Massachusetts Universal Health Care Goes Live

In a first for the nation, all residents of Massachusetts were required to obtain health insurance by July 1, 2007, under a law passed last year. By May 2007, more than 100,000 residents who had been uninsured had acquired coverage.¹ To make universal coverage possible, the law makes new demands on employers, which must make a “fair and reasonable” contribution to the cost of their employees’ health insurance or else pay a fair-share contribution to the state. Employers also must offer section 125 cafeteria plans and submit health insurance responsibility disclosure (HIRD) forms annually.

Residents and those working in Massachusetts may choose from a combination of private and public plans, with state plans available for residents who lack employer coverage and can’t afford private plans.

The Law
Key provisions of the Massachusetts statute include:

• A requirement that all individuals maintain creditable health insurance coverage
• The creation of the Commonwealth Health Insurance Connector, which acts as a clearinghouse for insurance plans and payments
• The employer fair-share contribution
• A requirement that employers maintain section 125 cafeteria plans
• The free-rider surcharge on employers that do not maintain section 125 cafeteria plans and whose employees use at least $50,000 of uncompensated medical care
• A requirement for employers to submit annual HIRDs
• A requirement for health plans to extend coverage for young adults who lose dependent status

Timing
The law passed in April 2006, and enrollment began in May 2007. Effective July 1, 2007, all residents of Massachusetts 18 and older must have minimum creditable coverage. Under the final regulations, most health insurance offered in Massachusetts will be deemed minimum creditable coverage until January 1, 2009. After that, however, health insurance plans must offer a broad range of benefits, including preventive and primary care, emergency care, hospitalization, ambulatory services, prescription drugs and mental health services.

Commonwealth Health Insurance Connector
The Connector is the hub for insurance plans and payments. It sets minimum standards for health insurance coverage and offers two insurance programs:

• Commonwealth Care connects eligible Massachusetts residents with approved health insurance plans and helps pay for them. Commonwealth Care is for uninsured people whose incomes fall within certain guidelines and who meet other qualifications.
• Commonwealth Choice offers new health insurance options to individuals and small employers that do not qualify for Commonwealth Care. The Connector works with major insurers to offer new, comprehensive plans.

The state also makes health insurance plans available to a resident who meets one of the following conditions:

• Is unemployed
• Is employed by a small business (with fewer than 50 employees) that offers health insurance through the Connector
• Is not offered employer-subsidized health insurance through an employer with 50 or more employees
• Is self-employed, works part-time or works for multiple employers

The Connector establishes premium subsidy levels for Commonwealth Care and affordability limits for individuals. It makes health insurance portable by allowing employees to keep the same plan even if they leave an employer. The Connector also allows employees who work part-time or work for more than one employer to aggregate the contributions of multiple employers and apply them to one insurance plan.

Employers’ Fair-Share Contribution
Massachusetts requires employers to make a fair-share contribution to their employees’ health care plan. The law applies to all employers with 11 or more full-time employees (FTEs) in Massachusetts. To be considered an FTE, an employee must work at least 35 hours a week. Independent contractors, seasonal employees and temporary employees are not considered FTEs.

To determine whether an employer’s contribution is fair and reasonable, the employer must meet one of two tests for the period from October 1 through September 30:

• Enroll at least 25 percent of FTEs in a group health plan and contribute to the plan
• Offer to pay at least 33 percent of the premium cost of any group health plan offered to all FTEs who are employed more than 90 days

Employers that fail both tests will be assessed up to $295 per FTE. Although part-time employees are excluded from fair-share-contribution testing, they generally count for penalty purposes. For part-timers, the Connector will assess a penalty based on a prorated portion of the $295.

Employers Must Offer Cafeteria Plans
Effective July 1, 2007, employers with 11 or more full-time employees that do not pay the full monthly cost of medical coverage for all employees must maintain a section 125 cafeteria plan that meets both IRS rules and Connector regulations. However, enrollment is not required until September 1, 2007.

Connector Requirements for Cafeteria Plans

• The plan must allow employees to pay for some or all of their health care coverage on a pretax basis.
• The plan document must clearly describe eligibility requirements. The eligibility waiting period may not exceed two months. The employer must make the plan available to all eligible employees during the applicable period, regardless of whether they were previously eligible or waived participation during the previous election period.
• All contributions may be made solely by employee salary reduction — nonelective employer contributions are not required.
• Employers may exclude certain classes of employees from the plan:
  • Employees who are younger than 18
  • Temporary employees
  • Part-time employees working less than 64 hours per month (on average)
  • Employees who are legally considered wait staff, service employees or service bartenders, and whose average earnings are less than $400 in monthly payroll wages
  • Students employed as interns or as cooperative education student workers
  • Seasonal employees who are international workers with either a U.S. J-1 student visa or a U.S. H2B visa, and who are also enrolled in travel health insurance
• Employers must file a copy of the section 125 cafeteria plan document with the Connector by October 1, 2007 (the Connector will not accept plan documents before September 1, 2007).

Free-Rider Surcharge
The free-rider surcharge penalizes employers with 11 or more FTEs that do not provide health insurance or maintain section 125 cafeteria plans, and whose employees use at least $50,000 worth of state-funded health services.

Under the regulation, employers are exempt from the surcharge if:

• The employees who receive the free care are covered by certain collective bargaining agreements; and/or
• The employees who receive the free care participate in the state’s Insurance Partnership Program

Surcharge amounts will range from 20 percent to 100 percent of the state’s cost, depending on: (1) the number of employees, (2) the number of admissions and visits for each applicable employee, (3) the total state-funded health services provided to the applicable employees and (4) the percentage of employees for whom the employer provides health insurance (Table 1).

Table 1
Penalty Percentage of State-Paid Medical Costs

State-funded costs	11-25 Employees	26-50 Employees	More than 50 employees
$50,000-$75,000	20%	50%	80%
$75,001-$150,000	30%	60%	90%
Over $150,000	40%	70%	100%

The employer form must disclose the health insurance status of employees, including the following information:

• Number of full-time and part-time employees
• Whether the employer maintains a section 125 cafeteria plan in accordance with the requirements of the Connector
• Whether the employer contributes to the premium cost of a group health plan for employees
• If the employer contributes to the premium cost of a group health plan, it also must report:
  • The contribution percentage for each employee category (if the percentage varies by category)
  • The total monthly premium cost for the lowest-priced health insurance offered for an individual plan and a family plan
  • The total monthly premium cost for the highest-priced health insurance offered for an individual plan and a family plan
• If the employer offers an employer-sponsored group health plan, it must report the plan’s open enrollment period.

Any employee who declines to enroll in employer-sponsored insurance or in the employer's section 125 plan must complete an employee HIRD form. The employee receives a copy of the signed form, and the employer must retain a copy for three years, which must be available to the Division of Health Care Finance and Policy and the Division of Revenue.

Individual Insurance Requirement
All residents of Massachusetts 18 and older must maintain creditable health insurance coverage. The law defines “creditable coverage” very broadly to include most forms of individual and group health insurance. Supplemental health benefits, such as separately issued, limited-scope vision or dental plans, disability income or accident-only insurance, limited hospital indemnity coverage and specific disease insurance do not constitute creditable coverage.

Residents must report their insurance coverage status as of December 31 of the previous year on their state tax forms (for example, as of December 31, 2007, for the 2008 tax year). They must say whether they have creditable insurance, have waived health insurance due to sincerely held religious beliefs or have obtained a waiver from the Connector. Residents who lack both coverage and a waiver will lose their personal exemption for their state taxes. They also will be fined one-half of the monthly premium of the most affordable health plan, as certified by the Connector.

Young Adult Coverage
Effective January 1, 2007, fully insured group health plans that provide family coverage must cover young adults until the earlier of age 26 or two years after they lose dependent status. Effective July 2007, the Connector offers reduced-benefit plans for young adults up to age 26 without access to employer-based coverage.

ERISA Preemption
The Massachusetts law may face an ERISA challenge, although no employer or employer group has challenged the new law yet. Under ERISA, states may not enforce legislation that “relate(s) to” ERISA employee benefit plans. At particularly high risk of ERISA preemption are: (1) the employer mandate requiring covered employers to “offer” medical coverage to their employees, (2) the fair-share contribution requirement and (3) the individual mandate requiring Massachusetts residents to have individual or group medical coverage that constitutes “minimum creditable coverage.”

Earlier this year, the United States Court of Appeals for the Fourth Circuit affirmed a lower-court decision that ERISA preempts the Maryland Fair Share Health Care Fund Act, which would have required nongovernmental employers with 10,000 or more workers to spend at least 8 percent of their payroll on health care or pay the difference in taxes (see Watson Wyatt Insider, February 2007).

¹ Kaiser Commission on Key Facts, “Massachusetts Health Care Reform Plan: An Update,” June 2007.