Does the Fee Imposed by Section 9010 of the Affordable Care Act Apply to Stop-Loss Coverage?

It was the intent of Congress in enacting the Patient Protection and Affordable Care Act to regulate health insurance comprehensively. Most of the regulatory provisions of Title I (the insurance reforms) apply to “A group health plan and a health insurance issuer offering group or individual health insurance coverage.” The definitions of these terms are drawn from the definitional section of the Public Health Services Act (added by the Health Insurance Portability and Accountability Act), which defines a “group health plan” as an ERISA plan, and a “health insurance issuer” as “an insurance company, insurance service, or insurance organization (including a health maintenance organization, as defined in paragraph (3)) which is licensed to engage in the business of insurance in a State and which is subject to State law which regulates insurance.” 42 U.S.C. § 300gg-91(a)(1), (b)(2). Thus the ACA covers both self-insured ERISA plans and insured individual and group plans.

In fact, however, the ACA does not apply to all health insurance coverage, and does not apply to all health insurance coverage to which it does apply to the same extent.  HIPAA excepted benefit plans, including specific disease and fixed-dollar indemnity plans, and short term individual coverage are not subject to ACA requirements, and many of the provisions of the ACA that apply to individual and small group plans, including the essential benefit package, the risk adjustment program, and the risk pooling, community rating, minimum medical loss ratio, and unreasonable premium increase justification requirements do not apply to self-insured plans.  It is, therefore, important to read the ACA section by section to determine which requirements or prohibitions apply to which types of health insurance.

One particularly important provision that has not received enough attention is section 9010, “Imposition of Annual Fee on Health Insurance Providers” (at 811-815 in the link).   This provision is found in Title IX of the ACA, but was amended both by the December 2009 Managers’ Amendment, which became Title X, and by the Health Care and Education Reconciliation Act, enacted in March 2010.  Section 9010 imposes a fee, beginning in 2014, on a “covered entity’s net premiums written with respect to health insurance for any United States health risk.” The fee is determined by multiplying the fraction determined by dividing the covered entity’s net premiums by the net premiums of all covered entities that are taken into account under the statute times a set annual amount, which begins at $8 billion, but rises to $14.3 billion by 2018.  This fee will be an important revenue source for funding the ACA’s coverage expansions.

The fee imposed by section 9010 does not apply to all insurers equally.  Insurers with annual net premiums of $50 million are fully taxed on their revenues, while insurers with annual net premiums of $25 to $50 million are taxed on only half of their net premium revenues, and insurers with net premiums below $25 million are not taxed at all.  Certain tax-exempt insurers are also taxed on only half of their net premium revenues (after applying the small insurer discount just mentioned).

The fee also only applies to “covered entities.”  Section 9010(c) defines “covered entity” as an entity that “provides health insurance for any United States health risk,” subject to a number of exclusions.  These exclusions include “any employer to the extent that such employer self-insures its employees’ health risks;” government entities; certain non-profit insurers that derive 80% of their revenue from government programs; and VEBAs that are tax exempt under I.R.C. § 501(c)(9).What is the universe of “covered entities,” however, that remain subject to § 9010 after these exclusions are applied?

To answer this question it is necessary to parse the meaning of “health insurance” and “United States health risk.”  Both terms are defined in the section, but only in part.  “United States health risk” is defined to include the health risk of an individual who is a United States citizen, resident, or located in the United States. § 9010(d).  “Health insurance” is defined to exclude certain but not all forms or HIPAA excepted benefits (as defined in I.R.C. § 9832(c)), long-term care insurance, and Medicare supplemental insurance.  Nowhere in § 9010, or indeed anywhere in the Internal Revenue Code, however, are the terms “health insurance” or “health risk” defined.  Section 9010 tells us what “health insurance” is not, but not what it is.

The most interesting question is whether health insurance for a United States health risk includes stop-loss coverage.  The sale of stop-loss coverage to small employer groups is increasing very rapidly.  As noted above, self-insured small groups are not subject to many of the consumer and market protections that the ACA applies to insured small groups.  Self-insured group plans are also not subject to state regulation because of ERISA preemption.  There is thus a great deal of interest in the part of small group plans in self-insuring.  Small groups can only self-insure, however, if they can find generous stop-loss coverage that will assume most of the health risk of employees.  A small employer that fully assumed coverage for its employees without stop-loss coverage would face unacceptable risk.  Some insurers, therefore, are actively marketing stop-loss coverage, often with very low attachment points, to small groups.

Is this stop-loss coverage subject to section 9010?  It certainly is “insurance” and it certainly covers a “health risk.”   It also does not fit within any of the explicit exclusions from the term “health insurance.”  But is “stop-loss insurance” “health insurance”?  The term “health insurance” is nowhere defined in the Internal Revenue Code (which would be the relevant code since the fee is administered by the Secretary of the Treasury and the fee is considered to be an excise tax, see § 9010(f),(h)(1)).  “Health insurance coverage” and “Health insurance issuer” are defined in § 9832, but those are not the terms used in section 9010, presumably intentionally.  By analogy, the term “group health plan” is used throughout the ACA to mean an ERISA plan, but in § 1301(b) the term “health plan” is explicitly defined to not include self-insured ERISA group plans.  Wherever the term “health plan” is used in the ACA without the adjective “group,” therefore, it does not include self-insured ERISA plans, but where it appears with the adjective “group” self-insured plans are included.  Similarly, it must be presumed that Congress used the term “health insurance” to mean something different from the defined terms “health insurance coverage” or “health insurance issuer,” which terms are used throughout the ACA in different contexts.

Is stop-loss insurance that covers health care risks health insurance?  This is certainly a reasonable interpretation of the term.  Moreover, the fact that Congress explicitly excluded from the definition of “covered entity” risk borne by employers in self-insured plans, but not risk that they pass on to stop-loss insurers, indicates that Congress did not intend to exempt stop-loss plans from the fee.

Applying the fee to stop-loss coverage would help to level the playing field between conventional health insurers and health insurers that insure health risk through stop-loss plans, and might help stem the flood of small groups to self-insured status, which in turn threatens to undo the consumer protections extended to employees insured through small groups and the market protections built into the ACA to stabilize the small group market (such as the risk adjustment and risk pooling requirements).

Section 9010(c) tasks the Secretary of the Treasury with providing implementing regulations and guidance.  It is to be hoped that the Secretary will clarify through the regulatory process that the § 9010 fee applies not only to conventional insurance, but also to stop-loss insurance.  Stop-loss insurance increasingly serves as an alternative mechanism for covering the same health risks that are covered by conventional insurance, while at the same time providing a means of evading ACA consumer and market protections.  Section 9010 should be applied to stop-loss insurance just as it is to conventional insurance.

Clarifying the AIA question

I have had a great deal of off-line correspondence with several readers about the applicability of the Anti Injunction Act to all of the lawsuits challenging the minimum essential coverage provision. Thanks to everyone who has written; it has been extremely helpful.

I remain convinced, at least at this point, that the AIA poses a very serious threat to the Supreme Court’s hearing of any challenge to the individual mandate. That said, I think I have a clearer idea of the issues that will determine the resolution of that issue.

* First, and perhaps most important, there is a very real dispute as to whether one should see the mandate (codified at 26 USC 5000A(a)) as a stand-alone legal obligation, or instead merely as part of a provision that, taken as a whole, gives those persons covered by the provision a choice between acquiring health coverage and paying a penalty.

* Second, this matters greatly, for if 5000A(a) is truly a stand-alone legal obligation, it obviously is not a “tax” within the meaning of the Anti-Injunction Act (or the General Welfare Clause). It is simply a  command, an “economic mandate” in the words of Randy Barnett.

* Conversely, if the best way to see 5000A is in its entirety, giving “applicable individual[s]” a choice between either (a) buying insurance, or (b) remitting the applicable exaction on their tax return, then the provision might well be a “tax” within the meaning of the AIA, consistent with the reasoning of Judge Motz’s opinion in Liberty University.

There is much more to this issue. I think this question functions as a basic threshold, over which all other analysis of the AIA question must cross.

[Ed. Note: This post originally appeared on the aca litigation blog, an invaluable resource in following the various lawsuits pending against the Patient Protection and Affordable Care Act (PPACA or ACA). Bradley W. Joondeph, Professor of Law at Santa Clara Law School, publishes the aca litigation blog.]

Senate Fails to Repeal Form 1099 Reporting Requirements

On November 30, the Food Safety Modernization Act (Senate Bill 510) passed the Senate with a 73-25 vote.  Despite bipartisan support for the bill, on November 29, the Senate rejected two amendments to repeal Form 1099, a measure which likewise carries bipartisan support.

Form 1099 is an informational return required of any business that pays a vendor or contractor more than $600 in a tax year.  Pursuant to the Patient Protection and Affordable Care Act, all corporations must fill out one Form 1099 for each qualifying payment relationship beginning in 2012.  The tax requirement has been criticized as an onerous and burdensome requirement for small businesses.

Although both proposed amendments would have repealed the new rules, the bipartisan agreement was limited to that single issue.  Democrats and Republicans have not decided how to offset the loss of approximately $20 billion over ten years that will result from repeal of the Form 1099 reporting requirements.  Senate Finance Committee Chairman Max Baucus’s (D-Mont) amendment (S. Admt. 4713) did not include any budgetary offset, an omission which appears to have sunk the amendment.  The Baucus amendment failed in a 44-53 vote.

The competing amendment (S. Admt. 4702) was offered by Senator Mike Johanns (R-Neb) and would likewise repeal the Form 1099 requirements.  In addition, it would have offset the cost of repeal by permanently rescinding $39 billion in discretionary non-defense spending.  The Johanns amendment garnered more support, but ultimately failed in a 61-35 vote (the amendment required 67 votes to pass).

According to BNA, Senators Baucus and Johanns spoke after the vote and have agreed to work together on a bipartisan solution.  Senator Baucus told BNA, “We will probably need to find a revenue bill, but our desire is to get this done. We will do whatever works.”

Senator Chuck Grassley (R-Iowa), also a member of the Senate Finance Committee, stated that negotiations had begun on November 30 to solve the Form 1099 reporting problem.  According to Grassley, the two main issues are (1) how to pay for the repeal and (2) what bill will serve as a legislative vehicle.  “I assume there’s going to be at least one tax bill this year and if there isn’t, there’s something wrong … so some sort of tax bill has to go and you can put it on that.”

Lawmakers still have time to work out these two issues, since the Form 1099 requirements do not go into effect until 2012.

Survivors’ Costs Gone Wild, Beverage Tax Edition

Mr. Gradgrind Catches Louisa and Tom at the Circus. Illustration by Charles S. Reinhart (1844-1896)

Gradgrind is alive and well, as this exchange on soda taxes explains:

This discussion between Greg Mankiw and David Leonhardt reads a bit like an economics textbook gone rogue. At issue is whether a soda tax makes sense. David Leonhardt says it does: There’s good evidence that it will reduce obesity, which will reduce health-care costs. Au contraire, says Mankiw: You have to “net out the appropriate budgetary savings from shorter lifespans.” In other words, maybe it’s not worth it, as the obese live shorter lives and so cost the government less.

Ezra Klein goes on to describe how the calculation of survivors’ costs (without offsetting valuation of survival benefits) “disadvantages the quality/value agenda as compared with the cost-control agenda.”

I would add a couple more points to complicate the analysis:

First, Mankiw may be interested in exploring the benefits of the “plus-size” clothing market. As the NYT reports, “The plus-size market increased 1.4 percent while overall women’s apparel declined 0.8 percent in the 12 months leading up to April 2010 versus the same period a year earlier, the most recent figures available, according to NPD Group, a market research firm.” Certainly taxes that discourage the development of this growth industry should be scrutinized carefully.

Second, for team Leonhardt, we might think of the tax as a way of deterring anti-beverage tax ads which have glutted the tri-state airways over the past few months. We could all do with a little less of the rent-seeking featured below:

The Individual Mandate’s No Insurance Tax & the IRS: How Will they Collect?

Interesting article by Timothy Noah over at Slate on the enforceability (read, “collection”) of taxes assessed for failure to procure insurance under the individual mandate contained within the new Health Reform law.

Noah, working with some posts from Prof. Timothy Jost and some recent comments from the IRS Commissioner, Douglas Shulman, notes provisions within the bill that will make enforcement difficult. They are worth noting.

As the failure to procure assessment is a tax, the IRS is charged with its collection. Verification will be done through a form similar to the 1099 for bank interest, but this form will be received from one’s insurance company. You will then attach that form to your tax return. And if you don’t and do not pay the either $695 or 2.5% of your income–whichever is higher? The Health Reform law imposes fairly stringent restrictions upon the form that collection efforts may take. From Noah:

What if your failure to obtain health insurance means you owe the penalty but you nonetheless refuse to pay it? That’s where things get tricky. The IRS can’t throw you in jail, because the health reform law explicitly states (on Page 336): “In the case of any failure by a taxpayer to timely pay any penalty imposed by this section, such taxpayer shall not be subject to any criminal prosecution or penalty with respect to such failure.”

Nor can the IRS seize your property, because the law states (also on Page 336) that the health and human services secretary may not “file notice of lien with respect to any property of a taxpayer by reason of any failure to pay the penalty … or levy on any such property with respect to such failure.”

So without the ability to prosecute, penalize, or file a notice of lien–what’s left? As Noah notes, Tim Jost points out that most people, desirous of obeying the law generally, will do so in this matter particularly. And many who do not have health insurance–often the self-employed or independent contractors of some sort or another with long complex and deduction riddled tax returns–will be prudently averse to raising the red flag of  civil disobedience.

According to Commissioner Shulman (again via Noah who took the time to transcribe Shulman’s press conference in its pertinent parts),

“People will get letters from us. We can actually do collection if need be. People can get offsets of their tax returns in future years, so there’s a variety of ways for us to focus on things like fraud, things like abuse, and we’re gonna run a balanced program.”

Noah then asks a rather interesting series of questions:

But if the IRS owes you a refund, isn’t that refund in effect your property? And if the IRS decides to withhold part or all of that refund because you didn’t pay your tax penalty for not obtaining health insurance, doesn’t that amount to seizure of your property? Or was Shulman just talking about people who might claim they paid the penalty but really didn’t, or who might claim that one of the law’s exemptions applied to them when it really didn’t, or who might engage in some other form of conscious duplicity that violated some other statute? (Is that what Shulman meant by “things like fraud, things like abuse”?) I’m not certain Shulman’s reply addressed the scenario Jost envisioned, wherein a civilly disobedient citizen would forthrightly tell the IRS: Yes, under this law I owe you $695, but I refuse to pay it. What are you gonna do about it?

First things first, I would argue that fraud and duplicity are separate from merely not paying or refusing to pay. Congress enjoined the prosecution or the levy of liens for a failure to pay–that does not include, in my estimation, a similar proscription against prosecuting tax fraud– which is what such “conscious duplicity” would entail. Separate matter, separate punishment– which I think the Commissioner alludes to in the above quote.

As for the withholding of a refund? It is, I believe, a valid exercise of the office. It may, however, for analysis, be easier to think of the practice as “an offset,” not a withholding of refund. It’s an important distinction under these circumstances and the Commissioner spoke in terms of “offset.”  The IRS will not so much be keeping your refund from you, as they will be merely utilizing the money withheld for its explicitly intended purpose: to pay a valid tax. In the scheme of things it would not be proper to say that the IRS owed you a $1000 refund, but then deducted $695 tax from your refund for your failure to have health insurance, and thereby left you with a refund of only $305.

They never owed you $1000 to begin with. Because you didn’t have health insurance, you owed an additional $695 in tax. You never had $1000 coming from the IRS. They only ever owed you $305; the “refund” being that which remains after all your tax has been paid. The other $695, by law, was always theirs and they have merely used the money set aside (for most people, incrementally through each paycheck) in the manner for which it was intended: to pay a valid tax. It is not “seizure,” merely appropriate allocation.