New IRS guidance will impact people eligible for Medicare based on End Stage Renal Disease (ESRD) and those who must pay a premium for Part A

Introduction

In general, people who are eligible for Medicare may not purchase Marketplace plans (also called Qualified Health Plans or QHPs).[1] However, IRS guidance released in June, 2013 clarifies that two sub-populations of Medicare eligible individuals may be able to forego Medicare coverage to buy Marketplace plans: people who must pay Part A premiums (also called “voluntary enrollees”) and those entitled to Medicare based on a diagnosis of End Stage Renal Disease (ESRD). These two subgroups may also be eligible to receive tax credits and cost sharing subsidies to make Marketplace plans more affordable.  This guidance raises a number of questions and considerations for beneficiaries who may choose to enroll in a Marketplace plan with tax credits rather than Medicare.

Background

The Affordable Care Act (ACA) allows individuals without insurance to purchase Qualified Health Plans (QHPs) on the new health insurance Marketplaces. QHPs are standardized health insurance plans that provide varying levels of benefits. Premiums for QHPs vary by geographic region, but insurance companies are not be permitted to refuse to sell someone a QHP based on their health status or age. There are also limits on how much insurers can charge in premiums.

The ACA provides tax credits to help people afford their QHP premiums. These tax credits, available to people between 100% and 400% FPL[2]  or about $11,500 to  $46,000 per year for a single person, can either be paid directly to the insurance company to help subsidize the cost of the QHP premium or can be received as a tax refund after a yearly filing.[3]  People with incomes between 100% and 250% FPL can also receive cost-sharing subsidies. These subsidies bring down enrollee out-of-pocket spending on co-pays and deductibles.

The Department of Health and Humans Services has released several FAQs which state that “it is illegal to sell people with Medicare a Marketplace plan.”[4] The Affordable Care Act, while not expressly prohibiting the sale of Marketplace plans (QHPs) to people with Medicare, seems to track HHS’s interpretation.

The ACA clearly prohibits people with Medicare from receiving tax credits.[5] These tax credits are only available to people who are not eligible for other “minimum essential coverage.” Because Medicare Part A is considered minimum essential coverage, all those eligible for Part A may not receive tax credits. It follows that the ACA never contemplated QHPs being available to people with Medicare.

New Guidance

On June 26, 2013 The Internal Revenue Service (IRS) released guidance clarifying recent regulations implementing premium tax credit provisions of the Affordable Care Act.[6] The guidance states that there are two sub-populations of Medicare-eligible individuals who may qualify for premium tax credits to pay for the cost of a QHP: they are people eligible for Medicare based on a diagnosis of End Stage Renal Disease (ESRD) and those who must pay a premium for Part A.

Although most people who are eligible for Medicare Part A will NOT be eligible to receive tax credits, IRS guidance clarifies that people with ESRD and people who pay a premium for Part A may choose to have a QHP and will be entitled to tax credits if their income is between 100% and 400% FPL.  In order to qualify for the tax credits and be allowed to enroll in a QHP, people with ESRD must not apply for Medicare and potential premium Part-A enrollees must not enroll in Part A or Part B.

Potential Pitfalls and Unanswered Questions

Medicare beneficiaries could encounter unanticipated adverse consequences from foregoing Medicare coverage to enroll in a QHP with tax credits. The recent IRS guidance also raises a number of unanswered questions, detailed below.

1. Part A and Part B Premium Penalties

Individuals eligible for Part A as voluntary enrollees (they pay a premium) who decide to enroll in a QHP rather than enrolling in Part A will face financial penalties should they later decide to enroll in Medicare. The Part A premium goes up 10% for people who do not enroll in Part A when they are first eligible. They are then required to pay the higher premium for twice the number of years they could have had Part A, but didn't sign up.

For Part B, the premium penalty is 10% for each 12 month period the person could have had Part B but did not enroll. Unlike the Part A premium penalty, this Part B premium penalty is not lifted after a number of years but lasts the duration of a person’s enrollment in Part B.

2. Enrollment Period Limitations

Beneficiaries who choose to enroll in a QHP rather than taking Medicare will be limited to the General Enrollment Period if they decide to later enroll in Medicare. They will not be entitled to a Special Enrollment Period allowing them to pick up Part A and B outside the General Enrollment Period. The General Enrollment Period runs from January 1 to March 31 every year. Upon enrolling during the General Enrollment Period, Medicare Part A and B will become effective the following July 1^st. 

Example: After taking a QHP instead of Medicare, Ms. Smith changes her mind in April 2014 and decides she wants to enroll in Medicare. She must wait until January 2015 to enroll, and her coverage will not begin until July 2015.

3. Medicare Part B coverage of immunosuppressant drugs for people with ESRD

If someone does not have Part A when they receive a kidney transplant, Medicare Part B will not cover the immunosuppressant medication kidney-transplant patients require for the rest of their lives. If beneficiaries are not enrolled in Part A when they receive their transplant, and then later enroll in Medicare, Medicare Part D should cover their immunosuppressant drugs.  However, coverage of immunosuppressant drugs under Part D may not be as comprehensive as under Medicare Part B. While all Part D plans are required to have immunosuppressant drugs on their formulary, beneficiaries should weigh the potential costs of receiving these expensive medications through Part D rather than Part B.

4. Unanswered questions: QHP’s for people not between 100% FPL and 400% FPL

IRS guidance specifies only that people who must pay a premium for Part A or are entitled to Medicare based on ESRD will be eligible for tax credits. It is implied that if eligible for tax credits, someone is also eligible to enroll in a QHP to use those tax credits, although this is not clearly spelled out. It is not clear from the guidance whether people in the two exempt groups who are ineligible for tax credits due to their income will be eligible to enroll in a QHP, or whether they will be subject to the general prohibition against selling QHPs to people eligible for Medicare.

Example: Ms. Smith is entitled to Medicare based on ESRD, but would like to enroll in a QHP rather than Medicare. Her income is $60,000 per year (a little over 500% FPL) which makes her ineligible for a tax credit. It is unclear from IRS guidance whether Ms. Smith will be allowed to enroll in a QHP without a tax credit, or whether she will need to take Medicare.

5. Unanswered questions: Cost-sharing subsides for people between 100% and 250% FPL

In addition to premium tax-credits, under the ACA individuals between 100% and 250% of poverty may also qualify for cost-sharing subsides. These subsides will help lower out-of-pocket expenses associated with a QHP; reducing deductibles, copays and co-insurance.  These subsidies will prove especially valuable for consumers with chronic illnesses like ESRD who us a lot of health care services.

The recent IRS guidance addresses only the availability of premium tax credits. It does not address the availability of cost-sharing subsides for Medicare-eligible individuals with ESRD or voluntary Part A. It is unclear whether people with ESRD or voluntary Part A who choose a QHP over Medicare will be eligible for these subsides.

Conclusion

As a general rule, people eligible for Medicare cannot enroll in a Qualified Health Plan or receive a tax credit. However, a narrow exception to this rule exists for people with ESRD and “voluntary” Part A enrollees- those that must pay a premium for Part A. However, individuals should carefully consider the option to enroll in a QHP rather than Medicare, taking into account the potential long-term effects of such a decision.