In last month’s issue of Benefits in Brief, we examined the ERISA preemption issues raised by state health care reform. This month, we continue our survey of state health care reform by examining the universal coverage programs of three New England states – Massachusetts, Vermont, and Maine. Each state’s legislation takes a distinct approach, with quite different implications for employers.MASSACHUSETTS
The Massachusetts health care reform plan is the most publicized (and arguably the most ambitious) effort in the nation. By the end of 2007, all adult Massachusetts residents are required to obtain health insurance meeting specified minimum standards — if coverage affordable at their income level exists. Residents who fail to comply with this requirement will forfeit their personal income tax exemption in 2007, and in later years will be fined 50 percent of the cost of available coverage. The Massachusetts plan imposes three requirements on all employers that have more than ten full-time employees working in Massachusetts. They must (1) adopt a compliant Section 125 plan; (2) make a “fair and reasonable” contribution toward their employees’ health insurance premiums; and (3) disclose certain health insurance information.Section 125 Plan
Massachusetts employers must adopt a Section 125 plan (also known as a cafeteria plan) that complies with the regulations of the “Commonwealth Connector” — or risk paying a “free rider surcharge” based on their employees’ use of public funds. The Connector is a statewide clearinghouse for private health insurance plans that meet the requirements of the insurance mandate. Essentially, the Connector offers a collection of group health policies, both to businesses and to uninsured Massachusetts residents who have incomes of less than 300 percent of the federal poverty level. The Section 125 plan must offer employees the ability to use pre-tax dollars to pay health insurance premiums, but it need not offer any other features. A copy of such a Section 125 plan must be filed with the Connector by October 1, 2007.Fair and Reasonable Contribution
Employers subject to the Massachusetts plan must also make a “fair and reasonable” contribution toward their employees’ health insurance premiums, or pay a tax of up to $295 per full-time employee. An employer can demonstrate that it makes a fair and reasonable contribution in one of two ways. First, it can show that the total payroll hours of its fulltime Massachusetts employees who participate in an employer-subsidized group health plan equals at least 25 percent of the payroll hours of all its full-time Massachusetts employees. Second, the employer may show that it pays at least 33 percent of the premium cost of at least one group health plan that it offers to all its full-time Massachusetts employees who have been employed for more than 90 days. For fair and reasonable contribution testing purposes, employers may exclude employees who work fewer than 35 hours per week, seasonal employees, temporary employees, leased employees, independent contractors (as determined by Massachusetts law), and religious objectors. However, all qualifying employees who work in Massachusetts locations — not just Massachusetts residents — must be included in the testing group. The first testing period runs from October 1, 2006, through September 30, 2007. Testing results for this period must be filed with the Division of Unemployment Assistance by November 15, 2007.Health Insurance Responsibility Disclosure
The Massachusetts plan requires employers to deal with two different types of Health Insurance Responsibility Disclosure (“HIRD”) forms. The Employer HIRD Form asks for information about the employer, its employees, and its health coverage options. The first annual Employer HIRD Form must be filed with the state by November 15, 2007. The Employee HIRD Form must be completed by any employee who either declines to enroll in an employer-sponsored health plan or declines to participate in the employer’s Section 125 plan. The Employee HIRD Form will require an employee to indicate any alternative source of coverage, and it must be retained by the Employer for at least three years.Insurance Reform
Massachusetts’ reform efforts include a variety of insurance reforms. For employers, the most important change is the imposition of new nondiscrimination tests on insured plans. These tests are similar to the nondiscrimination tests that self-funded plans must already satisfy under Section 105(h) of the federal Tax Code. The new tests may require changes to plans that utilize Massachusetts insurance policies.
Implications for Employers
The Massachusetts plan will force all employers with operations in Massachusetts to reevaluate their health coverage. Employers subject to the law must:
- Ensure that any health coverage they offer meets Massachusetts’ minimum standards for
- individuals (which many self-funded plans are unlikely to do)
- Implement a Section 125 plan that complies with the Massachusetts law;
- Pass the “fair and reasonable” contribution test; and
- Prepare to file the required disclosure forms.
Many issues regarding these requirements remain unresolved. In particular, there is much ambiguity surrounding the treatment of employees who work only partially in Massachusetts. Consequently, any employer with more than ten employees who frequently work in Massachusetts should seek legal counsel before assuming that it is exempt from the Massachusetts plan.
Vermont passed a health care reform plan in 2006. Vermont’s approach is similar in some respects to Massachusetts’, although it does not require individuals to buy insurance. The Vermont plan includes a substantial Medicaid expansion and heavy subsidies of premium payments for those who cannot afford their employer’s coverage options.Catamount Health
The centerpiece of the Vermont effort is Catamount Health, a largely state-designed, but privately administered, health plan. Initially, Catamount Health policies will be offered by Blue Cross Blue Shield of Vermont and MVP Health Plan, the two largest insurers in Vermont. Individual Vermont residents are eligible to purchase a Catamount Health policy if their income is less than 300 percent of the federal poverty level and their employer does not offer creditable coverage.
As under the Massachusetts plan, Vermont employers who do not offer health coverage to their employees may be assessed a tax. The Vermont tax is based on the number of full-time equivalent employees who are uninsured. An employee is deemed to be uninsured if he or she is:
- Not eligible for health coverage offered by an employer to any other employees; or
- An employee of an employer who does not offer to pay any part of the cost of health
- coverage for its employees; or
- Eligible for employer-subsidized health coverage but has elected not to accept the coverage and has no other health coverage under either a private or public plan.
On a quarterly basis, each employer must tally the hours of all employees for whom it pays unemployment insurance and who are deemed uninsured, and then divide the total by 520. The resulting figure (rounded down to the nearest whole number) is the number of uninsured full-time equivalent employees.
The employer may subtract the permitted number of uninsured employees (presently 8, but scheduled to decrease to 4 by 2009) from the number of uninsured full-time equivalent employees. The difference is then multiplied by a contribution factor (currently $91.25) to yield the employer’s required quarterly contribution to Vermont.
Notably, the Vermont plan does not require an employer to establish a Section 125 plan. Nor does it require an employer to pay any specific amount of an employee’s health care premiums.
Implications for Employers
The Vermont plan is in some respects easier to understand than the Massachusetts plan. However, the Vermont plan’s testing group includes part-time employees, seasonal employees, temporary employees, new employees, and others who are often excluded from health plan participation. Moreover, Vermont employers are responsible for employees who voluntarily elect to go without health insurance. For these reasons, most employers with a sizeable, diverse workforce in Vermont will likely have to pay an assessment for uninsured employees. MAINE
Though its efforts have often been overlooked in the popular press, Maine enacted significant health care reform in June of 2003. This is known as Dirigo Health. Dirigo Health consists of three main components: (1) Medicaid expansion; (2) increased regulation (including price caps), intended to reduce costs and improve quality; and (3) a state-designed, privately administered health plan for small businesses, the self-employed, and the unemployed.
The most innovative part of Dirigo Health is an insurance program called DirigoChoice. Though designed by the state, DirigoChoice is operated exclusively by Anthem Blue Cross and Blue Shield of Maine. Only businesses with 50 or fewer employees, the self-employed, and individuals are eligible to enroll in DirigoChoice.
Even eligible employers must obey a relatively onerous set of restrictions to use DirigoChoice. First, an employer may not offer any health insurance other than DirigoChoice. Second, the employer must pay at least 60 percent of each participating employee’s individual premium. Third, at least 75 percent of the employer’s eligible employees must participate. (Eligible employees include all employees working more than 20 hours per week.)
DirigioChoice features a multitiered premium and out-of-pocket subsidy system that is income-tested. However, an employer is not eligible to receive any subsidy for contributing to the premium of a low-income employee.
Implications for Employers
At present, Dirigo Health has almost no impact on most employers. It does not mandate that employers provide insurance, nor does it require individuals to obtain insurance. Given the highly voluntary nature of the program, it is probably not surprising that Dirigo Health has had only a modest impact on the number of uninsured in Maine.
Unfortunately, even this progress has come at a high cost. Although Dirigo Health was represented as self-financing, the Dirigo Health Agency has levied a tax (known as the “Savings Offset Payment”) of 2.4 percent of claims paid by health insurers, stop-loss carriers, and third-party administrators doing business in Maine. These costs are likely to be passed through to employers.
Some of the state laws discussed in this article may be preempted by ERISA or by future federal legislation, and many legal requirements are likely to be modified by the states themselves as they continue to experiment. But whatever the fate of the specific laws discussed in this article, employers should steel themselves for increasingly complex state health care regimes. Many other states (including California and New York) are considering health care reforms aimed at yielding universal coverage, and they are sure to carefully analyze the respective experiences of Massachusetts, Vermont, and Maine.