Health Insurance and You!

One of the least-discussed – and most valuable – tax breaks is receiving closer scrutiny lately, as the federal government looks for ways to reduce the deficit and reform health insurance policy.

That’s the tax break on contributions made by businesses to pay for employee health insurance plans. Estimates of the value of the tax break place it between $185 billion and $250 billion per year, which make it by far the largest tax break in the U.S. tax system. By comparison, mortgage interest tax breaks are worth a total of some $100 billion per year.

The Patient Protection and Affordable Care Act (PPACA) includes a provision that taxes “Cadillac” plans that cost more than $10,200 for an individual or $27,500 for a family starting in 2018. There’s been little or no talk of extending taxation to lower-cost employer-sponsored health plans. When it was first enacted just after World War II, the tax break was barely debated, swept in along with a variety of other measures that were protected from wage and price controls. Since then, both employers and employees have forcefully opposed reducing the break, keeping it off the table as a means of raising revenue.

Until now, that is. Lately, there’s been an uptick in attention to the large tax break. Here are a few examples:

• On December 5, political commentator David Brooks repeated a common argument for lowering the break on insurance benefits in an interview in the New York Times Opinionator blog. He said, “I would definitely cap the health insurance benefits deduction. That nasty thing encourages wasteful and excessive health care spending because you essentially get a health care subsidy from your employer tax free instead of getting your money in plain old salary, which is taxed.” (Note that the interview is somewhat sarcastic in tone, but Brooks’s suggestion is serious and echoes many economists’ critique of the tax break.)
• National Public Radio aired a segment on December 3 in which it said that many economists agree that “excluding the value of health insurance from federal taxes is nuts.” You can read a summary of the piece on the NPR website.
• Fiscal Times recently included the tax break in its “Top 10 Tax Breaks That May Be Eliminated”.

What might result from decreasing or eliminating corporate deductions for health insurance?  One possibility is that employers could push down the costs of health care coverage to employees, offering insurance plans that cover less, asking for higher contributions from employees for premiums, or asking for higher copays and deductibles. Another is that employers might simply stop offering coverage altogether. Or there may be a middle ground involving defined contribution plans that amount to less than the amounts employers contribute to health care coverage, reducing their tax burdens but still helping employees purchase insurance.

The latter two outcomes could influence individuals to use the health care exchanges mandated under the PPACA, which are due to come on line next year.

A different kind of outcome could emerge, as well: lowering or ending the health insurance tax break could spare Medicaid and Medicare from larger cuts.

Discussions about reducing the tax break on company-funded health insurance – and its consequences — can be expected to increase, given the urgency of the need for solutions to U.S. fiscal issues and the size of the tax break. We’ll monitor the discussion and provide further analysis here.

In less than two weeks, states will have to formally decide whether to create and run their own health insurance exchanges – online marketplaces for health coverage slated to debut in 2014, along with the individual health insurance mandate – or join the federal exchange. According to an article by N.C. Aizenman of the Washington Post, 14 states are likely to develop their own exchanges, and another 13 will probably join the federal one. For many of the remaining states, this decision is still up in the air.

Just like the health law’s optional expansion of Medicaid eligibility, potential costs – for both state governments and individual consumers – are one reason health exchanges are such a hot-button issue. According to an piece by Phil Galewitz of Kaiser Health News, state policymakers are wondering and strategizing about who will pay for things like staffing the exchanges’ phone lines with experts to help consumers choose a plan, rating and comparing plans on their quality and costs, determining and enforcing eligibility restrictions for assistance through Medicaid and other subsidies, and marketing the exchanges to the public.

The federal exchange will address these costs through a surcharge to insurers. On Friday, wrote Alex Wayne in an article for Bloomberg, the Department of Health and Human Services (HHS) released new draft regulations stating that in order to sell their plans on the exchange, insurers will have to pay a fee of 3.5% of their premiums. A spokesperson for the insurance industry umbrella organization America’s Health Insurance Plans, quoted in Mr. Wayne’s piece, explained that the extra costs will most likely be passed on to consumers. To keep premiums low and remain competitive, insurers will also try to trim their administrative costs.

Many states are considering similar approaches. Several states have received federal funds to help their exchanges get started, such as setting up the websites and planning out the user experience, but by 2015, the health law requires that exchanges be covered entirely by the state. Those maintenance costs are not insignificant; according to Mr. Galewitz, a state exchange’s annual operating costs will range from tens to hundreds of millions of dollars per year, depending on the state’s population and the features of its exchange.

And several states have pledged not to take money from other state programs in order to run the exchange, which means that the exchanges will have to generate enough revenue to cover that whole amount. California, for example, plans to have insurers pay a 2% surcharge in order to be sold on the state’s exchange, writes David Gorn in an article for California Healthline. This should make the exchange self-sustaining by 2017.

According to Mr. Galewitz, other options for financing an exchange include dipping into states’ general funds, an unpopular approach at a time when states are already strapped for cash; allowing paid advertisements on exchange websites; and charging fees to insurance agents, health care providers, and insurance companies whose plans are not sold on exchanges.

Readers, how would you finance a health insurance exchange? Would you use one or more of the above approaches, or perhaps another strategy entirely?

The Defense of Marriage Act (DOMA) was enacted by Congress and President Bill Clinton in 1996. The law defines marriage as between one man and one woman, when used for legal purposes in a national context. According to DOMA, states can choose to legalize same-sex unions, but no state has to recognize a same-sex marriage that took place in another state.

Since then, as times and social norms have changed, the law has been challenged several times in court. These cases addressed a variety of issues, such as access to a same-sex spouse’s long-term care insurance and taxation of an inheritance after a spouse’s death. In 2008, wrote the Associated Press in an article for the Washington Post, newlywed lesbian couple Karen Golinski and Amy Cunninghis were married in their home state of California during the short period when same-sex marriage was legal in the state, before Proposition 8 passed that November and banned same-sex unions. They applied for spousal health insurance benefits through Golinski’s employer, a federal circuit court of appeals – part of the federal government, and thus, not legally required to recognize the couple’s marriage. When their application was denied for that reason, Golinski cited the appeals court’s policy against discrimination and filed a grievance.

The government turned down the application again, and this time, the couple sued. Their case made its way up to a U.S. District Court and won, allowing Cunninghis to receive health benefits through Golinski’s plan. She is currently covered through that plan and interestingly, is the only same-sex spouse receiving health coverage from the federal government. Now, according to the AP article, this case and several others challenging DOMA are up for consideration by the U.S. Supreme Court.

As reporter Howard Mintz explains in an article for the San Jose Mercury News, if the Supreme Court decides to hear and rule on the case, the decision could have a major impact on gay and lesbian rights across the country, including their access to health coverage. Mr. Mintz outlines three possible outcomes: same-sex marriage may be legalized across the country, prohibited across the country, or continue being debated and decided at the state level.

For more on LGBT health insurance issues, see:

• Nov. 9, 2012: San Francisco Prepares to Cover Gender Reassignment Surgery for the Uninsured
• Sept. 6, 2012: HHS Letter Will Ban Health Coverage Denials Based on Transgender Identity
• Feb. 9, 2011: Michigan to Provide Health Benefits to Domestic Partners of State Employees

It’s easy to imagine that certain government agencies – the Department of Health and Human Services (HHS), the Centers for Medicare and Medicaid Services, and state insurance regulators, for example – would have a central role in interpreting and implementing the 2010 health reform law. But the Internal Revenue Service (IRS)? Not so much.

It turns out, though, that the IRS does have a big part to play – in short, the agency is responsible for managing the flow of money related to the law. According to an article by Paige Winfield Cunningham of Politico, this includes managing relevant tax credits and new taxes related to health insurance and implementing more than 40 changes to the tax code that resulted from the health law. And analysts are getting worried about the IRS’ ability to prepare for its new workload in time for health reform’s full debut in 2014. Ms. Cunningham’s piece describes five new tasks that the agency has promised to be ready to handle by 2014:

• Managing tax credits for health insurance. Based on their income, low- and middle-income people will be able to receive subsidies to buy coverage through health insurance exchanges. The IRS will be involved in determining who is eligible and reconciling those credits at the end of the year.
• Collecting overpayments. If income changes cause a person to receive too high a subsidy for health insurance, the IRS will be responsible for retrieving the extra money.
• Collecting new taxes. The health law includes a penalty for not having health insurance coverage and other taxes for things like brand-name drugs and medical devices. The IRS will be in charge of calculating and collecting these taxes.
• Creating specific guidelines for businesses. Just as HHS has left several health insurance exchange details up to the states, many financial questions relating to businesses, such as defining a full-time employee, have been left to the IRS.
• Getting new information out to the public. As the new tax rules start to take effect, analysts expect confusion from consumers on how the rules work, and the IRS will be the recipient of many of their questions. The agency’s call centers are already busy during tax season, and will likely be even more so in 2014.

As the IRS gets ready for its new role, Congress is continuing to debate the specifics. For example, on Friday, a bipartisan group in the House of Representatives introduced H.R. 6597, a bill that would allow people to be exempt from the individual health insurance mandate if it conflicted with their religious beliefs. The person’s religious beliefs would have to conflict with health care that would be covered by the minimum benefit requirements for insurance. If those individuals later sought treatment that would be covered, their exemption would be revoked. These exemptions would be processed and kept on record by the IRS.

According to the text of the bill, treatment that would be covered includes acute emergency and urgent care. It does not include alternative medicine, dentistry, physicals required by a third party, or vaccinations.

As consumer-directed healthcare becomes more popular, more and more employers are shifting from traditional health insurance plans to options like high-deductible health plans (HDHPs) and health savings accounts (HSAs).

Among these newer models is the flexible spending account (FSA), which allows workers and their companies to set aside pre-tax money for health costs and to use those funds for any qualified expenses, such as doctor’s visits and prescriptions – including those not covered by insurance. Account holders must either spend the money by the end of the year or forfeit it, a rule that was debated during the summer but was ultimately upheld.

Currently, laws allow workers to contribute as much as they’d like into these accounts, though most companies set annual contribution limits of their own. On top of employees’ contributions, companies can also add to workers’ accounts, and those amounts are also unlimited.

Not so for 2013 and beyond. According to an Associated Press article appearing yesterday in the Times Union, employee contributions will be capped starting next year to $2,500 per calendar year, beginning January 1. June 2012 guidance from the Internal Revenue Service explains that the $2,500 limit applies only to FSAs, not dependent care accounts, HSAs, or other similar accounts. Employer contributions will remain unlimited.

Also in 2013, the annual limits for HSAs and HDHPs will be increased. According to a 2012-2013 comparison chart from the Society for Human Resource Management, individuals will be able to contribute up to $3,250 per year to HSAs and families will have an yearly limit of $6,450. Minimum deductibles for HDHPs will go up to $1,250 for individuals and $2,500 for families. HDHP out-of-pocket maximums will also rise to $6,250 per year for individuals and $12,500 per year for families.

Confused about the growing variety of health plans and how they interact? Check out our FAQ page, which includes definitions of these new accounts and answers to common questions about how they work.

On Election Day this week, ordinary voters were not the only ones setting health and health insurance policies in their communities. Health officials were doing it, too, at least in San Francisco, where the city’s Health Commission voted to develop a program for transgender people in need of counseling, health services, and gender reassignment surgery. According to an article by Lisa Leff of the Associated Press, the city already provides counseling, hormone treatment, and preventive health care for transgender residents, but has not yet offered surgery or covered its cost.

That will soon change. This past Tuesday, the Health Commission agreed to remove gender reassignment surgery from its list of treatments that are specifically excluded from coverage through Healthy San Francisco, the city’s universal health insurance plan for uninsured residents. The decision was informed by transgender advocates, who pushed for mastectomies, genital reconstruction, and other surgeries recommended for certain transgender individuals to be covered, Ms. Leff explains. It is also not a new idea in San Francisco, which has been covering the costs of gender reassignment surgery for government employees since 2001. In recent years, employers and health insurance companies have started doing the same, responding to the idea that such surgeries are medically necessary, rather than elective.

The effects of Tuesday’s vote won’t be immediate. “Instead of expanding the existing plan, the Health Commission approved the establishment of a separate program that covers all aspects of transgender health, including gender transition,” Ms. Leff writes. For now, city health officials will need to study the costs of various procedures, determine which doctors and clinics would perform the surgeries, and put together the relevant protocols before they are able to offer surgery. They hope to be ready by the end of next year.

Health reform won’t require the U.S. government to cover health care and health insurance for all Americans, but the law did call for what’s known as a “public option” – one or more health plans offered and run by federal officials. These plans, which will launch along with online health insurance exchanges in 2014, will be sold through the federal and state-based exchanges.

According to an article by Robert Pear of the New York Times, the Obama administration plans to manage at least two such plans. Of these, one must be run by a nonprofit organization. Additional plan(s) will be managed by the U.S. Office of Personnel Management, the agency that currently manages health insurance options for federal employees. Experts estimate that each plan will enroll at least 750,000 people in the first year.

According to Mr. Pear, these plans will be regulated at three levels: by the federal government, by state insurance officials, and by state insurance exchange administrators. Whether or not these plans meet state exchange standards, they will be sold on all exchanges. In general, it is unclear whether the national plans will have to comply with the rules, administrative requirements, and taxes and fees faced by other plans sold on exchanges. And this possibility has some groups concerned: insurance companies, who find it unfair that their plans may be held to stricter standards, making them less competitive; and consumer associations, who say the differences in requirements will prevent consumers from making balanced decisions.

Officials are currently reviewing the rules for national health plans, and are expected to issue a decision soon on how they will be run. Readers, would you welcome a multistate plan that is not held to the same standards as state-level plans? Or would it concern you that such a plan may not comply with your state’s requirements?

With health reform offering states funding to expand eligibility for their Medicaid programs – the government’s health care programs for the poor, run at the state level – Medicaid has been a major topic of health insurance news in recent months. Every week, state legislatures and governors move closer toward deciding whether to raise the maximum income level that would allow individuals and families to participate.

Having to make a decision on this issue has given many states an opportunity to revisit how their Medicaid programs are run and their overall effectiveness. One issue that affects many people in the income range targeted by Medicaid expansion is known as ‘churn’, writes Christine Vestal in an article for the Pew Center on the States’ Stateline. ‘Churn’ refers to the frequent cycling in families’ incomes that would make them eligible for Medicaid during some parts of the year and ineligible if their income goes up. To add to the confusion, as incomes fluctuate, certain family members may retain coverage while others lose it; for example, children and pregnant women can often qualify for care that adults without children may not be eligible for.

For people at the threshold of eligibility for government-funded health care, getting a subsidy from the state can make the difference on whether they can afford to see a doctor regularly and get the preventive care and treatment they need. By the time individuals experiencing churn regain Medicaid coverage, health conditions they may have developed by putting off doctors’ visits during the previous months may have progressed and become more expensive and painful to treat. Long-term treatments may be disrupted when patients become ineligible. Plus, keeping track of people’s changing eligibility adds to administrative costs. In short, churn makes health care through Medicaid less efficient.

According to Ms. Vestal, state officials in Tennessee are considering a new approach to address this issue. Known by the tagline “one family, one card,” the program aims to keep people from constantly losing and regaining Medicaid coverage. Specifically, Medicaid insurers would offer a health plan that covers 70% of health care costs through the state’s online health insurance exchange. The doctors, hospitals, and clinics that accept Medicaid patients would also belong to this plan’s network. As long as one family member qualifies for Medicaid, the entire family would be able to maintain coverage through the plan.

‘One family, one card’ has yet to receive federal approval, but other states are already showing some interest. Readers, what are your thoughts on this program? Ultimately, do you think it will save money?

One aspect of health reform that has been popular among almost all groups has been the expansion of dependent coverage for young adults, which allows them to remain on their parents’ health insurance plans until age 26. Popular as it is, treating young adults as children (for insurance purposes) does bring up some challenges. For example, many people in their late teens and early 20s, who may be covered on their parents’ plans, are starting families of their own. As we wrote earlier this year, while these young adults do have coverage, insurers do not have to pay for their maternity care or delivery, or the newborn’s well-baby care.

Another issue that has begun to come up is privacy. Young adults on their parents’ plans don’t necessarily live at home, and as part of that independence, may choose to keep certain aspects of their health care private. Sensitive issues that affect this group include sexually transmitted disease tests, mental health treatment, and substance abuse counseling. According to an article by Michelle Andrews of Kaiser Health News, the Health Insurance Portability and Accountability Act (HIPAA), which protects patients’ privacy, does not allow insurers and providers to disclose patients’ medical information without proper permission – except when trying to coordinate payment.

And that can be tricky when the policyholder and billpayer – usually the parent – is not the patient. When providers send insurance companies a claim, the insurer usually closes out the claim by sending the policyholder an Explanation of Benefits form, which may bill the policyholder for remaining costs or simply document that a health service took place and was covered. Patients can request that the form be sent to another address or that it not include private details, Ms. Andrews explains, but they don’t necessarily think to do so until they encounter a problem.

As open enrollment season approaches and many women gain access to free contraception, another potentially thorny issue, privacy concerns are poised to grow. Readers, how would you address this challenge? How important an issue do you think it is?