjusted Gross Incomes (MAGI) up to 300 percent of the Federal poverty level (FPL). MAGI would be defined as an individual’s (or couple’s) adjusted gross income (AGI) without regard to sections 911 (regarding the exclusion from gross income for citizen or residents living abroad), 931 (regarding the exclusion for residents of specified possessions), and 933 (regarding the exclusion for residents of Puerto Rico), plus any tax-

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