BNA Pension and Benefits Blog

Massachusetts enacted its health reform requiring individuals to purchase health insurance or benefits under a plan that meets certain minimum standards in order for the individual to avoid a tax on the uninsured.  Massachusetts also imposes a tax or penalty of sorts on employers of individuals who incur more than a minimum amount of uncompensated care to fund the state's cost of health care that is not reimbursed or paid elsewhere. 

There is a collision between the federal initiatives to move employers toward offering high deductible health plans and health savings accounts and the Massachusetts initiative toward requiring the individuals to purchase minimum levels of health insurance coverage and to indirectly pressure employers to conform their benefit plans to satisfy the minimum level of coverage.  The Massachusetts rules do not accommodate a high deductible health plan as defined in federal tax law. 

There is a collision for employers operating in Massachusetts with high deductible health plans. If the employer's employees covered by the high deductible health plan do not pay for their care that is subject to the high deductible, then that care is uncompensated care for Massachusetts law purposes.  Such care which is not paid for by the employee can fall in the very broad definition of uncompensated care in Massachusetts resulting in a surcharge on the employer if the limits on uncompensated care for either the individual employee or their employees as a whole in Massachusetts are exceeded. 

Employers have a deadline to file their cafeteria plan documents with the "Connector" in Massachusetts by July 1, 2007; however, the form which must be filed with the cafeteria plan document and how all this is to occur has yet to be disclosed. 

There are many questions related to the Massachusetts legislation and its impact on employers and their plans that are still unanswered, including the most important one ...ERISA preemption.

Greta E. Cowart

I read the other day that 20% of the income of a typical medical office is spent on insurance claims administration. Then there's the insurance company cost of administering the claims, plus the cost of the darned ERISA lawyer who brings those class actions.  A billion here, a billion there, pretty soon it starts to add up (Thanks Ev Dirkson).  I read the other day that most of the Democratic candidates for Preident are not only afraid of suggesting single-payor health plans, but are afraid of suggesting expanding employer coverage.  In other words, despite everyone being miserable with the present system, it's become like the weather - everyone complains, no one can do anything about it.  Then I read that some were proposing that ERISA preemption of health care matters be lifted so that the states could be freed to try what the states are supposed to do -- experiment with different ideas so we can get a handle on a national solution.  But the ERISA wags say "no no no. National uniformity is far too important for big corporations.  After all, these corporations can't even keep up with the laws of the tens or hundreds of nations in which they do business so . . .  wait a minute, yes they can and do quite well at it."  And the wags win, because we don't want to upset big corporations.  So the most logical means of finding the answer is removed.  And we are left with nothing.

I think I'll stop reading.

In today’s WSJ, Justin Lahart observes that the United States spends a much larger portion of its GDP on health care than other countries, yet seems to get little for its extra spending. I wonder whether this is true, which is not to say that I disagree with his larger point: that we are spending too much on health care for what we get.

But here are some thoughts:

1. Lanhart points out that both infant mortality and life expectancy are higher in Japan and France, which spend (on average) approximately 55% of what the United States spends on health care. But critics of our system have noted that a large part of what we spend money on is spent on expensive care for people during the very last part of their lives. So a relevant question might be: do people who reach, say, age 60 in the United States live longer and/or more comfortably than members of their comparable cohort in Japan and France. And we can refine that question bit more by limiting the comparison to people in the United States who have access to good health care.

Is there a free-rider problem here? Some have argued that drug costs are high in this country to pay for research, which produces important advances in medical science. Do Americans thus fund new medications (and other medical technologies) whose value other nations can import without paying their share of developing these technologies?

What is the infant mortality rate and the life expectancy rate for people in this country who have access to good health care, and how does that compare to the infant mortality and life expectancy rates to people in Japan and France? Do we know if our insured, or at least those of our insured who have good coverage, fare as well or better than the Japanese or French participant in the national health care systems in those countries?

There are certainly other questions we can ask along these lines and the answers might show that we are getting something for the extra resources we expend. It might not be purchasing what we should be purchasing, and our choices might be critiqued on moral grounds (as the folk song goes, if religion were something that money could buy, the rich would live and the poor would die), but I would be hesitant to conclude that we don’t get much for our extra spending.

And of course, there is the extraordinarily important point Frank Cummings makes on his recent post, that the employer system has faults of its own, apart from aggregate costs and quality of medical delivery. Making some employers bear the costs of our imperfect system is itself a serious imperfection in our system.

I intended to end the post two paragraphs up, but let me make two additional points related to the employer system. Two related arguments for the system are: 1) the employer is an efficient purchasing agent for its employees; and 2) the employer pools risk (which is part of the reason it might be an efficient purchasing agent for its employees). But national health care pools risk far more effectively than individual employers and can anybody seriously argue today that the employer has been a good purchasing agent except for its ability, though risk pooling, to create access to the health care market for its higher risk employees? Well I suppose you can say that the employer forcing employees to take part of their compensation in health care coverage is good, but national health care also takes care of this problem.

Health Care’s Game of  “Let’s Pretend” – Rearranging Deck Chairs on the Titanic?

    The game of health care consensus and “let’s pretend” continues:

        Consensus view #1: We have the best medical system in the world, for those who can afford it.

        Consensus view #2: The “best” is unaffordable, or almost unaffordable, for most people.

        Consensus view #3: The U.S. is the only advanced economy without a National Health system.

    Put that all together, and you get an inkling of an unexpected consensus among big business and big labor:

        Consensus view #4:  Unless the U.S. gets universal health care, U.S. businesses, already paying huge health care costs for their employees, will be non-competitive with Asian and European companies in any (every?) nation where health care costs are paid from general governmental revenues.

    What’s the fix?  As almost always, a real fix must be preceded by a long string of pretenses.  Consider these:

        Pretense #1: At least current employer-provided insurance is workable.  Really?  The employee-paid premium shares, plus deductibles, plus co-payments, are growing to the point where “coverage” is becoming a sham, and at the tipping-point the young and healthy will opt out, leaving the system unaffordable and therefore unsustainable if it only insures the bad risks.

        Pretense #2: Let the poor pay for themselves -- the emergency room, or medicaid, or other state-financed benefits, are “free”.   Really? Look at any hospital bill and pretend that the huge number for each item is its real cost, and then recognize that this is just cost-shifting to the payers from the non-payers (the poor).  The payers pay for everyone else.

        Pretense #3: Fix it with tax deductions?  Really?  Tax deductions for the lower paid, who don’t take deductions – indeed often don’t pay taxes – is trading one sham for another.

        Pretense #4: Solve the problem by mandating benefits, instead of enacting national health.  Really?  It’s just shifting the burden to employers who are already non-competitive because of the current burden, or to employees, many of whom cannot afford what we have now.

    Bottom line: The consensus, stripped of its pretenses, will eventually force something like “national health.”

    Is National Health a “fix”?  National Health has its own pretenses:

        Pretense #1: National Health is a “good” health delivery system.  Really?  Please!  It’s terrible.  Only it’s better than anything else that’s feasible, except for those who can afford completely private top-of-the-line medical care.

        Pretense #2: Good private medical care would be wiped out by National Health.  Really?  Not so in Britain (the “Harley Street” alternative).

    Bottom Line: Sooner or later (and sooner is a better bet) private insurance will not be provided by employers (in which case the private system itself may be non-viable), and will not be affordable by employees, and at that point, like it or not, “let’s pretend” gambits will run out, and National Health will run in.

    Not a happy prospect, but then, rearranging deck chairs on the Titanic is the ultimate pretense.  Rearrange them or not, sinking is still sinking.

Faced with growing numbers of uninsured, rising Medicaid costs, and no likelihood of timely federal leadership, states have -- again -- taken the lead in expandingn health coverage. Following 2005 implementation of Maine's "Dirigo" voluntary health purchasing pool, in 2006 Maryland, Massachusetts and Vermont passed laws to expand access to health coverage. Policy makers in California are drafting universal coverage bills and similar initatives are under discussion in several other states, such as Colorado and Wisconsin.

As the level of government constitutionally responsible for the "health, safety, and welfare" of their residents, state governments have long provided health care and health coverage to vulnerable (e.g., poor, disabled and elderly) populations, preceding, for example, federal programs like Medicaid and Medicare. Recognizing that the uninsured are not only the low income unemployed but also low and moderate income working people, for almost three decades, many states have tried to assist low wage workers to obtain coverage through both public and private sector sources. In the late 1980s and early 90s, several states (including Massachusetts, Minnesota, Oregon and Washington) enacted programs to make insurance available to most state residents, but these laws were never fully implemented and most were eventually repealed. Because 2/3 of Americans receive health coverage through the workplace, state programs typically include a role for employers as financers and/or providers of coverage in order to retain employer dollars currently spent on health care and not disrupt existing employee benefit programs and expectations. But ERISA's preemption clause complicates state policy development -- for example, shortly after ERISA was passed, courts held that it preempted Hawaii's law requiring employers to offer and pay for health coverage (eventually restored by a 1983 ERISA amendment).

Last July, a federal court struck down Maryland's law requiring large employers (i.e., Wal-Mart) to spend at least 8% of payroll on health coverage or pay the difference to the state's Medicaid program. Whether the much smaller employer taxes in Massachusetts or Vermont will face and survive preemption challenges remains to be seen.

Proposals recently outlined by California Governor Schwarzenegger and the heads of the state's Senate and Assembly contain elements of the Massachusetts and the Maryland laws, including assessments on employers to partially fund a public coverage program while allowing employers to offer health coverage if they choose. Because it seems undeniable that states can tax employers for such public purposes, the issue will be whether a state law allows multi-state employer-sponsored health plans the type of choice Supreme Court decisions indicate are the primary objective of ERISA's preemption clause. And this outcome will likely depend on the precise language of a final legislative compromise -- if the myriad and contentious stakeholders can craft one.

More Mandated Benefits?  Stop!  Think!

    ERISA regulates and mandates a system that is, above everything else, voluntary.  In my view, mandates have no place in it, not because they are not good objectives, but because they are not voluntary, not free, and inevitably counter-productive.

    Why not mandate?  Because mandates undermine the voluntary market - a market that produces for the employees of most participating employers a package of benefits that is better than anything a government could or would mandate .  The voluntary market is not universal (like Social Security or Medicare).  It is a result of business decisions to provide these benefits because they are good business.   Universal mandates (for example, so-called “Mandatory Universal Pensions” or “MUPs”) are always just a devious way of making private employers pay for a safety net that should be paid by taxes.  A mandate will always be minimal, like the minimum wage, because it is a national, universal, rock-bottom benefit.  That is not what private employee benefits are about.

    Why not mandate at the state level (like Maryland’s Pay or Play)?  Same reason, only worse: It’s not even a universal mandate.   It’s still ultra-minimal.  And it guts the private employee benefit system’s cornerstone – federal preemption.  It just balkanizes the system.

    But why not abandon federal preemption?  Take a look at 14(b) of the National Labor Relations Act (the so-called “right to work” provision).  The supporters of non-preemption are, these days, at the liberal end of the political spectrum – and there they are supporting the same theory as “right to work” laws (which they have always opposed).  Those who ignore past experience are condemned, of course, to repeat it.

    Once that preemption door is opened, what, inevitably, also comes through it?  How about these: Each new unpreempted state law will come with a new unpreempted state remedy (without which, of course, the state law is meaningless).  And that state remedy – bet on it – will come with compensatory and punitive damages – the very thing that ERISA preemption sought to head off. 

    What’s wrong with that?  If you don’t know, you won’t care, but it’s the death knell of the ingenuity and further development of the private voluntary system.  It just converts the floor into a ceiling.

    The moral to the story?  If you want to pass a federal benefits law (“National Health” for example), OK.  Go for it.  But do it as a governmental benefit with governmental financing and governmental control.  Don’t pretend it is or should be part of the private voluntary ERISA system.  In the private system, it’s pure poison.

Tell me why this isn't a good idea

a. There should be National Health Insurance to cover basic insurance for everyone; employed, unemployed, uninsured and people like me. Employers would contribute to it based on a percent of payroll. There would be no problems with adverse selection or horrible bookkeeping problems about who's in and who's out, since this National Plan would cover everyone for these "basic" needs. It is a policy choice as to how far basic coverage should go. But suppose we use current Medicare as a base.

b. Employers may also provide "wrap around" policies in addition to the Basic policy. Like Medicare supplements (or private retirement plans supplementing social security), they can be as stingy or as generous as the employer desires. These wrap around policies could be self-insured or be provided by insurance companies. The policy would pay supplemental coverages (supplemental charges above what the National Plan determines to be "average" (see below), long term/catastrophic care, additional days of hospital stays, dental, dog and cat medical, whatever). In this way, the private industry can continue to provide benefits on a less than universal basis, and can play their exclusion and denial games, yet the right to fundamental basic medical care will not be diminished.

c. This is the part I like the best. Under this Plan, when you go to the doctor that doctor has to tell you (a) what services are covered under the National Plan and which are not (e.g., experimental, beyond the basics, etc.); and (b) how much more, as a percentage, that doctor will charge over that allowed by the National Plan. So, for example, the doctor may say "I will be charging you 10% more than what the National Plan pays me" and that will be a binding commitment. It has the following charms: (1) Doctors, not patients, have the expertise to know this information; (2) Doctors, not patients, have the expertise (and resources) to challenge the National Plan on determinations they believe are incorrect.

If a doctor finds that the National Plan will only pay $100 for a procedure but the doctor feels $150 is appropriate, all he has to do is tell patients, "I will charge you 50% more than the National Plan." If other of the doctor's charges are identical to that paid by the National Plan the doctor will simply average it out and tell people "I charge 5% more than the National Plan." The doctor cannot say that a particular procedure, test, exam, etc. will cost x% more -- the percentage must apply to all services supplied by that doctor to that patient. In this way the patient can doctor shop and compare apples with apples; the doctor can determine her own fees (within a narrow range) by using a multiplier of the National Plan; and disputes as to what the National Plan should pay can be resolved between those with the expertise and knowledge.

Presently the payor says $100 is reasonable, the doctor says the payor is full of it and that $150 is reasonable, and the patient winds up losing $50 and having no idea of who's right -- or any simple means of finding out. No wonder people are mad as hell and just won't take it anymore. I think this has the elements everyone needs. People are happy because they'll at least have guaranteed access to basic medical care; employers/employees are happy because they can have greater coverage than the basic plan; patients are happy because they will have a pretty good idea going into the doctor as to how much it's going to cost them. More important, there aren't going to be any surprises like "pre existing condition" and "we don't cover that" and "we only pay 50 cents for that procedure."

So whaddya think?

While I wasn't paying much attention, on July 19 the U.S. Supreme Court entered a short order, without opinion, denying Texas and several other would-be co-plaintiff states leave to file a complaint challenging the constitutionality of part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). Texas v. Leavitt, No. 135 Orig. (U.S.) (15 HLR 735, 6/22/06). The part of the MMA under attack is embedded in the program familiar to even the lay public, and more so to the elderly, as Part D of Medicare.

What was (and still remains) in issue is a common so-called "clawback" provision -- in Part D, one requiring the States to pay to the federal government the money that they now save under their Medicaid programs because of Medicare's funding the drug benefit costs of "dual [Medicare/Medicaid] eligibles" which would otherwise remain the States' burden.

The fiscal stakes are enormous. We are talking, of course, about a prescription drug program which, before it became law, carried a 10-year (2004-2013) estimated cost of almost $400 billion.  Afterward, in a well publicized flap, involving accusations that the then head of the CMMS had suppressed higher cost estimates of CMMS's own actuaries, Congress bitched and moaned about having been deliberately misled, and some members who had supported the bill openly declared they would have voted against it, in numbers possibly sufficient to defeat the bill, had the higher cost projection been revealed to them.

With the passage of the lead time for implementation on January 1 of this year, and considering drug price trends generally during this period, later 10-year (2006-2015) cost estimates for Part D rose in stages to a federal number of $1 trillion or more -- gross before the estimatedl hundreds of billions which the States would be billed and either pay or have offset against receivables from Washington under the clawback provisions in question.

In the context of these magnitudes up in the stratosphere, announcements of fresh estimates of other cost savings in the billions of dollars have passed for very good news. Thus, early this year, the CMS took pride in the claimed results of private-market competition in holding down drug costs, dropping previously expected spending in 2004 and 2005 and bringing the expected net cost to the federal government in 2006 to be $30.5 billion, 20% less than earlier estimated. By the new reckoning, the estimated 10-year cost -- presumably, now dealing with the less scary net numbers after clawbacks -- has been lowered from $737 billion to $678 billion, a decrease of 8%.  (In navigating through these numbers, I absolve from blame any misunderstandings on my part of the factually detailed attention Robert Pear of the New York Times has especially given to Part D program implementation and finance.  See especially Robert Pear, In Medicare Maze, Some Get Tangled in Two Drug Plans, N.Y. Times, 3/01/06.)

However, the reality is that dollar numbers that cease to evoke dread in Washington can bring on panic attacks in state capitols. In a declaration filed in the HHS Secretary's opposition brief to the States' initial motion to file in Texas v. Leavitt, a (now) CMS actuary laid out estimates making clear the size of the chunks of change subject to clawbacks against the plaintiff States.  Pursuant to the applicable law in 42 U.S.C. § 1396u-5(c), he calculated for the lead plaintiff, Texas, its 2006 liability of $261 million to send back to the federal government from the roughly $10.3 billion the State was estimated to receive this year in federal Medicaid payments -- in effect, an "adjustment" of 2.5% from gross to net.

From a federal advocate's standpoint, advising the Supreme Court that the State is complaining about having to repay HHS "only" 2.5% of the more than $10 billion of Medicaid assistance HHS sends to Austin is to make a telling point that the case merits are not substantial enough for the Court to deviate from its more routine practice of letting its non-exclusive original jurisdiction cases start out in the federal trial courts. (Beyond that, Texas is far from the threatened "irreparable injury" to the State that it pled as part of a preliminary injunction motion it filed with its proffered complaint.) From the perspective of a State governor and its chief fiscal officers, having to budget for and ask the State legislature to appropriate $261 million, or roughly a quarter-billion more than it otherwise would, to give Washington relief from perceived excesses of federally conceived and created social programs is to give offense to some attributes of state "sovereignty": the state's reserved powers under the Tenth Amendment as well as other "federalism" principles derived from it.

Go to the poorest State among Texas's co-plaintiffs, Maine, and the dollars involved invite the same gut reaction.  HHS is slated to render Maine $1.58 billion of Medicaid program aid this year, from which it is estimated it will recoup, one way or the other, via payment or offset, $39 million under the clawback rule. That is a 2.5% adjustment from gross to net, the same as in Texas.  Again, though, another $39 million to be raised from Maine taxpayers under compulsion of federal law has a  different feel to it in Augusta than in D.C.

The Supreme Court's orders of June 19 disposing of the case had an odd structure to them. First, the Court denied the plaintiff States' motion to leave to file its bill of complaint.  Second, after so declining to take jurisdiction, the Court then denied the States' motion for a preliminary injunction, as opposed to dismissing it, outright or as moot. So was the matter disposed of, seemingly with short shrift, as the Court's conference on the case (and dozens of others) was held but days earlier. Can the Court's denial of the States' motion for preliminary injunction be seen as a form of message to the lower courts that the case, if refiled, does not merit any preliminary relief to stop a program as large and meaningful as Part D of Medicare is to Medicare's 41 million enrollees and 6 million fully-covered "dual eligibles"?  Legally speaking, certainly not.

However, the plaintiff States, and their friends in other States which filed supporting amici briefs in the Supreme Court, have to date not tipped their hand on whether and when at least some of them will repair to, say, the District Court in D.C. to attack the constitutionality of the clawback provisions anew, on the same or added grounds they invoked in the High Court. As recently as yesterday (October 5), your blogger spoke with a reliable official source in Austin, who gave every indication that deliberations among certain of the States were still taking place and an upshot is not close at hand.

One of the more obscure provisions of the Pension Protection Act is Section 843, which amends IRC §419A(c) by adding new subsection (6). The new provision permits a health benefit plan sponsored by a “bona fide association” (as defined in 42 U.S.C. 300gg-91(d)(3)) to maintain a reserve of up to 35% of current operating costs. Prior to the amendment no reserve was permitted.

So, is this just another special interest goodie that slipped in under the radar? Not really. It actually provides much needed relief for many small business association health programs. Here’s the reason why. Under IRC §419A annual deductions for contributions to funded health benefit plans (other than retiree medical plans) are limited to “qualified costs,” which are defined as current claims and related administration expenses for the year, plus a reasonable cost for “run out” claims, sometimes referred to as IBNR - incurred, but not reported claims. The run out cost must either be actuarially determined or limited to a percentage of current claims, as set by statute. An exception to the annual deduction limitation is available to “10 or more employer” plans. (IRC §419A(f)(6)). However, as the statute states and the final regulations issued by the IRS and Treasury in 2003 (§1.419A(f)(6)-1) clearly explain, a plan which “experience rates” claims or costs cannot be a 10 or more employer plan. Many small business associations maintain health benefit programs for their members, some have for 50 years or more. These programs typically allow participating members to obtain health care for their employees at reduced cost through a group purchasing or funding arrangement. In order to obtain the lowest rates these programs often provide health coverage under a tiered premium arrangement, which is then made available to members from year to year according to prior usage - a clear experience rating arrangement under the final regulations.

As many who are familiar with this area know, one of the primary purposes of the (f)(6) regulations was to curb welfare plan abuses, particularly in the area of life insurance (death benefits) and severance pay plans. Unfortunately, the wide net cast by the regulations also put the association health plans in a difficult position: either they operated at break-even or at a loss each year (which created significant concerns for the plan fiduciaries under ERISA’s prudent man standard) or they had to inform their participating members that portions of their annual heath premiums paid to the group plan were non-deductible. A number of the affected associations approached their congressional representatives about the problem, and with the help of Treasury, hammered out the statutory language which is now part of the PPA. The new law will permit bona fide association health plans that experience rate their members to maintain a reserve of slightly more than 4 months’ annual premiums, enough to help these plans keep a cushion available for contingencies, while retaining competitive lower cost and fully deductible health benefits for their members. (Under the Public Health Service Act a “bona fide association” must (A) have been actively in existence for at least 5 years; (B) have been formed and maintained in good faith for purposes other than obtaining insurance; (C) not condition association membership or health insurance coverage on any health status-related factor or offer coverage to non-members; and (D) meet any additional State law requirements.

Kudos to Senators Hatch, Grassley, Baucus, Snowe and Bennett, who all worked to get Section 843 included in the PPA. Of course, Senator Snowe has long championed the right of small business associations to provide low cost health care to their member employers. Does this new provision signal possible help for her much-beleaguered proposed legislation which she touts as “giving small businesses greater access to medical care for their employees"? We will see. jeffclayton@cnmlaw.com (Submitted by my partner, W. Waldan Lloyd)