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Tax Reform Update

Tax Reform Update

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

The Congressional Budget Office (CBO) Issued a Preliminary “Score” on Repeal of the “Individual Mandate” Penalty Tax Based on Revised Assumptions

  • In CBO’s most recent estimate, the agency came to the following 4 conclusions:  By repealing the mandate (1) The government would save $338 billion over 10 years (from reduced premium subsidy spending and reduce Medicaid spending); (2) 4 million people would be uninsured in the 1st year and 13 million uninsured in 2027; (3) The individual market would continue to be stable in almost all areas of the country throughout the coming decade; and (4) Premiums would go up by 10% in most years in the decade.
    • Analysis:  Once again, you gotta love the media.  Every headline (at least the ones I read) highlighted 2 of the 4 conclusions.  Guess which ones?  Answer:  Premiums going up by 10% and 13 million uninsured.  Unfortunately, you saw NO headline underscoring that CBO said the individual markets “would continue to be stable in almost all areas of the country throughout the next decade.”  Look, it’s not as if premium increases and increases in the uninsured are not important points.  They are.  But it’s just so maddening that the media continues to feed a negative narrative, instead of taking the time to describe how vastly different CBO’s most recent estimates of repeal of the individual mandate are from prior estimates.  There are some very important differences to point out.  So let’s get to it:
      • CBO said “the individual market would continue to be stable in almost all areas of the country throughout the coming decade.”  This is a HUGE departure from where CBO was on repeal of the mandate just 3 months ago.  This past summer, CBO said repeal of the mandate would essentially destabilize most of the markets around the country.  But now, CBO thinks the effects of repeal won’t be so dire.  It’s almost a 180-degree shift from where CBO was on things just a short time ago. Why the HUGE change in CBO’s estimate??  Unfortunately, CBO did not specifically say.  Maybe it is because CBO – like me – has consistently said that so long as the premium subsidies are available, people are going to be attracted to the subsidized coverage, thus ensuring that about 8 to 9 million people are always going to remain in the individual market.  Actuaries will tell you that 8 to 9 million people constitutes a stable market, even if the health risks in that market remain unbalanced.  What is most important in the context of the ACA Exchange markets is that the premium subsidies absorb any premium increases resulting from the unbalanced market.  Thus, any adverse effects that would otherwise result from an unbalanced market never really impacts a consumer, and their economic decision to obtain health coverage that is heavily subsidized.  Note, off-Exchange consumers will be impacted, however, but NOT the 8 to 9 million consumers purchasing an Exchange plan. I would also argue that CBO is now assuming that the premium subsidies will be bigger on account of the decision to cancel the cost-sharing subsidy payments.  As I explained in the past, CBO estimates that the individual market will actually improve in the long-run because of the cancellation of the cost-sharing subsidy payments.  And that’s because bigger premium subsidies are going to keep consumers coming back to the Exchanges (and even attract new consumers) for as long as those subsidies continue to flow.
      • CBO said “4 million people would be uninsured in the 1st year and 13 million uninsured in 2027.”  This is another BIG DEAL.  Just 3 months ago, CBO said that – under the Senate ACA repeal-replace bill – 15 million people would be uninsured in the 1st year of repeal (under the House bill, the uninsured in the 1st year would be 14 million (see my attached update)).  But now, CBO is saying 4 million in the 1st year.  Wow!!  Maybe I am geeking-out here, but a 10 to 11 million swing in the uninsured number is just crazy to me. Why the HUGE change in CBO’s estimate??  Here, CBO did explain the agency’s thinking.  In short, CBO said that it now thinks individuals and employers will react more slowly to the elimination of the individual mandate, and thus, the impact of repeal would phase-in more slowly than previously projected.  To me, that makes sense because I have consistently stated that I believe CBO is over-estimating the current effectiveness of the mandate.  It seems that CBO may be coming around to that realization.
      • CBO said “premiums will increase by 10% over the next decade.”  Just 3 months ago, CBO said that premiums would go up by 20%.  But now, the premium increase is cut in half.  To me, that is pretty significant.  Unfortunately, the media did NOT discuss this 10-percentage point reduction based on CBO’s revised assumptions.
      • CBO said “the Federal government would save $338 billion over 10 years.”  3 months ago, CBO said the savings would be around $400 billion.  It makes sense that the savings is less, because CBO has slightly reduced the uninsured number over 10 years from 15 million to 13 million. Importantly, CBO said that the agency will be making further revisions to its assumptions on the impact of repeal of the individual mandate.  CBO actually hinted that – based on these forthcoming revisions – CBO’s estimated effects on the savings and the coverage numbers “would probably be smaller.”  That means that CBO will likely say – at some point in the future – repeal of the mandate won’t save $338 billion, but instead, some lesser amount.  Also, CBO will lower the uninsured number (even lower than 4 million in the 1st year and 13 million over 10 years). These forthcoming revisions are a double-edged sword for Republicans.  On the one hand, a lower uninsured number will help beat back the negative narrative that Republicans are “kicking people off of their health coverage.”  But, Republicans will have less savings to offset things like repealing the ACA’s taxes or spending on a tax credit for health insurance.  Does this mean Republicans should use the savings now – in Tax Reform – as opposed to waiting and repealing the mandate through a forthcoming ACA repeal-replace exercise??  Possibly.  Because the $338 billion in savings is the best number Republicans are going to get.

Employer Update

IRS Announces That the Agency Will Begin Sending Penalty Assessment Letters to Employers for the 2015 Calendar Year

  • To the surprise of the employer community, the IRS quietly announced that the agency will start sending out letters to those employers the IRS has identified as possibly owing an employer mandate penalty tax for the 2015 calendar year.  The IRS said that these letters will go out between now and the end of this year.
    • Analysis:  Back in Spring of 2016, IRS officials publicly stated that these same types of letters would be going out the 1st Quarter of 2017.  BUT, the Nov. 2016 elections happened, and it appears that the IRS’s enforcement of the employer mandate was put on hold by the Trump Administration.  BUT, it now appears that Treasury and the IRS feel that enforcement can no longer remain idle.  So – it now appears – enforcement activity will finally begin. But here is a big problem that Treasury and the IRS face:  An argument has recently been brought to my attention that calls into question whether the IRS can indeed impose penalties at least for the 2015 calendar year.  After doing my due diligence – by reviewing the statute itself, the employer mandate final regulations, and the Exchange final regs – here is how this argument goes:
      • BOTH, the statute and the final employer mandate regulations state the following:  A penalty tax will be imposed on an employer with 50 or more “full-time equivalent employees” (1) if the employer does NOT offer health coverage or the employer does NOT offer an “affordable/minimum value” plan AND (2) the employer received a “certification” from an ACA Exchange that one or more the employer’s “full-time” employees received a premium subsidy.
      • The important point here is #2 above.  That is, BOTH the statute and the regulations require that – as a condition to imposing a penalty tax – an ACA Exchange MUST “certify” to the employer that one or more of its full-time employees received a premium subsidy.
      • Section 1411 of the ACA directs the ACA Exchanges to make this “certification” through a notification process established by HHS.
      • Importantly, the final employer mandate regulations define this certification and notification as a “Section 1411 Certification,” which – according to the final regs – means a “certification received as part of the process established by the Secretary of Health and Human Services under which an employee is certified to the employer under section 1411 of the Affordable Care Act as having enrolled for a calendar month in an [Exchange plan and having received a premium subsidy].”
      • What is also important here is this:  NONE of the ACA Exchanges (with the exception of Maryland) sent a “Section 1411 Certification” to an employer for the 2015 calendar year.
      • Interestingly – in a “sample letter” the IRS intends to send to employers – the letter states:  “This letter certifies, under Section 1411 of the Affordable Care Act, that for at least one month in the year, one or more full-time employees was enrolled in [an Exchange plan] for which a [premium subsidy] was allowed.”
      • BUT, the problem with this statement is that a “Section 1411 Certification” CANNOT come from the IRS.  Instead, a “Section 1411 Certification” MUST come from an ACA Exchange, as the statute and the final regulations explicitly state.
      • Note, for the 2016 calendar year, some State-based Exchanges, along with the Federal Exchange – through HHS – DID send out a “Section 1411 Certification.”  But again, NO ACA Exchange (with the exception of Maryland) sent out these certifications for 2015. Look, I am NOT saying that the IRS should NOT enforce the employer mandate.  But what I am saying is that the statute and the regulations set forth a “process.”  And, it does NOT appear that the IRS and the ACA Exchanges have followed this “process.”  As a result, I do NOT believe the IRS can enforce the employer mandate penalties for the 2015 calendar year prior to exhausting the “process” that BOTH the statute and the regulations require. The IRS may argue that the agency’s assessment letter serves as the “Section 1411 Certification,” and therefore, the IRS has exhausted this “process.”  But again, the statute and the regulations are crystal clear that the “Section 1411 Certification” MUST come from an ACA Exchange, NOT the IRS. BTW, I think this issue is ripe for litigation.  What I mean is, if the IRS assessment letters indeed go out informing employers that they may be subject to penalties for the 2015 calendar year, I could very well see the employer community filing a lawsuit, arguing that the IRS did NOT exhaust the “process” that I described above.  Personally, when my clients tell me that they received an IRS assessment letter, I am going to appeal the letter back to the IRS within-a-moments-notice, arguing that my client failed to receive a “Section 1411 Certification,” and therefore, the IRS CANNOT impose penalties (due to the failure to exhaust the “process”).  This could get very, very messy for the IRS, and by extension the White House.  We’ll keep monitoring this.

Uber Partners With Stride Health To Enroll Uber Drivers In an Individual Market Plan

  • This news article is very interesting to me.  Why?  Because – to me – it brings up 2 issues:  (1) “Direct enrollment” of part-time, temporary, seasonal, and even contract workers in an “individual” market Exchange plan through a Web-Broker Entity (WBE) and (2) The “association health plan” (AHP) guidance that we may see from the Department of Labor (DOL).
    • Analysis:  As you know, I am a huge proponent of “direct enrollment” in an Exchange plan through WBEs.  I have consistently suggested that employers should take a holistic approach to offering health insurance to their workers.  What I mean is, employers with 50 or more FTEs have to figure out whether they want to offer a “group health plan” or whether they want to pay the employer mandate penalty tax.  Most if not all employers decide to offer the group health plan.  But what about part-time, temporary, or seasonal workers?  Employers do NOT have to offer them group health plan coverage.  BUT, employers still care about the health and productivity of their part-time, temporary, and seasonal workers.  Same goes for contract workers?  While employers do NOT offer these contract workers employee benefits, employers care about their health and productivity. Importantly, there is now an option out there for employers who do NOT offer health coverage to their part-time, temporary, seasonal, or contract workers.  And that option is partnering with a WBE to enroll these types of workers in an Exchange plan (assuming they are premium subsidy-eligible) or an off-Exchange plan (in cases where the worker is NOT subsidy-eligible).  I recognize that there are some ERISA issues that employers need to navigate should they partner with a WBE.  But those ERISA issues are easy navigate if you know what you are looking for.  Kudos to Uber for taking this holistic approach and partnering with a WBE – here Stride Health – to enroll Uber drivers in individual market plans. How does the AHP issue play into this?  Under current law, a self-employed individual with no employees (either an incorporated sole proprietor or an unincorporated independent contractor) CANNOT enroll in a group health plan.  This means that these sole-props and independent contractors are forced into the fully-insured individual market.  Many policymakers view this as unfair, and an arbitrary limit on the “choices” these individuals have when it comes to obtaining health coverage.  As a result, there is interest among policymakers to change current law to somehow allow self-employed individuals with no employees to participate in a group health plan. How could you allow sole-props and independent contractors to participate in a group health plan?  First, you could allow these individuals to purchase a self-insured plan on their own (a plan backed by reinsurance and subject to all of the same consumer protections a group health plan is subject to).  To accomplish this change, the DOL could amend its regulations to allow a self-employed individual with no employees to participate in a group health plan, and also provide for specific solvency requirements for the self-insured coverage. Second, you could allow these individuals to join an AHP.  To accomplish this change, you would need to amend the DOL regulations (to allow a self-employed individual with no employees to participate in a group health plan), and also modify the DOL’s current “commonality of interest” test to allow a self-employed individual with no employees to be a part of a “bona fide group or association of employers” as defined under ERISA. If this second change in the law were to be effectuated by the DOL, sole-props and independent contractors working in the same industry could band together to form an AHP.  The AHP could be a fully-insured “large group” plan or a self-insured plan.  In Uber’s case, this means that all of the Uber drivers nationwide could form a fully-insured “large group” or self-insured AHP.  Or, Uber drivers could form regional or State-by-State AHPs.  Uber – as the employer – would NOT be directly involved in establishing the AHP, rather the AHP would be established and operated by a third-party administrator (TPA).  But, Uber – as the employer – could provide some support in organizing its drivers to form an AHP, and Uber – as the employer – could also aid in connecting the group of Uber drivers with competent TPAs and insurance carriers.

ACA Exchange Update

Over 600,000 People “Sign Up” for an Exchange Plan Through the Federal Exchange, a 76% Increase In “Sign Ups” Relative to Last Year  

  • You are going to hear 2 different reactions to the fact that Exchange “sign ups” are way, way up during the 1st week of the 2018 “open enrollment” period.  First, proponents of the Trump Administration (and opponents of the ACA) are going to say:  “See, we told you so.  Our reduction in funds for marketing and outreach – and other actions we have taken impacting the law – have had ZERO impact on enrollment, and any claims that we are ‘sabotaging’ the law have no basis.”  Second, opponents of the Trump Administration (and ACA supporters) are going to say:  “See, we told you so.  The ACA is here to stay and people now understand how they can get coverage, and boy, just think of how many more people would have signed up if Republicans hadn’t taken steps to ‘sabotage’ the law.”
    • Analysis:  I am not going to take a position on either of these reactions.  Instead, I am going to side with economic behavior, and the fact that it appears that people are acting rationally when it comes to obtaining health coverage for little to no cost.  Remember last week when I told you that word spreads fast when there is a good deal out there (see last week’s update attached).  Well, it appears that word has spread that most people can purchase a “bronze” plan for free, or they can purchase a “gold” plan at the same cost they purchased a “silver” plan last year.  Note, I am NOT trying to suggest that this revelation is the sole reason why “sign ups” at the Federal Exchange are up 76% relative to last year.  But, it goes to the point that people are responding to the bigger premium subsidy amounts this year (due to the decision to cancel the cost-sharing subsidies) in an economically rational way, and purchasing health coverage at little or no cost. I would also argue that some people are “signing up” so they can make sure they have coverage “before the ACA is repealed.”  What I mean here is that some people are concerned that the ACA may be repealed before they purchase a health plan, so instead of sitting around and procrastinating, they are purchasing health coverage to secure that coverage, at least for 2018. Now, we do NOT yet know if this pace of “sign ups” is going to last throughout the entire 2018 “open enrollment” period (which runs until Dec. 15th).  The pace will no doubt taper off as we move through the month.  But again, as more people hear about the “free health coverage” they can get through the Exchanges, I would argue that we will still see “sign-up” numbers that rival last year’s numbers.  Then, we will have to wait and see what the “attrition” rate is like for 2018.  Over the past 4 years, the attrition rate has hovered around 15% to 20%, where those who “sign-up” end up dropping off of their Exchange plan coverage (because they, for example, failed to pay their premiums or they got a job). Last comment:  Many analysts – including the S&P – estimated that ACA Exchange enrollment will go down by 1 to 1.5 million this year.  They attributed the decline in enrollment to the “uncertainty” Republicans have inserted into the marketplace, and also the reduction in funding for marketing and outreach efforts.  It is currently unclear whether – at the end of the day – S&P will be right or wrong.  Personally, I have been on-the-record pushing back on S&P’s estimates, suggesting that I do NOT think enrollment will go down this year.  I actually think enrollment will be flat, around 12.7 million “sign-ups” like last year.  Or maybe slightly lower, around 12 million “sign-ups.”  The basis for my estimate rests on the fact that as long as the premium subsidies continue flow, you are going to get about the same “sign-ups” you got the year before.  Yes, maybe the lack of marketing and outreach will have a minor impact on enrollment numbers.  But, I believe that this reduction will be counter-acted by the re-allocation of resources within HHS to better enable “direct enrollment” through insurance carriers and agents/brokers (including WBEs).  Only time will tell…