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The Patient Protection and Affordable Care Act

06/01/2016

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The Patient Protection and Affordable Care Act, also known as PPACA, healthcare reform, Obamacare, Affordable Care Act or the ACA, is a law enacted on March 23, 2010, which issued new rules and guidelines on the offering, administration, and acceptance of healthcare coverage in the United States. PPACA directly regulates healthcare providers, insurance companies, individuals, and employers. The law was amended by the Health Care and Education Reconciliation Act on March 30, 2010.

The law is quite broad, affecting insurance companies, hospitals, individuals, and employers. Many of the law’s sections have different effective dates. For instance, the individual mandate, the piece of PPACA which requires that individuals obtain a level of health coverage known as “minimum essential coverage” or face a tax penalty, went into effect in 2014. The employer mandates, or rules in PPACA which require employers to provide certain levels of coverage to certain employees, went into effect in 2015.

Since PPACA regulates a number of different areas regarding healthcare coverage, it naturally contains a number of separate provisions. Many of these provisions also have associated regulations which offer further guidance. Guidance is offered by the three main departments which regulate PPACA: the Internal Revenue Service (IRS), the Department of Labor (DOL), and the Department of Health and Human Services (HHS).

Goals and Methods

The balance of PPACA is the expansion of a number of individuals who receive healthcare coverage in the United States against tighter rules on what kind of healthcare coverage may be offered to such individuals.

In general, this balance was reached by first enacting a number of regulations on insurance companies. By regulating insurance companies, healthcare coverage will improve and offer a greater benefit to individuals who obtain such coverage. However, these increased regulations will increase the cost of healthcare coverage.

Second, the individual mandate was included to ensure that individuals would obtain health insurance coverage. By expanding the number of individuals seeking health insurance coverage, the price of such coverage decreases.

A number of arguments have been presented by different interest groups and unbiased studies concerning the overall effect of this balance on the price of healthcare coverage. Under certain assumptions and pricing methodologies, PPACA could be shown to either cause a cost decrease or a cost increase. As implementation of PPACA continues, these arguments will be readjusted to better reflect the effects.

While some arguments exist on whether PPACA will improve the benefit of healthcare coverage in the United States, the arguments tend to stem from ancillary issues, such as smaller healthcare networks or problems with healthcare exchanges. The rules which regulate insurance companies, such as a prohibition on pre-existing condition stipulations for certain benefits or guaranteed issue requirements, are generally seen as beneficial to individuals from a benefit perspective.

Challenges

PPACA has been controversial and highly contested since its inception. It has been challenged in a number of different venues for a litany of reasons. These provocations have included legal challenges, political challenges, and implementation challenges.

The highest-level challenge to PPACA questioned, among other things, the constitutionality of the individual mandate. This challenge reached the Supreme Court of the United States in National Federation of Independent Business, et al. v. Sebelius, Secretary of Health and Human Services et al. On June 28, 2012, the Supreme Court issued its opinion on this case, deeming the individual mandate to be constitutional.

PPACA has also been challenged on its ability to issue subsidies and excise taxes in States which do not form a health insurance exchange. Two cases, Pruitt v. Sebelius and Halbig v. Sebelius, both challenge PPACA on this issue. This case also reached the Supreme Court, who ruled against this challenge.

The HHS Mandate, which requires employers to provide contraceptive coverage in their healthcare coverage to eligible employees, has also been challenged by dozens of different groups. The results of these challenges have been varied, but a national precedent has yet to be set.

Politically, PPACA has been challenged through numerous efforts to repeal the law entirely. Other tactics, such as amending certain provisions or defunding implementation, have also been explored. Overall, these efforts have yet to see tangible success.

Compliance has had its importance magnified by increasing government interference in and scrutiny of employer-sponsored health plans. PPACA includes compliance requirements for supplementary documents such as a Summary of Benefits and Coverage or exchange notification.

PPACA takes a dim view of noncompliance, with a multitude of excise tax penalties for those who violate its provisions. Perhaps the most dangerous, but ironically least discussed penalty is under IRC § 4980D. This penalty is for general violations of PPACA provisions, especially the insurance and plan design reform statutes. The penalty is harsh, levying $100/affected employee/day against employers out of compliance, which can add up significantly. 

Two other excise tax penalties under PPACA comprise the employer mandates. These penalties are assessed against applicable large employers who fail to offer (mandate #1) minimum essential coverage, as well as (mandate #2) affordability and minimum value.

Under mandate #1, an employer will be liable for $2,160 per full-time employee per year if the employer does not offer minimum essential coverage to at least 95% of full-time employees. This penalty is also known as the “opt out penalty,” because employers who choose to offer no plan will be subject to this penalty.

Under mandate #2, an employer will be liable for $3,240 per full-time employee who qualifies for a government subsidy on a public exchange plan. The trigger for this penalty is the employee’s qualification for an exchange subsidy. Employers may prevent this subsidy access by offering a plan with affordability and minimum value. Affordability means roughly that the premium for the plan costs the employee no more than 9.66% of the employee’s monthly adjusted gross income. One simple way of determining monthly adjusted gross income is by dividing the employee’s W-2 annual income by 12. Minimum value is a complex calculation weighing the amount of money spent by the employee on the employer’s plan compared to a standardized plan. Most plans meet this test, but employers are encouraged to have minimum value certified by any plan designer they may utilize.

Note that employers can only meet mandate #2 by denying subsidy access to employees. This circumstance is a natural tension between employer and employee created by PPACA. Great care must be taken by employers to sufficiently educate employees on the necessity of subsidy access denial.

Even if employers offer a compliant plan, they may still face excise tax liability due to the method by which exchange subsidies are granted. Subsidies are granted based on the application of the employee only. If the employee is not aware of the employer’s compliance or inadvertently leaves out critical information on their application, they will be pre-qualified for a subsidy by the exchange. Once pre-qualified, the employer will be notified that unless an appeal is filed, subsidy access will be granted and the employer will be excise taxed. This appeal will be similar to an IRS audit of the plan’s compliance. Employers are encouraged to keep all necessary documents in place and at the ready, as these appeals will likely be necessary exercises for most employers this fall.

Preparing for Obamacare

To prevent excise taxes, excess costs, and the interference of appealing exchange subsidies, employers have a couple of solutions available: deny and design.

Deny - to decline eligibility to certain employees or classes of employees, as appropriate to their position and the employer’s ability to fund health benefits. Denial may be achieved through management of look-back and stability periods.

Design - to efficiently create a health plan such that offering coverage is still less expensive than paying an excise tax under the opt out penalty. Such plan designs are available to most employers, but specific details of design are typically dependent on a case-by-case analysis of the employer’s finances, employee pool, history with health plans, and other needs regarding the plan. If an employer must offer a plan, the least expensive plan should at least be considered by the employer for certain employees or classes of employees.

From an implementation perspective, PPACA has seen a number of various issues. These issues include state exchange plans attracting a smaller number of insurance companies than desired, the main enrollment hub (www.healthcare.gov) experiencing severe technical difficulties, and a lack of clarity in several regulations. While certain issues will likely be resolved over time, some outstanding matters, such as the potential for adverse selection on state exchange plans, may threaten the viability or economic efficiency of PPACA, which could have lasting effects.

Relevant Citations:

LBMC can help you navigate through the extensive ACA requirements, determine any penalty exposure, and develop strategies to eliminate or reduce future penalty exposure. Learn about our ACA Compliance Consulting and Tracking services.

External PPACA Resources: