State Activity Update

by Christoper E. Condeluci, Principal and sole shareholder of CC Law & Policy PLLC in Washington, D.C.

New Jersey Passes Legislation to Establish a Reinsurance Program and to also Re-Instate the Individual Mandate Penalty Tax for New Jerseyans

As I have reported to you, States like California, Connecticut, Maryland, New Jersey, New York, and Washington State are trying to replace the ACA’s “individual mandate” penalty tax with their own State-based individual mandate. I also noted that the likelihood of success – even in these Blue States – are slim. However, unlike some of these other States (where enactment of an individual mandate is hitting some road-blocks), New Jersey appears to have broken-through, and the Governor is expected to sign into law a State-based individual mandate penalty tax applicable to New Jerseyans who fail to obtain health coverage starting in 2019.
- Analysis: Interestingly, the revenue collected from New Jersey’s individual mandate penalty tax would be deposited in a special “fund” that would be used to pay for a newly created reinsurance program in the State. In short, the legislation the Governor is about to sign ALSO establishes a State-based reinsurance program. Here, New Jersey would seek a Section 1332 Waiver to establish a reinsurance program (with “pass through” funding from the Federal government). But, New Jersey still has to come up with “other” revenue to fund its reinsurance program. To date, States that have set up a their own reinsurance programs have imposed a tax assessment on their insurance carriers to come up with this “other” revenue.” New Jersey will do the same thing (i.e., New Jersey will assess its insurance carriers to help fund the reinsurance program). BUT, New Jersey will ALSO use revenue collected from its newly enacted individual mandate penalty tax to help fund the reinsurance program (which could result in New Jersey’s carrier assessment being somewhat lower – relative to other States – due to the additional revenue source). Query how much revenue New Jersey expects to collect from its State-based penalty tax? I have not seen any revenue estimates. BUT, there should indeed be some revenue generated from the penalty tax. What I mean is this: Although the Federal individual mandate penalty tax has been ineffective as a means to get more people into the ACA markets (especially young/healthy lives), the IRS has collected at least some revenue from people who actually admitted on their tax return that they were NOT covered by health insurance for the year. I say “actually admitted” because there is anecdotal evidence that some taxpayers “checked-the-box” – indicating they had health coverage – when they actually did NOT have any coverage (and they rolled-the-dice banking on the fact that the IRS would NEVER go after them). In addition, twice the number of taxpayers who paid the penalty tax claimed an “exemption” from the tax. Specifically, in 2015, 6.5 million taxpayers paid the penalty tax, while 12.7 million taxpayers claimed an “exemption” from the tax. New Jersey’s State-based individual mandate penalty tax will mirror the Federal penalty tax (e.g., $695 or 2.5% of an individual’s income (whichever is greater)). I would assume that New Jersey would also adopt the same “exemptions” from the penalty tax that are currently available at the Federal level. Or, New Jersey may come up with their own “exemptions.” How many New Jerseyans will claim an “exemption”? Will New Jersey’s Department of Revenue actively enforce the penalty tax, and “go after” non-compliant taxpayers? These are important questions when trying to determine how much revenue New Jersey may collect from its new State-based individual mandate penalty tax. These are ALSO important questions for determining whether New Jersey’s penalty tax will be any more effective than the Federal penalty tax. What I mean is this: It will definitely be interesting to see if New Jersey’s individual mandate penalty tax works any better than the Federal penalty tax (from the perspective of getting more New Jerseyans into the individual market risk pool). Again, everyone knows that the Federal individual mandate has been ineffective. Thus it follows that if New Jersey is mirroring an ineffective requirement, New Jersey’s newly enacted State-based individual mandate will likely be ineffective too. Maybe New Jersey has more law-abiding citizens than other States ;], and therefore, maybe more New Jerseyans will want to comply with the law (and avoid paying a tax) by purchasing an individual market plan (and thus entering the risk pool). Or maybe not.

Quick Note on Maryland’s Reinsurance Program, and Louisiana’s Proposed Reinsurance Program

Last week, I explained that Maryland was imposing an assessment on insurance carriers operating in the State – to the tune of $380 million – to fund Maryland’s newly created reinsurance program. I also noted that it did not appear that Maryland was going to seek Federal “pass through” funding through a 1332 Waiver. I was incorrect. Not on the $380 million in tax assessments. But I was wrong on the 1332 Waiver. Maryland does indeed plan to submit a 1332 Waiver to establish a reinsurance program, and use the Federal “pass through” funds to pay for a portion of the program (where the $380 million assessments on carriers would cover the rest). Actually, the implementation of Maryland’s reinsurance program is contingent on HHS approving Maryland’s 1332 Waiver request (for the reinsurance program).
- Analysis: Louisiana is also seeking to enact legislation that would establish a State-based reinsurance program through a 1332 Waiver. Like other States, the Federal “pass through” funding expected to fund Louisiana’s reinsurance program will not be enough. So, like other States, Louisiana is looking to “other” revenue sources to help fund its reinsurance program. Unlike other States, however, Louisiana is seeking to impose an assessment on third-party administrators (TPAs) of self-insured health plans. Assessments on self-insured plans are not new. As we all know, Congress tapped self-insured plans to fund the ACA’s temporary reinsurance program. Also, the State of Michigan currently imposes a Health Claims Tax on TPAs of self-insured plans to fund Michigan’s portion of its Medicaid program. The employer community and the self-insurance industry are NEVER happy about assessments on self-insured plans – or their TPAs – to fund a program that self-insured plan sponsors do NOT even benefit from (e.g., the reinsurance program only benefits the individual market). Employers pushed back hard on the previous Administration when it came to the ACA’s reinsurance program. And, the self-insurance industry filed a lawsuit against the Michigan Health Claims Tax (claiming that the Tax was pre-empted by ERISA). Unfortunately for the self-insurance industry, the 6^th Circuit did NOT find that ERISA pre-empted Michigan’s Tax. And, the Supreme Court declined to take-up the 6^th Circuit ruling on appeal, due in large part to the fact that there was NO “split” in the Circuit courts over whether a Tax (like the Michigan Health Claims Tax) – or a similar assessment on TPAs of self-insured plans – is pre-empted by ERISA. Well, Louisiana is in the 5^th Circuit. So, if the Louisiana State legislature passes the “TPA assessment” to fund its reinsurance program – and the Governor signs the legislation into law – will the self-insurance industry (joined by the employer community) file an ERISA pre-emption challenge against the assessment? Such a legal challenge could set up a split in the Circuits, but only if the 5^th Circuit disagrees with the 6^th Circuit’s previous ruling on ERISA pre-emption and the Michigan Tax. As you may recall, Oklahoma submitted a 1332 Waiver request to, among other things, establish a reinsurance program. Oklahoma imposed a “TPA assessment” similar to what Louisiana is proposing. Note, the Oklahoma Governor withdrew their 1332 Waiver from consideration because HHS was unable to approve the Waiver by the end of Sept. 2017 (which was kind of a drop-dead date for approval if premiums were going to be lowered for 2018). While I believe there were a number of issues at play that made it difficult for HHS to approve Oklahoma’s Waiver in time, query whether the “TPA assessment” was one of them?? That is all of long way of saying this: States definitely want to “tap” self-insured plans to fund things like their reinsurance programs, or fund the State’s portion of Medicaid, or to fund a State-based Exchange. But if they do, these States are likely looking at an ERISA pre-emption challenge. And, an argument can be made that these types of assessments may not sit well with the Federal regulators. Stay tuned, because this issue is NOT going to go away.

ACA Individual Market Update

Premiums Increases for 2019: How Large Will They Be?

Everyone is trying to figure out how insurance carriers participating in the ACA’s individual market for 2019 are going to “price” their plans. Well, without the individual mandate, the Congressional Budget Office (CBO) has told us that premiums will go up by at least 10%. Many left-leaning economists agree. But others in the insurance industry know that the individual mandate penalty tax has been ineffective, and they also know that the absence of the mandate is NOT going to change behavior so significantly that those healthy lives that are currently in the risk pool are going to drop out. It just ain’t gonna happen (at least in my non-economist view).
- Analysis: BUT, it is likely that insurance carriers will use the absence of the individual mandate as an excuse to increase their premiums by at least 10%. So a question people are starting to ask is this: Will State Insurance Commissioners acquiesce to the carriers? That is, will the Insurance Commissioners approve a 10% increase even though the industry – including the Commissioners – know that the absence of the mandate is NOT going to change behavior so significantly to justify a 10% increase? Inquiring-minds-want-to-know. Speaking of Insurance Commissioners approving premium rates, here is another question people are starting to ask: Will the Insurance Commissioners recognize that the insurance carriers were BIG winners under Tax Reform, and will the Commissioners ask the insurance carriers to reduce their premium increase requests by a specified percentage in light of the fact that the carriers have new-found capital through their tax savings? It is important to understand that – as U.S.-based income taxpayers – insurance carriers typically had an effective corporate tax rate of at least 28% and above. Soooo, a 21% tax rate for the carriers means HUGE savings in taxes. With such significant tax savings, will the insurance carriers “voluntarily” reduce the premium increases they would otherwise request by a certain amount, factoring in the windfall they received through Tax Reform? Stated differently, will carriers “give back to the consumer” by reducing, for example, the profit load they traditionally add into their premium rates because the carriers now have additional capital as a result of Tax Reform? As you may know, a number of corporations outside of the health care industry have already announced that they will re-deploy their tax savings into things like bonuses for their employees, plused up employee benefits, higher dividends to shareholders, and/or plowing the savings back into the company’s research and development or physical plant (depending on the company). If the carriers did decide to “give back to the consumer,” premiums for 2019 would certainly be lower than expected. BUT, there is probably a less than a 5% chance that the carriers will voluntarily re-deploy their tax savings as a “give back” to consumers. However, will State Insurance Commissioners DEMAND that the carriers reduce their premium increase requests, and argue that because of Tax Reform, the carriers profited, and as a result, those profits should be shared with consumers? I would NOT be surprised if certain Blue State Insurance Commissioners deny a carrier’s premium rate request, and demand that the carrier reduce their request commensurate with, for example, a portion of their tax savings due to Tax Reform. Heck, maybe even Red State Commissioners make a similar demand. We are already seeing State policymakers demanding that the insurance carriers “give back” some of their tax savings for the “greater good” of the insurance markets. For example, in both Maryland and New Jersey, State legislators have justified the tax assessments levied on insurance carriers to fund their State-based reinsurance programs by arguing that the reduction in the carriers’ corporate tax rate is more than enough to cover the new taxes, so the carriers have no room to object to the imposition of these new taxes. The bottom-line is this: Policymakers/Regulators are already cognizant of the savings the carriers enjoyed as a result of Tax Reform, and some of them are already suggesting that the carriers could and should “give back to the consumers.” Will we see similar suggestions over the next few months when it comes to approving premium increase requests?? Stay tuned.

Individual Market Premiums: Impact of “Association Health Plan” Coverage (no news story)

Other policy changes that everyone believes will affect individual market premiums include: (1) The elimination of the cost-sharing subsidies (and the resulting “silver loading” practice), (2) The availability of short-term health plans, and (3) Association health plan (AHP) coverage for self-employed individuals with no employees.
- Analysis: Let’s start with AHPs. Critics of AHPs argue that allowing self-employed individuals with no employees (i.e., independent contractors) to enroll in AHP coverage will “siphon” off the healthy lives currently in the ACA’s individual market, which in turn, will increase premiums in the individual market. I do believe that healthy independent contractors currently enrolled in an UN-subsidized ACA-compliant individual market plan will probably find AHP coverage attractive (because in most if not all cases, the cost of the AHP coverage will be lower, and in many cases, the coverage will just as good if not better than an individual market plan). BUT, I ALSO think that less healthy independent contractors enrolled in an UN-subsidized ACA-compliant individual market plan are going to find AHP coverage attractive too.

Why? Because – as stated – the cost of the AHP coverage is going to be lower than an ACA-compliant individual market plan. And – contrary to what AHP critics believe – AHP coverage that will be available to these less healthy independent contractors will be as good as, if not better, than an ACA-compliant individual plan. Say whhhaaaaaaaattttt?!? Yes, I believe AHP coverage is going to be just as good if not better than an ACA-compliant individual market plan.

Why? Because the organizations that will be offering AHP coverage – for example, national trade associations, or franchisees, or Chambers of Commerce – have a reputation to keep. And, the last thing these organizations are going to do is offer inferior health coverage. It just ain’t gonna happen (in my benefits attorney and policy analyst view). These groups are going to want “to do right” by their members, and they are going offer good coverage. These organizations do NOT want to be on the cover of the New York Times headlining a news story that they are “screwing over sick people.” Again, it just ain’t gonna happen.

Yes, there will likely be some “bad apples” out there that are not like the organizations I mentioned above, and yes, maybe they offer a more limited set of benefits. But guess what?!? There will be enough organizations “doing the right thing,” and offering good coverage, and as a result, less healthy independent contractors will have a choice: (1) Enroll in the limited benefit AHP or (2) Enroll in an AHP that provides comprehensive coverage (at a lower cost than an ACA-compliant individual market plan). I think you know what a less healthy independent contractor is going to do. I tell you all of that to say this: It’s a two-way street people. Less healthy independent contractors are going to exit the ACA’s individual market just like healthy independent contractors. There is NO question about that. Importantly, this will have a POSITIVE impact on the individual market because these less healthy risks will no longer bog down the risk pool. As a result, I do NOT believe that individual market plan premiums will spike once AHP health coverage is available. Why? Because the number of less healthy people exiting the individual will offset most of the negative effects of healthy people exiting, even if more healthy people – relative to less healthy people – end up exiting.

Individual Market Premiums: Impact of Short-Term Health Plans

Let’s pivot to short-term health plans. Ummm, I DO indeed think short-term health plans could have a negative impact on individual market premiums.
- Analysis: But by how much? Well, Wakely Consulting is out with a report that suggests that in 2019, individual market premiums will increase between .7% and 1.7%. Ummm, what?!? Yes, a marginal increase, at least in my opinion. However, Wakely further suggests that in a couple of years, premiums will go up by between 2.2% and 6.6%. I’m tracking your reaction…yes, that is a material increase. So what does that mean? Well, it means that due to the availability of short-term health plans – in the long-run – individual market premiums will go UP. But guess what?!? For 2019, it is likely that premiums will NOT go up significantly. Note, for purposes of our discussion today, we are focusing on 2019 (but note, that is not to minimize the impact in the out-years, which is troublesome).

Individual Market Premiums: Impact of “Silver Loading” (no news story)

With little fanfare, CBO officially estimated that the lack of cost-sharing subsidy funds would COST the government money. I say “little fanfare” because I figured more media outlets would trumpet this news. But, I only saw the folks at Inside Health Policy pick this up (maybe others did too, but I didn’t see it).
- Analysis: CBO’s change in assumptions – at least to me – is significant for reasons I have been explaining to you in past updates (see the attached update, first post). As you know, up until now, CBO always assumed that the cost-sharing subsidy payments were being made (even if they were not), and CBO never “scored” the cost-sharing subsidy payments as costing the government. BUT, as I explained – if CBO were to change their assumptions and actually assume that the cost-sharing subsidy payments actually cost the government – any Congressional appropriations to fund the payments would be “scored” as savings to the government. And, depending on whether the savings was greater than the Congressional appropriations, Congress could then use those savings to pay for something else (like Federal funds for a reinsurance program/“invisible high risk pool” or plused up premium subsidy amounts). But alas, it does not really matter anymore, does it? Congress failed to agree to appropriate the necessary funds for the cost-sharing subsidies, so CBO never really had an opportunity to find any savings. BUT, now that CBO has officially incorporated the cost-sharing subsidy payments into its “base-line,” any future Congressional efforts to fund the cost-sharing subsidies will produce savings to the government. So to me, this is still kind of a big deal, even though it does not look like Congress will ever appropriate the necessary funds. Enter…“silver loading.” As you know, the “silver loading” practice increased premiums for the “silver” Exchange plans in most States. In 2018, however, there were some States that did NOT “silver load,” but instead, they also spread the unfunded cost-sharing liabilities to off-Exchange “silver” plans, or all of the plans on- and off-Exchange at all metal levels. This adversely impacted UN-subsidized consumers purchasing an UN-subsidized ACA-compliant individual market plan. BUT, the States that did NOT “silver load” were few in numbers. And now that we finally know that Congressional funding for the cost-sharing subsidies is NOT coming, I fully expect these few States will adopt the “silver loading” practice for 2019, just like a majority of the States did for 2018. So, contrary to what some commentators are saying, I do NOT believe that “silver loading” in 2019 will increase premiums for UN-subsidized consumers purchasing an UN-subsidized ACA-compliant individual market plan. YES, “silver loading” is going to cost the Federal government $$$. And that is because the increased premiums for “silver” Exchange plans will be absorbed by the premium subsidies such that an Exchange plan-holder will never feel the impact of “silver loading.” Instead, the Federal government will bear the cost in the form of increased spending. For this reason, many Republicans would like to end the “silver loading” practice. BUT, despite some of the recent suggestions about ending the “silver loading” practice, I would find it hard to believe that the Trump Administration would somehow outlaw “silver loading.” If the Administration did indeed end “silver loading,” I think they will get CRUSHED by the media and out-spoken ACA supporters. And, I believe that the negative rhetoric will resonate with Americans. Why? Because the American public understands money, and if they are getting what ultimately amounts to free-money to purchase something (like health insurance), taking that free-money away is a BIG deal, even to Americans who are NOT subsidy-eligible (because Americans feel bad for others who may be losing a free-benefit whether it is for a justifiable reason or not). Stay tuned for future developments.

Individual Marek Premiums: Adding It All Up (no news story)

Let’s connect-the-dots here: (1) If premium increases due to repeal of the individual mandate will not be as high as CBO and other ACA supporters are suggesting and (2) If less healthy people – along with healthy people – are going to exit the UN-subsidized individual market for AHP coverage, premium increases for 2019 should NOT be as crazy-high as most people are projecting.
- Analysis: In addition, while individual market premiums will likely go up – in the long-run – on account of the availability of short-term health plans, for 2019, it is likely that any such increase will NOT be as pronounced as critics of the Administration are suggesting. And finally, if premium increases on account of the “silver loading” practice are only going to affect the Federal government (and NOT affect any consumers, including UN-subsidized consumers), then it does NOT appear that 2019 premiums in the individual market are going to sky-rocket. Make no mistake, premium increases are going to be pretty high, for sure. BUT, I am not sure the premium increases are going to be as high as most people are suggesting. Add in the fact that carriers may – on their own – reduce their premiums by a couple of percentage points due to their new-found capital due to Tax Reform (but this is unlikely). However, there is a chance that State Insurance Commissioners will force the carriers to reduce their premiums due to the carriers’ tax savings. Also, we can’t forget that the excise tax on insurance carriers was delayed yet again by Congress, which means – at least for 2019 – the excise tax liability will NOT be passed through to individual market plan-holders, resulting in about a 2.5 to 3.5 premium savings. I am anxiously awaiting news of the initial premium increase requests (which we will likely hear at the end of May/some time in June time frame) because I may be totally be wrong here. But, I don’t think I am. Stay tuned.