On March 23, 2010, President Obama signed into law H.R. 3590, the Patient Protection and Affordable Care Act (PPACA).

Generally speaking, health care reform is not effective until 2014; however, there are a number of reforms that are effective for plan years that begin on or after six months after the enactment date, and there are a number of tax provisions with varying effective dates. Irrespective of the effective date, immediate action is required to ensure compliance with the new “law of the land.”

The following is an overview of some relevant, health-plan-related provisions of PPACA.

We have also identified the changes proposed by the Reconciliation Bill to PPACA (identified throughout as “RB Alerts”) so that you will have an understanding of the changes that will take place if the Reconciliation Bill passes as expected.

Immediate improvements in health care

As noted above, some of the reforms will be effective almost immediately. The new provisions, which impact both self-insured and fully-insured group health plans, are generally added to the Public Health Service Act and incorporated by reference into ERISA and the Internal Revenue Code.

Except as noted below, the reforms are effective for plan years beginning six months after the date of enactment—meaning Jan. 1, 2011, for calendar year plans and as soon as this year for plans that have a plan year beginning October 1 or later this year.

Annual and lifetime limits: Plans may not impose lifetime limits and only restricted annual limits, as determined by the Secretary of Health and Human Services, on the value of essential benefits (as defined by PPACA) for any participant or beneficiary.

For plan years beginning on or after Jan. 1, 2014, group health plans and group health insurers may not impose any annual limit. Otherwise permissible lifetime or annual limits may be imposed on specified covered benefits that are not essential health benefits. (New § 2711 of the PHSA)

Prohibition on rescissions: Plans may not rescind coverage except in cases of fraud or intentional misrepresentation. [NOTE: This does not appear to prohibit employers from terminating group health plans.] (New § 2712 of the PHSA)

Coverage of preventive care: Plans must provide first dollar coverage (i.e., no cost sharing) for certain evidence based preventive care (including well child care) and certain immunizations. (New § 2713 of the PHSA)

Coverage of adult children: Plans that cover dependent children must provide for coverage of unmarried children until age 26. There is no requirement to cover children of covered dependent children. The requirement is applicable even if the child is not a tax dependent. (New § 2714 of the PHSA)

RB Alert: The Reconciliation Bill also extends the requirement to married children and extends the tax exclusion for employer-provided coverage to adult children through age 26.

Uniform explanation of coverage: The plan administrator (in the case of a self- insured plan) or the insurer (in the case of a fully-insured plan) must prepare and distribute a paper or electronic summary of coverage to all applicants and all enrollees, both at the time of initial enrollment and annual enrollment. This is in addition to the Summary Plan Description otherwise required by ERISA.

The summary must satisfy certain uniform standards developed by the Secretary of HHS, including but not limited to: (i) no more than four pages in length with print no smaller than 12 point font, (ii) written in a culturally and linguistically appropriate manner, and (iii) containing certain contents related to the covered benefits, exclusions, cost sharing, and continuation. HHS must establish the standards within 12 months of the date of enactment and the summary must be provided within 24 months after the date of enactment.

In addition, the plan or the issuer (as applicable) must notify enrollees of material changes to the coverage reflected in the most recent summary no less than 60 days in advance of the effective date of such coverage. Failure to comply may result in a $1,000 penalty for each failure. (New § 2715 of the PHSA)

Transparency requirements: Group health plans and health issuers in the group market are subject to the same transparency requirements applicable to plans offered in the state exchange.

Under these requirements, such plans and issuers must provide to the Secretary of HHS, the applicable state insurance commissioner, and the public the following information: claims payment policies and data, financial disclosures, enrollment (and disenrollment) data, data on rating policies, information on cost-sharing and payments with respect to out of network coverage, information on participant rights under the Act and other information as determined by the Secretary of HHS. (New § 2715A of the PHSA)

Nondiscrimination rules for insured plans: The nondiscrimination rules of Code Section 105(h) previously applicable only to self-insured health plans are extended to fully-insured group health plans. (New § 2716 of the PHSA)

Pre-existing condition exclusions: With respect to children under age 19, plans may not impose a pre-existing condition exclusion or limitation. (New § 2704 of the PHSA)

Ensuring quality of care: Plans must annually report to HHS and to enrollees (during each open enrollment period) regarding benefits under the plan that improve health, such as case management, disease management, and wellness and health promotion activities. HHS is to develop the reporting standards within two years of the enactment date. (New § 2717 of the PHSA)

Cost reporting and rebate requirements: A health insurance issuer offering group coverage must submit to the Secretary of HHS a report relating to loss ratios. Rebates to enrollees must be provided if the medical loss ratio is 85% (80% in the small group market) or such higher amount as permitted under state law. (New § 2718 of the PHSA)

Claims procedures: Plans must establish an internal claims appeals process that (i) provides notice in a culturally and linguistically appropriate manner of the review process and availability of any applicable health insurance ombudsman created by a state to assist claimants with appeals, (ii) allows claimants to review the entire claim file and present evidence, (iii) allows claimants to continue receiving coverage during the appeals process, and (iv) initially incorporates the claims review procedures set forth in DOL regulations that apply to plans covered by ERISA.

Plans must also establish an external review process that complies with applicable state law and that, at a minimum, includes the consumer protections set forth in the Uniform External Review Model Act developed by the NAIC or, in the case of self-insured plans, meets similar requirements as provided by the Secretary of HHS.

The Secretary of HHS may deem the existing external review process of a group health plan to be in compliance with the provisions of the bill. (New § 2719 of the PHSA)

Patient protections: Plans that require or provide for a designation of a primary care provider must permit each participant to designate any participating primary care provider who is available to accept such individual.

PPACA also requires plans to comply with requirements regarding access to emergency services and obstetrical and gynecological care and to allow designation of a pediatrician as a primary care provider for children. (New § 2719A of the PHSA)

High risk pools: Until the high risk pool established under PPACA for individuals with pre-existing conditions is terminated in 2014, a group health plan must reimburse the high risk pool for medical expenses incurred by the pool for individuals found to have been offered financial incentives to disenroll from the group health plan. (§ 1101 of PPACA)

Electronic transaction standards: Plans must implement certain electronic transaction standards and certify compliance to HHS. The timing of certification varies depending on the type of transaction.

For example, the health plan must certify compliance with electronic fund transfer, health claim status, and health care payment and remittance advice standards established by PPACA by no later than Dec. 31, 2013. Compliance with other standards, such as the health claims or equivalent encounter standard, is due no later than Dec. 31, 2015.

Health insurance reforms

Group health plans and health plan insurers are subject to the following general insurance market reforms. These reforms are generally effective for plan years beginning on or after Jan. 1, 2014.

Prohibition on preexisting exclusion limitations: No preexisting condition exclusions or limitations are permitted. (§ 2704 of the PHSA)

No discrimination based on health status: Essentially, the same rules that currently exist under HIPAA are included in PPACA. PPACA does, however, raise the maximum incentive amount for wellness programs that provide the incentive based on achieving a health standard from 20% of the COBRA cost of coverage to 30% of the COBRA cost of coverage for those participating in the program (and allows the Secretaries of DOL, HHS and Treasury leeway to increase the percentage to 50%). (§ 2705 of the PHSA)

Prohibition on discrimination against providers: No discrimination against a provider who is acting within the scope of his/her license is permitted. This does not mean, though, that a health plan must contract with any willing provider. (§ 2706 of the PHSA)

Cost-sharing limitations: Certain cost-sharing requirements must be satisfied such that the out-of-pocket (OOP) expense does not exceed that applicable to Health Savings Account (HSA) related coverage, and deductibles do not exceed $2,000 for single coverage and $4,000 for family coverage (as indexed). (§ 2707 of the PHSA)

Limitation on waiting periods: Plans may not impose a waiting period in excess of 90 days. There is also an excise tax penalty under PPACA for waiting periods imposed on full-time employees (i.e., employees working more than 30 hours per week) between 61 and 90 days.

RB Alert: The Reconciliation Bill removes the tax penalty under PPACA for waiting periods in excess of 60 days.

Employer responsibility

Effective for months beginning on or after Jan. 1, 2014, employers must satisfy the following requirements:

Automatic enrollment: Large employers with 200 or more full-time employees that offer at least one health plan benefit option must automatically enroll all new employees in a benefit option and continue the enrollment of current employees in a health benefit plan offered by the employer.

The auto-enrollment program should include adequate notice and the opportunity for an employee to opt out of the “auto” coverage and elect another option, or opt out altogether. (§ 1511 of PPACA)

Notification of availability of exchange and subsidies: Employers must notify each employee at the time of hiring of the following: (i) the existence of the exchange, (ii) that the employee may be eligible for a subsidy under the exchange if the employer’s share of the total cost of benefits is less than 60% and (iii) that if the employee purchases a policy through the exchange, he or she will lose the employer contribution to any health benefits offered by the employer (except as set forth in the free choice voucher requirement). (§ 1512 of PPACA)

Employer penalties: Notwithstanding the obligation to comply with the reform requirements identified above, there is generally no requirement for employers to offer the same coverage that insurers offering coverage in the exchange must offer.

In fact, there is generally no requirement for employers to offer any coverage; however, employers with 50 or more full-time employees (“Applicable Employer”) are subject to the following penalties related to coverage that they offer or fail to offer to full-time employees (§ 1513 of PPACA): Applicable Employers who fail to offer any full-time employees health coverage must pay a penalty with respect to each full-time employee in any month in which any employee enrolls in and receives a subsidy for the exchange.

The penalty is determined on a monthly basis and is the product of the total number of full-time employees of the employer for that month (including those employees who did not receive a subsidy for the exchange) and 1/12 of the applicable payment amount, which is $750 under PPACA.

RB Alert: The Reconciliation Bill changes the monthly penalty from 1/12 of $750 to 1/12 of $2,000 and it disregards the first 30 employees. Thus, for example, a business with 51 employees that does not offer coverage is subject to tax equal to 21 times the applicable payment amount.

Applicable Employers offering coverage for any month to a full-time employee who is certified as having enrolled in the exchange and received a tax subsidy are subject to a penalty equal to the product of the total number of such employees (i.e., employees receiving the credit) and 1/12 of $3,000 (400% of the applicable payment amount, which is $750).

The amount of the tax in this instance is limited to 1/12 of $750 multiplied by the total number of the employer’s full- time employees. Note that an employee who is offered employer coverage is not eligible for a credit unless the employee’s required premium for the coverage exceeds 9.5% of the individual’s household income or the plan’s share of allowed costs under the plan is less than 60%.

Applicable Employers who impose a waiting period of more than 60 days and less than 90 days must pay a penalty for each full-time employee to whom the extended waiting period applies. The penalty is equal to $600 for each full-time employee to whom the excess waiting period is imposed.

RB Alert: The Reconciliation Bill eliminates this penalty for waiting periods between 60 and 90 days.

A large employer is defined as an employer (and any other employer within the same controlled group) who employed on average at least 50 full-time employees on business days during the preceding year.

However, an employer is not considered to be a large employer if the employer did not employ more than 50 full-time employees for more than 120 days during the preceding year. A “full-time employee” is defined as an employee who is employed on average at least 30 hours of service per week. Certain “seasonal workers” are not counted as full-time employees.

RB Alert: Under the Reconciliation Bill, part-time employees are taken into account solely for the purpose of determining if an employer has at least 50 employees. The number of full-time employees otherwise determined is increased by dividing the aggregate number of hours of service of employees who are not full-time employees by 120.

Reporting requirements: Applicable Employers must also report to the Secretary of Treasury each year, certifying (i) whether coverage is offered to full-time employees, (ii) the waiting period for any such coverage, (iii) the number of full-time employees of the employer during each month, and (iv) the name, address and TIN of each full-time employee and the months during which they were covered under the plan. (§ 10108 of PPACA)

“Free choice vouchers:” Employers that offer minimum essential coverage and make a contribution must offer “free choice vouchers” to qualified employees for the purchase of qualified health plans through exchanges. The free choice voucher must be equal to the contribution that the employer would have made to its own plan.

Employees qualify if their household income does not exceed 400% of the federal poverty level and the required contribution under the employer’s plan would be between 8 and 9.8% of their income. Free choice vouchers are excludible from employees’ incomes and deductible by the employer. Voucher recipients are not eligible for tax credits through the exchange. (§ 10108 of PPACA)

John Hickman can be reached at john.hickman@alston.com and Ashley Gillihan can be reached at ashley.gillihan@alston.com.

Related coverage: Legal Alert: Dissecting the health reform legislation (Part 2)

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