Proposed Regulations Affecting Employers Issued under the Massachusetts Health Care Reform Act

The Division of Health Care Policy and Finance of the Commonwealth’s Executive Office of Health and Human Services (DHCPF) recently issued three proposed regulations (the “proposed regulations”) that address the obligations imposed on employers under the new Massachusetts health care reform law, Chapter 58 of the Massachusetts Acts of 2006 (An Act Providing Access to Affordable, Quality, Accountable Health Care) (the “Act”). Specifically, the proposed regulations cover the following of the Act’s requirements:

• The “Fair Share Contribution” Requirement. Act § 47 requires that Massachusetts employers with eleven or more employees that fail to make a “fair and reasonable premium contribution” toward health insurance costs pay an annual per employee “fair share contribution” not to exceed $295.
• The “Employer Surcharge for State-Funded Health Care Costs.” Act § 44 imposes a surcharge on Massachusetts employers for the state-funded health costs of employees and their dependents for whom the employer has neither offered to contribute toward, nor arranged for the purchase of, health insurance. This surcharge is sometimes referred to as the “free-rider” surcharge.
• The Health Insurance Responsibility Disclosure Form. Act § 42 requires DHCPF to promulgate, and employers to file with the Commonwealth, a Health Insurance Responsibility Disclosure (HIRD) form that provides information necessary to enforce the fair share contribution and free-rider surcharge mandates.

This client advisory explains the background and the key features of each of these proposed regulations.

Background

The Act was a major legislative undertaking that radically overhauled the manner in which the Commonwealth regulates health care. Among the Act’s (many) novel features are mandates both on individuals (to obtain health coverage) and employers (to offer, and pay for—or at least arrange for—health coverage). The issues and concerns of employers, as adduced in hearings and written comments, related principally to timing, cost and administrative complexity of the employer mandates. For the reasons set out below, we expect that employers will be relieved by much of what they see in the proposed regulations.

DHCPF is charged under the Act with the interpretation of most of the requirements of the Act that impose obligations on employers. In preparing the proposed regulations, the agency operated from a set of guiding principles that included the following:

• be mindful of the potential for challenges under federal law;
• avoid creating incentives for employers to drop health care coverage;
• recognize and provide credit for employers already paying into the uncompensated care pool;
• keep the rules simple for smaller employers; and
• recognize that part-time, seasonal and temporary workers are an important part of the workforce.

It is clear from the proposed regulations that DHCPF took seriously, and endeavored to adhere to, these guiding principles. Many of the worst fears of employers over the Act’s implementation have been minimized to a significant degree or sidestepped altogether. This is not to say that there will be no new administrative burdens, but the added burdens in each case appear—at least so far—reasonable in light of the Act’s requirements.

The “Fair Share Contribution” Requirement [Proposed 114.5 C.M.R. 16.00 et seq.]

The Fair Share Contribution is assessed on employers with eleven or more “full-time-equivalent” (FTE) employees that fail to make a “fair and reasonable premium contribution” toward the health insurance costs of their employees. The amount of the Fair Share Contribution is derived from the annual per capita cost of persons accessing the Commonwealth’s uncompensated care pool or receiving unreimbursed physician services, but cannot exceed $295 per year per FTE employee. The calculation is done annually (using fiscal years beginning on each October 1) beginning October 1, 2006, and is prorated for employees who work for an employer for at least one month based on 2000 annual hours. Payments for the fiscal year commencing October 1, 2006, and ending September 30, 2007, will be due by March 1, 2008. Employers may make installment payments quarterly prior to March 1, 2008.

Whether an employer makes a fair and reasonable premium contribution toward the health insurance costs of its employees is determined based on a two-part test:

1. The 25% Test. If at least 25% of the employer’s full-time employees are enrolled in a health plan sponsored by the employer, then the employer is deemed to be making a fair and reasonable premium contribution for purposes of the proposed regulation. Therefore, the employer will not be required to pay the Fair Share Contribution. The percentage of employees covered for purposes of this test is determined by dividing the employer’s total annual payroll hours of its full-time employees (i.e., those employees who work more than 35 hours per week) enrolled in one of its health plans by the total annual payroll hours of all of its full-time employees. For purposes of performing this calculation, employers can exclude employees receiving health care from other parties (e.g., spouse’s coverage or government programs).

NOTE: This test is based solely on the “take-up” rate; it does not measure the amount of the employer’s contribution. It looks to whether the employer is actually covering employees, and not just making the offer of coverage. This test is consistent with free-market principles, that is, it in effect allows the employer and employee jointly to establish the level of a “fair and reasonable” employer contribution. Employees measure the value of the employer-provided coverage to them by either enrolling or not enrolling in the employer’s health plan. Under this test, the Commonwealth simply measures the result of the employer’s and employees’ wage and benefit negotiations, whether explicit or implicit.

2. The 33% Test. If the employer fails the 25% test, it may nonetheless demonstrate that it makes a fair and reasonable premium contribution if it contributes 33% or more for the purchase of health insurance for its full-time employees who work more than 90 days in a fiscal year.

Both tests are based on full-time employees only; part-time employees are excluded. Seasonal and temporary employees are similarly excluded. For this purpose, a temporary employee is an employee who works full time for less than 90 days during the period from October 1 to September 30. What constitutes a seasonal employee is determined under rules established by the Division of Unemployment Assistance, but it generally would permit the exclusion of an employee who works four months or less in seasonal employment.

An employer that fails both tests must pay the Fair Share Contribution.

The Employer Surcharge for State-Funded Health Care Costs [Proposed 114.5 C.M.R. 17.00 et seq.]

So-called “non-providing” employers are subject to a surcharge for “state-funded health costs” incurred by their employees and dependents.

The employer surcharge is imposed only on employers with ten or more employees, and it is imposed only with respect to “state-funded employees.” An employer will not be considered non-providing if it offers to contribute toward, or arranges for the purchase of, health coverage. Under the proposed regulation, if the employer merely maintains a cafeteria plan (under Internal Revenue Code § 125) and makes coverage available through the Commonwealth Health Insurance Connector, the employer satisfies the “arranges for” requirement and will therefore be exempt from the surcharge. An employer is also exempt if it is a signatory to a collective bargaining agreement, or if it participates in the Commonwealth’s Insurance Partnership (which is a program of state subsidies for employer-provided health insurance for low income individuals).

NOTE: Internal Revenue Code § 125 requires a written plan document as a precondition for the pretax treatment of employee contributions. Many employers are unaware of this requirement. The Act requires employers not only to adopt a cafeteria plan but also to file a copy with the Commonwealth. This requirement should substantially increase the level of compliance.

For the surcharge to be imposed on a non-providing employer, the employer’s employees or dependents must meet a cumulative usage and cost threshold of “state-funded” health services under which the total costs incurred are $50,000 or more and

• an individual employee or their dependents must have three or more state-funded claims, or
• there are five or more state-funded claims in the aggregate from an employer’s employees or their dependents.

Assessment can range from 10% to 100% of the state-funded costs.

Under the proposed regulations, the percentage of state-funded costs assessed will vary by the number of the employer’s FTEs. State-funded costs are the costs incurred by the Commonwealth for services to the employees of non-providing employers and their dependents that are paid from the Uncompensated Care Trust Fund or its successor under Chapter 58, the Health Safety Net Trust Fund. The amount of the assessment increases with the number of occurrences, the employer’s failure to comply with the HIRD requirement (discussed below), and the employer’s status as a repeat offender. The assessment can decrease if the employer has a high percentage of full-time employees enrolled in employer sponsored health insurance.

For purposes of assessing the surcharge, employers are assigned to one of the following four categories:

Category 1	11 to 20 employees
Category 2	21 to 40 employees
Category 3	41 to 50 employees
Category 4	more than 50 employees

The proposed regulations establish a methodology for determining the percentage of the assessment based on the employer’s category. For example, a Category 3 employer with between four and six admissions by one state-funded employee or from five to ten visits for all of the employer’s state-funded employees would be assessed 20% of the state-funded costs, provided that the employer was otherwise in compliance with the HIRD requirements, was not a repeat offender, and did not cover its full-time employees.

The Health Insurance Responsibility Disclosure Form [Proposed 114.5 C.M.R. 18.00 et seq.]

The proposed regulations require every Massachusetts employer to file an initial HIRD form that includes:

• the employer’s Division of Unemployment Assistance account number;
• the employer’s federal employer identification number;
• the number of employees employed by the employer;
• whether the employer offers access to employer-sponsored group health insurance;
• whether the employer offers or arranges for access to employer-sponsored group health insurance (including under a cafeteria plan); and
• whether the employer maintains a self-funded plan.

The initial form must be submitted May 15, 2007, based on employees employed as of April 15, 2007. Following the initial HIRD filing, smaller employers will file annual updates, while large employers will file quarterly.

NOTE: The actual HIRD form itself has not yet been proposed.

In certain instances, an employee will also be required to sign the HIRD form if he or she declines the employer’s offer or arrangement of insurance. The HIRD form will require each affected employee to disclose

• his or her name and social security number;
• the name of the employer;
• whether the employer offered health insurance or offered to arrange for health insurance; and
• whether the employee declined and, if so, whether he or she has other coverage.

The obligation for filing this form rests with the employer.

Conclusion

In connection with the issuance of the proposed regulations, DHCPF announced a series of public hearings. The public hearings on the Fair Share Contribution and free-rider surcharge proposed regulations are both scheduled for August 8, 2006 (morning and afternoon, respectively). The public hearing on the proposed regulations governing the HIRD form is scheduled for August 15, 2006. DHCPF has also invited written comments from interested parties.

The requirements discussed above are imposed on employers, but, where health insurance is concerned, employers tend to rely on their brokers, consultants and third-party administrators, among others. These third parties will need to update their systems and procedures to accommodate the requirements of the Act, and they will also need to coordinate their efforts with their employer-clients. These sorts of endeavors nearly always take longer than originally anticipated. So until a technical corrections bill is signed into law pushing the compliance dates forward—there is one under consideration that would do just that—employers are well advised to begin contemplating compliance now. This is particularly true with respect to the free-rider surcharge, which can be avoided with a little planning.

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If you have any questions regarding the subject covered in
this Alert, or any related issue, please feel free to contact Alden J. Bianchi (AJBianchi@mintz.com, 617.348.3057) or Stephen M. Weiner (SWeiner@mintz.com, 617.348.1757).

Copyright © 2006 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

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