| May 1997 |
How Health Insurance Reforms will Affect Law Firms and Lawyersby Roger N. Morris and Barry D. MitchellIn the Fall of 1996 President Clinton signed into law the Health Insurance Portability and Accountability Act1 (the “Portability Act”). Many in the healthcare industry hailed the Portability Act at the time of its signing as the first step to allowing millions of Americans the freedom and luxury to be able to change jobs based solely on the economics of the job itself, rather than whether they would be able to obtain or maintain adequate health insurance. On August 21, 1996, President Clinton signed the Portability Act along with the Small Business Job Protection Act2 (the “Job Protection Act”) and the Personal Responsibility and Work Opportunity Reconciliation Act3 (“Reconciliation Act”), both of which were also viewed as providing huge benefits for working Americans. These new laws affect law firms and individual lawyers in virtually the same way as they affect every other business. This Article addresses the benefits of the “Portability Act” and the tax and legal implications of the Job Protection Act and the Reconciliation Act. An in-depth survey and analysis of each provision of the Portability Act is beyond the scope of this article. Nevertheless, a review of some of the highlights of the Portability Act will be helpful to managing partners and law firm administrators in making personnel decisions. Significant Features of the Portability Act At its inception, the purpose of the Portability Act was "to provide greater access, security and portability of health benefits" and it was known as the "Health Insurance Reform Act of 1995.4" Through a series of amendments and revisions by the House and Senate, the purpose of the Portability Act was focused and amplified as:
Summary of the Portability Act The Portability Act is divided into five titles. Title I, through the Employee Retirement Income Security Act (ERISA) of 19746 and the Public Health Service Act,7 impacts health care access, portability and renewability. Title II revises and refines the Social Security Act8 to prevent health care fraud and abuse, simplify administration of Medicare and state health care programs, and impose medical liability reform. Title III amends the 1986 Tax Code, among other things, to allow and promote the use of medical savings accounts and increase the tax deduction for health insurance costs of self-employed individuals. Title IV amends the Tax Code concerning group health plan portability, access and renewability requirements. Title V amends the Tax Code to offset the tax revenue lost in part by the allowance and promotion of medical savings accounts and increase in deduction amount for the health insurance costs of self-employed individuals. Portability The most widely publicized provision of the Portability Act relates to "portability" of health insurance for individuals. Portability is a misnomer. In fact, there is nothing in the Portability Act allowing for the movement of an insurance policy from one employer to another. Rather, the Portability Act requires insurance companies to make individual policies available for employees who lose their group coverage and ensure that an individual beneficiary is not denied enrollment or other benefits because of his or her health status. Health insurers now may only limit pre-existing condition exclusions to 12 months (18 months in certain unusual circumstances) and may impose pre-existing exclusions only for conditions diagnosed or treated within the six months prior to enrollment. Once the appropriate exclusion period expires, insurers may not impose a pre-existing condition limitation on individuals who maintain their insurance coverage, and the time period for the individual’s pre-existing condition exclusion is reduced by the aggregate of the individual’s "periods of creditable coverage.9" Thus, pre-existing conditions of more than a year that have been covered for an employee at Employer "A" must also be covered for that employee at Employer "B". There is, however, a significant exception to the limitation on pre-existing condition exclusions: If individuals experience a break in coverage of more than 63 days (not including any employer-imposed waiting periods), then the 12-month exclusion for pre-existing conditions takes effect. Discrimination Provisions The Portability Act prohibits discrimination against individual participants and beneficiaries based on their health status.10 In addition, workers may not be denied enrollment due to health status or medical condition, claims history or medical history, genetic information or other evidence of insurability. Further, insurers may not require a single worker to pay a higher premium than other workers. The Portability Act also prohibits health insurers from denying coverage to "small employers" (two or more employees) and prevents employment-based health plans from excluding any employee from coverage based on health status.11 This prohibition guarantees that if individuals lose their jobs, or health insurance is eliminated by a current employer, the individuals must be offered access to individual health plans regardless of their health status.12 Termination of Policies Another aspect of the Portability Act is that health insurers must follow a specific and detailed set of plans in order to cease providing coverage under a plan.13 They may not simply stop issuing policies or decide not to renew policies. The Portability Act, however, does not impose a comparable requirement on employers; employers may at any time decide not to offer health insurance benefits to their employees. State Flexibility Seeking to promote state flexibility, the Portability Act allows states to enact their own insurance reforms pertaining to health insurance issuers to provide additional protection for consumers beyond the minimum requirements contained in the Portability Act.14 Additionally, the Portability Act, through preemption of contradicting or obstructive state laws, promotes group purchasing by allowing employers and individuals to form coalitions to purchase health insurance and negotiate with providers and health plans.15 Key Provisions Affecting Law Firm Personnel Increased Mobility of Lawyers The Portability Act will affect law firms as it does other employers. Law firms might be able to attract and hire new lawyers who previously would not have considered switching firms based on a prior medical condition for themselves or a family member. Accordingly, the law is likely to increase the already frantic pace of the musical-chairs-like movement of lawyers switching firms. While mobility clearly benefits individual lawyers and law firms, there is a corresponding detriment that follows. Because health insurers will no longer be able to limit pre-existing conditions, insurance premiums as a whole likely will increase. Obviously, this is not good news to any law firm manager or individual lawyer who pays any part of his or her own insurance premium. Easier Comparisons of Policy Terms Another benefit of the new Portability Act is that law firms will now be better able to compare health insurance benefits because pre-existing conditions are uniformly defined by the Portability Act. Previously, many individual health insurance plans had different definitions of pre-existing conditions. Law firms had difficulty in comparing relative costs because firms would have had to consider individual employee health requirements, which is not allowed under the Americans with Disabilities Act.16 This left law firms with the difficult task of trying to compare health care coverages without knowing who would be covered. This detriment will no longer exist. Other Provisions of the Portability Act Medical Savings Accounts The Portability Act contains other provisions affecting law firms and lawyers. For example, Title III of the Portability Act allows individuals a yearly tax deduction for amounts they paid into their medical savings account during the taxable year. The deduction is limited to 65 percent of the annual medical insurance deductible for an individual who has self-only coverage under a "high deductible health plan" and 75 percent of the annual deductible for an individual who has family coverage under a "high deductible health plan."17 For self-only coverage, a high deductible health plan is one that has an annual deductible between $1,500 and $2,250. For family coverage, a high deductible health plan is one that has an annual deductible between $3,000 and $4,500. The annual out-of-pocket expenses required to be paid under the plan (for premiums) for covered benefits must not exceed $3,000 and $5,500, respectively.18 For married individuals, if either spouse has family coverage, both spouses will be treated as having family coverage (and if both spouses have family coverage, then each spouse is treated as having the family coverage with the lowest annual deductible).19 The Portability Act also authorizes a four-year demonstration project for employers of 50 or fewer employees. Thus, small law firms may obtain favorable tax treatment for deductions and distributions relating to medical savings accounts. This change takes effect for tax years beginning January 1, 1997. Increased Deductibility of Health Insurance Costs Title III also increases the deduction for health insurance costs of self-employed individuals.20 Currently, self-employed individuals (or more than two percent employee/shareholders of an S-corporation) may deduct 30 percent of the amount they pay for health insurance premiums for themselves and their family. This 30 percent deduction will increase to 40 percent for 1997, 45 percent for 1998 through 2002, 50 percent for 2003, 60 percent for 2004, 70 percent for 2005 and 80 percent for 2006 and thereafter. This significantly benefits lawyers practicing alone or in a S-corporation. The money to allow and promote medical savings accounts and to increase the tax exemption for health insurance costs for self-employed individuals has to come from somewhere. Congress and the Senate have decided to offset the revenue loss in part by eliminating individual deductions for interest on loans against company-owned life insurance.21 Tax Penalties for Failure to Comply Title IV of the Portability Act imposes a tax on employers whose group health plans fail to meet the Portability Act’s portability, access and renewability requirements.22 Additionally, Title IV amends the Public Health Service Act 23 to minimize gaps in health coverage for newborns and adopted children, and individuals with disabilities. Individuals who have disabled family members or who become disabled at any time during their coverage under an initial COBRA extension period will be able to extend their coverage for an additional 11-month period (totaling 29 months), over that currently granted to workers who are disabled at the time they lose their coverage. Further, the Portability Act clarifies that newborns and adopted children may be covered immediately under a parent’s COBRA policy.24 Taxability of Some Personal Injury Awards The Small Business Job Protection Act, signed simultaneously with the Portability Act, clarified and changed existing law regarding the taxability of damage awards for personal injuries.25 Previously, the government did not tax damages recovered for personal injuries or sickness, including damages not involving any physical injury or illness such as job discrimination. Punitive damages, however, were tax-free only if awarded in connection with an actual physical injury or illness. Accordingly, lawyers and law firms participating in contingency fee arrangements will have a significant interest in the taxability of the award under these changes. The new law still exempts physical injury or physical sickness damages. However, emotional damages not associated with any physical injury or sickness (for example, discrimination and emotional distress damages) are now taxable. In addition, punitive damages will be taxable under virtually all circumstances. Thus, settlements likely will be structured differently. Previously, an individual plaintiff received 60 to 66 percent of the settlement (minus actual costs) in non-taxable personal injury cases. Now, taxes will reduce the net amount received by the plaintiff by up to 39.4 percent (the highest possible tax bracket to which an individual might be subject). This likely will result in higher demands for settlement with resulting higher attorneys fee awards based on the contingency percentage. It is possible that the Portability Act will result in more trials since it may be harder to reach a resolution and settlement with the government taking its portion of any settlement. Conclusion Overall, the Portability Act, and the other laws signed into effect by President Clinton in August 1996, are likely to result in higher costs to all law firms. Because comprehensive insurance coverage will be easier to obtain for even those in less-than-perfect health, the overall cost of health insurance is likely to rise. Nonetheless, lawyers might welcome the change despite the higher cost because they will have no concerns about being accepted by a firm’s health plan. The Portability Act probably is only the start in a series of changes regarding health insurance that will continue to affect all businesses, including law firms.
Roger N. Morris is a director and Barry D. Mitchell is an associate in Streich Lang’s Health Care Practice Group. Their practices involve all aspects of health care law, including licensure, medical malpractice defense, criminal defense, products liability defense, employment and general corporate advice to health care employees.
ENDNOTES: 1. Public Law 104-91. 2. 110 Stat. 1755. 3. 110 Stat. 2105. 4. S. Rep. 156, 104 Cong. 1st Sess. 1995, Section IV.A., 1995 WL 64926 at p. 13. 5. PL 104-191 (HR 3103), 110 Stat. 1936, 104th Cong. 2nd Sess., Jan. 3, 1996. See also House Rpt. 104-736. 6. 20 U.S.C. § 1181. et seq. 7. 42 U.S.C. § 300gg. et seq. 8. 42 U.S.C. § 1301, et seq. 9. Title I, Section 701, 110 Stat. at 1939-45. 10. Title I, Section 702, 110 Stat. at 1946-47. 11. Section 2711, Title I, 110 Stat. at 1961-63. 12. Title I, Section 703, 110 Stat. at 1946. See also 5 Rep. No. 156, 104th (104 Cong. 1st Sess. 1995, 1995 WL 624926 at 3-4. 13. See Title 1, Section 2712, 110 Stat. at 1964-65. 14. Title I, Section 2723, 110 Stat. at 1970-72. 15. See Title I, Section 2744, 110 Stat. at 1983-85. See also, S. Rep. 104-156, Supra. 16. Americans with Disabilities Act Compliance Guide § 342. 17. Title III, Section 220, 110 Stat. at 2037-39. 18. Title III, Section 220(b)(2), 110 Stat. at 2039. 19. Id. 20. See Title III, Section 311, 110 Stat. at 2052. 21. See Title V, Sections 501 and 511, 110 Stat. at 2089-93. 22. See Section 402, 110 Stat. at 2083. 23. 42 U.S.C. §300(b)-2(2). 24. Title IV, Section 421, 110 Stat. at 2086-88. 25. See Internal Revenue Code Section 104(a)(2). |