The HHS announcement states that insurers who failed to meet the MLR standards will rebate more than $1.1 billion to 12.8 million policyholders, with an average return of $151 per household.  HHS thus gives the total number of individuals affected, but calculates the average payment on a "per household" basis, so care must be taken to gain a clear understanding of the numbers.  In addition, the numbers are not for all policyholders, but only for those in plans where the insurer failed the MLR test.  Consumers Union, the parent of Consumer Reports, has a list of insurers by state and the amounts by which they exceeded the MLR limits.  The list for Ohio is as follows:

Ohio
Individual Market

• John Alden Life Ins Co: $380,135.00
• Time Ins Co: $409,486.00
• Humana Ins Co: $8,900.00
• Companion Life Ins Co: $1,062.00
• Mega Life & Hlth Ins Co The: $381,269.00
• Community Ins Co: $6,633,894.00
• Total: $7,814,746.00

Small Employer Market

• Trustmark Life Ins Co: $1,027,486.00
• John Alden Life Ins Co: $1,008,037.00
• Humana Ins Co: $77,670.00
• UnitedHealthcare Ins Co of the River: $700,208.00
• Humana Hlth Plan of OH Inc: $99,427.00
• Total: $2,912,828.00

The MLR test is one of the more controversial components of the Affordable Care Act, since, while it sounds fine on the surface to keep insurance companies from spending too much of their premiums on administrative costs, there are both unintended consequences and problems with the definitions.  For example, since the MLR is a ratio, there is a significant incentive for carriers to increase rates.  (15% of $1000 is greater than 15% of $500.)  At least some of the increases in rates since the passage of the Affordable Care Act can be attributed to this effect. As another example, anti-fraud investigation and enforcement efforts by insurers are treated as administrative costs.  Since one of the main drivers of cost increases in health care is fraud, treating fraud prevention as an administrative cost discourages prevention.  This also tends to increase the cost of health care.

In any case, insurers who fail the test must provide their rebates through one of the following methods: a lump sum check in the mail; a lump sum credit to the debit or credit card account from which the payments were made; a credit against 2012 premiums; or a payment through the employer using one of those methods.  If the insurer provides the rebates to the employer, the employer must then go through the exercise of calculating the portion due to its employees and providing them with their appropriate shares. 

Princeton economics professor, Uwe E. Reinhardt, recently posted an interesting article on the New York Times “Economix” blog entitled “The Fork in the Road for Health Care.” The post discusses the seeming inevitability of healthcare rationing and attributes rising healthcare costs under employer-provided health policies to rising healthcare prices rather than increased utilization of healthcare services.

For example, the Milliman Medical Index tracking average annual medical costs for a typical family of four has found that average healthcare costs increased from $8,414 to $20,728 between 2001 and 2012, with a 6.9% increase in the prior year alone. Given the fact that about 50% of U.S. households have an income of $50,000 or less, the expected average out-of-pocket family contribution of $8,584 in 2012 begs the question of how our society will handle the rising costs.

Dr. Reinhardt outlines several potential options, including government action to cap health care costs or segregating health care into income classes by eliminating tax preferences and subsidies for high-income groups, setting up “reference pricing” arrangements that tie reimbursement to regional low-cost rates, utilizing high-deductible policies and coinsurance for the middle class, and establishing public health systems for low-income persons similar to the Veterans Administration system to deliver services and control costs.

Regardless of which option society chooses down the road, healthcare rationing by income level may be inevitable (many would say it exits already). As Dr. Reinhardt writes, economists understand that the employer’s portion of healthcare costs is often effectively shifted back to employees in the form of lower pay increases. Thus, shifting increasing healthcare costs to employers is usually counter-productive as these cost increases are almost always offset by stagnant wages and reduced bonuses and are ultimately indirectly shouldered by employees.

At the same time, another study recently released by the Commonwealth Fund looks at individual plans. These plans are generally medically underwritten and are purchased by persons using their own funds. Individual purchasers can buy whatever coverage they choose, since once they meet the underwriting standards, they can select any plan they prefer, so long as they are willing to pay the cost.

The new study finds that over half of the individual policies currently in force will be below the minimum coverage allowed to be provided on the health insurance exchanges under the Patient Protection and Affordable Care Act. Thus, many current individual policyholders will be forced to purchase plans with higher benefits—and consequently, higher costs. As a result, the individual coverage markets will face considerable upward price pressure, as half of the current purchasers must give up coverage they now like in order to buy more expensive options.

The report summary states the key conclusions as follows:

CBO and JCT's Key Findings

• CBO and JCT continue to expect that the ACA will lead to a small reduction in employment-based health insurance. That projection arises from the agencies' modeling of the many changes in opportunities and incentives facing employers and employees under the ACA, and it is consistent with the findings of other analysts who have carefully modeled the nation’s health insurance system.
• Significant changes in some of the key assumptions underlying the estimates lead to somewhat higher or lower projections of the change in employment-based health insurance and the budgetary impact of the ACA. However, differences in the projected change in employment-based health insurance tend to have limited effects on the projected budgetary impact of the law because changes in the availability and take-up of such insurance affect the federal budget through several channels that are partly offsetting. Indeed, one scenario examined here shows that larger reductions in employment-based health insurance than expected by CBO and JCT might lower rather than raise the cost of the insurance coverage provisions of the ACA.
• In CBO and JCT's judgment, a sharp decline in employment-based health insurance as a result of the ACA is unlikely and, if it occurred, would not dramatically increase the cost of the ACA.

The "small reduction" in employees provided with employer-based coverage is 3 to 5 million.  In some scenarios modeled, the reduction was a total loss of employer-based coverage of 20 million people.  Again, the assumptions in the study were that the lost benefit costs would be replaced by salaries and wages: 

If a firm chose not to
offer insurance coverage under the ACA, some of its workers and their families might enroll in Medicaid or CHIP or be eligible to receive subsidies through the insurance exchanges; as a result, the cost of those programs would increase. At
the same time, the reduction in that firm’s compensation to workers that was
provided in the form of health benefits would generally be offset by an increase in
the compensation it provided in the form of wages and salaries. Because health benefits are generally not taxed but wages and salaries are, that shift in the
composition of compensation would raise federal revenues. In addition, the federal government would generally receive penalty payments from the employer and from any employees who ended up without health insurance.

It is also worth noting that the issue for this study is the effect upon the deficit, not the cost of the provision of coverage.  It is arguable that there could be deficit offsets in the form of increased taxes, but there can be no dispute that having billions of premium dollars of coverage no longer paid by employers and then provided through the exchanges, with subsidies, will affect the cost of the Affordable Care Act.  Even as to the deficit, if employers (especially small employers not subject to employer penalties) simply get out of the health care business without increasing their pay rates the anticipated offsets for higher income and payroll taxes simply will not occur and the deficit will increase.

Some observers have expressed surprise that CBO and JCT’s previous estimates did not show a much larger reduction in the number of people receiving employment-based health insurance. CBO and JCT’s estimates take account of the expanded eligibility for Medicaid and the subsidies to be provided through the insurance exchanges, but they also recognize that the legislation leaves in place substantial financial incentives for firms to offer health insurance coverage and also creates new financial incentives for firms to offer such coverage and for many people to obtain it through their employers. Shortly, CBO will release an extensive analysis conducted with JCT of the incentives for firms to offer or not offer health insurance under the ACA, as well as a range of estimates of sources of coverage and federal budgetary outcomes that would result from the ACA under alternative assumptions about employers’ behavior.

The tax gap can be divided into three components: non-filing, underreporting and underpayment.

As was the case in 2001, the underreporting of income remained the biggest contributing factor to the tax gap in 2006. Under-reporting across taxpayer categories accounted for an estimated $376 billion of the gross tax gap in 2006, up from $285 billion in 2001. Tax non-filing accounted for $28 billion in 2006, up from $27 billion in 2001. Underpayment of tax increased to $46 billion, up from $33 billion in the previous study.

Overall, compliance is highest where there is third-party information reporting and/or withholding. For example, most wages and salaries are reported by employers to the IRS on Forms W-2 and are subject to withholding. As a result, a net of only 1 percent of wage and salary income was misreported. But amounts subject to little or no information reporting had a 56 percent net misreporting rate in 2006.

The problem for employers is that this mindset results in additional burdens being imposed on them to prevent alleged tax evasion by the people the employers contract with or employ. It also encourages false counting of government revenue in legislation, such as the ridiculously costly 1099 requirement contained in the Affordable Care Act and finally repealed in 2011.

Speaking of the Affordable Care Act, there is a provision in it that requires employers to provide a report to employees, on their W-2's, of how much the employer pays to provide health care to them.  There is no additional tax, but the thought apparently was that employees did not appreciate how much their insurance coverage cost, so they would keep agitating for more costly coverage.  In turn, that would drive up demand for health care services and increase the cost of health care overall.  The law did not limit the report to the specific cost of health insurance.  That would probably have been too simple and might not have allowed any assumption about reduced demand for health coverage.  Rather, the figure is supposed to include all the employer costs, for example, contributions to Health Reimbursement Arrangements, other supplemental plans and subsidies.  There were issues about whether the reporting was to be on an individual basis, or averaged over the entire employee base.  The IRS was unable to develop rules in time for the initial reporting, so it gave employers an extension.  Earlier this week, it issued additional guidance in Notice 2012-9 for employers on the reporting that will be required on the W-2 forms for 2012, which must be provided by January 31, 2013.  Notably, employers who do not have to provide more that 250 W-2's are completely exempt for 2012.  There are a number of other limitations on the reporting required of larger employers.  HRA amounts are includable, but Flexible Spending Account expenses generally are not.  Most costs that are taxable to employees will not have to be included.  Most of the interpretations make it easier for employers to do the calculations, although the literal language of the Act could well support broader reporting.  There is nothing to prevent reinterpretations in the future that would make the process much more burdensome for employers. For the time being, however, small employers can breathe easier for another year and large employers should be able to cope without excessive costs.  Of course, with the limitations on reporting, the alleged benefits for the health care system of this requirement are slight.  The cost-benefit analysis still comes out on the far negative side of the ledger.

An Administrative Law Judge found that there was "little if anything more central to the Hospital's 'entrepreneurial purpose' than its attempt to keep its patients free of the influenza virus" and threfore dismissed the complaint.  The Board, in a 2-1 decision by Chairman Liebman and Member Pearce, with a dissent by Member Hayes, found that Peerless depended upon the Constitutional principle of freedom of the press and there was no such principle involved in hospital infection control.  The majority said that the Peerless Board was "mindful of" and to some extent influenced by the First Amendment implications of limiting a newspaper's control over ethical standards for journalists. It then converted that mindfulness into the basis for the Peerless decision and distinguished the Hospital's concern over the health of its patients as having no Constitutional dimension.  Hence, there was no Constitutionally-based core purpose to influenza control that excused the hospital from having to bargain.  The Board remanded the case to the ALJ for consideration of other defenses raised by the hospital.

As noted in a previous post, Chairman Liebman's term has expired and she is no longer on the Board.  Member Pearce has been named the Chairman.  The Board is now operating with three members--Chairman Pearce, Member Hayes and Member Becker.  Member Hayes is the sole Republican on the Board and is likely to be dissenting from more cases in the future.  In the meantime, unless reversed, the Virginia Mason case is likely to spell the effective end to the "core purpose" exception to the duty to bargain.

Employers who have taken this route have found themselves mired in a murky confluence of labor, employment, health care and privacy laws.  The plans must comply with HIPAA, the PPACA, the ADA, the ADEA, Title VII, GINA and possibly the NLRA if the workforce is unionized.  Depending on how they are interpreted, the requirements to comply are in some cases conflicting and in other places unclear.

Enter the United States District Court for the Southern District of Florida.  In a much anticipated decision for those following wellness programs, Judge K. Michael Moore granted summary judgment in favor of Broward County's wellness program.  A copy of the opinion in Seff v. Broward County is attached.  Seff filed a class action suit under the ADA challenging the legality of the wellness program, contending that the program violated the ADA's medical inquiry requirements because the program was not voluntary.  Seff argued that the program was not voluntary because non-participants incurred a $20 charge, which he characterized as a penalty.

The Court, although avoiding interpreting the ADA head on, held that the wellness program fell under the ADA's insurance safe harbor provision, 42 U.S.C. 12201(c). 

Employers who wish to take advantage of this good development should note:

1.  The wellness program must be a term of a bona fide benefit plan;

2.  Aggregate date obtained from the plan should used to analyze and develop future benefit plans; and

3.  The plan must be consistent with applicable state law.

Of course, employers should be mindful that this decision is likely to be appealed and that different courts may reach different conclusions.   Nonethelss, it is a positive step for the legality of incentive-based wellness programs.