Why Working With Actuaries is Desirable, In My Humble Opinion

Actuaries often get a bad rap. In my thirtieth year in the profession, I feel like I have heard it all. We are nerds. We are numbers geeks. We can't think outside the proverbial box. We are literal. outgoing actuaries look at YOUR shoes when they talk to you.

Despite all that, there is much to be said that is positive about the profession. An employee (not an actuary) of the US Department of the Treasury once said to me that actuaries were the single most honest and ethical profession that he has dealt with.

Many of us majored in college in something like actuarial science, risk management, math, or economics. Probably, a large number of us thought about a career in academia. I have a number of friends who have remained in academia and that I can think of, every one of them to my knowledge is an honest and ethical person. But, generally, that is because of who they are, not what their professions require them to be. For much of academia, codes of conduct tend to relate to embarrassing the college or university that employs them. In my personal experience, those codes of conduct are not overly stringent, at least not if we compare to the actuarial Professional Code of Conduct.

Recently, much has been in the news, or at the very least, the conservative news of a particular Professor of Economics at MIT, Jonathan Gruber. Dr. Gruber is highly regarded by his peers as one of the preeminent health care economists that we could find. Dr. Gruber also developed many of the econometric models put forth with the Affordable Care Act (ACA, PPACA, ObamaCare). He has been engaged by either or both of the United States Congress or the current presidential administration for his expertise as well as by a number of the states to consult on the economics of the ACA. By his own admission, he helped to deceive the public about the ACA and its costs and sources of revenues. Paraphrasing Dr. Gruber, he justifies this as being for the greater good. That is, he has proclaimed that the ACA was a good and necessary law to pass and that the goodness of the law justifies any deception.

Dr. Gruber may be right about that. Or, he may not be. You may have an opinion on whether he is right. I'm not here to express mine on that particular issue.

There are many actuaries who are qualified, given the appropriate data and choices of assumptions and methods, to project health care costs or the costs of a health care plan or plans. Those who fit that bill have attained initial qualification through examination and maintained it through continuing education. While this process has a different rigor than does the process of attaining a Ph.D., it has created a relatively small community of individuals who work in the field.

Actuaries tend not to be political animals. Part of the reason for that may lie in our Code of Conduct. Quoting directly,

An actuary shall act honestly, with integrity and competence, and in a manner to fulfill the profession's responsibility to the public and to uphold the reputation of the actuarial profession. [Precept 1] 

An actuary shall not engage in any professional conduct involving dishonesty, fraud, deceit, or misrepresentation or commit any act that reflects adversely on the actuarial profession. [Annotation 1-4]

Those are two strong statements. Actuaries who have failed to abide by the Code of Conduct have been counseled, censured, suspended, or even expelled from the profession. Many of those cases have been for violation of Precept 1 (and its annotations) among others.

So, while jokes have been told about actuaries regarding the variety of answers that we might provide, I suggest it is because ours is not an exact science. We use our experience to make sound professional judgments. But, we have a duty of honesty and of integrity. We have a duty to not misrepresent or deceive.

To me, this is laudable. It makes me proud to be a part of the profession. It's why there would not have been an attempt by actuaries to deceive the public had actuaries been used by the government to model the costs under the Affordable Care Act. It makes it desirable to work with actuaries.

 

Can Anybody Win the ACO Game?

Suppose you invented a game that ultimately, nobody could win. Do you think it would be popular? I don't. Game players get frustrated at losing. Either they give up or they try to get better, but eventually, if their improvement doesn't lead to some more wins, they stop playing the game.

I know that accountable care organizations (ACOs) are not a game. For the uninitiated, they are healthcare organizations that choose to operate under a model in which they are rewarded for meeting metrics related to quality of care and total cost of care (TCC). Under the Affordable Care Act (ACA), those reimbursements are tied significantly to an ACO's trend in TCC being meaningfully less than the norm.

That sounds like a really good idea, in theory. The system is providing an incentive (no, I will not say it is incentivizing) to ACOs to reduce medical inflation. For an ACO to do that, however, costs money. The ACO will likely have to add to its infrastructure both from the standpoints of technology and people. Each has a cost.

Simply put then, the game is won when reimbursements (incentive payments) exceed the essentially required investment in the business. The game is lost when the converse is true.

I think we can establish that each of these points is almost necessarily true:

1. Each ACO will try to reduce its own contribution to medical inflation.
2. There are practical limits to how much that medical inflation can be reduced.
3. When many organizations are simultaneously working to control TCC, the average increase in TCC will come down.
4. If 2. and 3. above are true, then it will become virtually impossible to achieve the financial goals necessary to have reimbursements large enough that an ACO gets a positive return on their investment (ROI).

You don't agree with the fourth point:? Think about it. If the target TCC increase gets low enough (because the average does) and a particular ACO has already gotten to the asymptotic point of its efficiency, then they have likely reached the point where they cannot win anymore. Because the competition had enough room to improve and that one ACO had reached the point where it didn't have enough room for improvement, it will have lost its chance to win (at least for a while).

There are presumably good things that will happen out of this model. Notice that the game breaks down because each organization is striving to reduce TCC. That's a good thing. But, at some point, ACOs that can no longer win may just stop playing the game. When they do that, what will happen to their TCC?

Can anybody win the game?

Anther Application of Modern Portfolio Theory

Modern portfolio theory deals largely with the allocation of assets between asset classes in a portfolio. The field, grown predominantly from Markowitz's concept of the efficient frontier has been a hot topic among both investment professionals and more casual investors alike during my time in the workforce (no, that doesn't take us back to prehistoric times, just close).

Essentially, the most significant outgrowth of this concept is that there exists a continuum of allocations that maximize expected return for a given level of risk, or conversely, that minimize risk for a given expected return. All of this, of course, is based on a large set of assumptions, in this case, capital market assumptions. Oversimplifying somewhat, what Markowitz, and after him others, discovered was that you can reduce risk in a portfolio while sometime even increasing longer-term expected return.

That's pretty cool. Part of what we learned is the value of populating a portfolio with uncorrelated and inversely correlated assets. Okay, John, what does that mean?

Consider a two-holding portfolio. Suppose each holding has an expected return of 8% per year and that their returns are well correlated. In other words, when one goes up, the other is expected to go up by a similar percentage. And, when one goes down, the other is expected to go down by a similar percentage. Essentially, your diversification is not. You're not getting any additional benefit from the second holding.

Suppose instead, your tow holdings are somewhat inversely correlated. In other words, they are neither expected to perform particularly well nor particularly poorly at the same time as each other. The expected return of each holding doesn't change. But, by decreasing the overall risk of the portfolio, you are able to increase the long-term expected return of the total portfolio by decreasing volatility.

Now that we've got that straight, let's change our portfolio. Instead of looking at financial assets, let's consider the insured lives of a health insurance company. While less is known about correlations of costs among diverse populations, it seems clear to me that a homogeneous population carries with it a higher risk to the insurer than one that is not.

As an example, consider a population consisting of 100 insured lives, all of them men between the ages of 65 and 75. Without doing any research to get the correct percentage, my past reading tells me that a meaningful percentage of them are going to get prostate cancer over the next 10 years. That's a largely unavoidable occurrence, or so I read, and the claims could all come at the same time.

How would an insurer manage that risk (other than reinsuring or hedging in some other way)? Suppose they cut their population of insured age 65-75 males from 100 to 10 and added in 90 other insureds. Some of them might be of the type that represent a very low risk, say 20-30 year-old males. Some might be women in their 40s, mostly past the age that they will be in the maternity ward.

What it seems that we will find is that the more diversification that our insurer has in its portfolio, the less volatility in claims it will have over time. This is good for them.

Under the Affordable Care Act (ACA), again somewhat oversimplified, health insurers must pay out at least 85% of their premium dollars in medical claims. Suppose they develop a set of premiums whereby they expect to pay out, on average, 90% of their claims. Further suppose that the 90% average has a standard deviation of either 5% or 15%. If I am doing my math correctly, then in the case where the standard deviation is 5%, our insurer will only have to pay rebates in about 16% of all years. In the 15% standard deviation case, however, they will pay rebates in 37% of all years.

In a nutshell, here is what this means. Our hero, if you choose, the insurance company will keep its full profit in either 84% (100%-16%) of all years or in 63% of all years. Before rebates, their long-term profits will be identical, but managing their portfolio for lower risk allows them to actually keep more of their profits.

Another application of modern portfolio theory?

If You Like Your Plan, You Can Have Something

Perhaps my mind is easily boggled, but it boggles the mind. The Department of Health and Human Services has once again, this time by Bulletin, reinvented the Affordable Care Act (ACA, PPACA, ObamaCare). This time, Health and Human Services (HHS) Secretary Kathleen Sebelius disclosed through a letter to six senators that HHS had issued a Bulletin modifying enforcement.

According to the Bulletin and letter, "If you have been notified that your individual market policy will not be renewed, you will be eligible for a hardship exemption and will be able to enroll in catastrophic coverage."

Call me a cynic. You wouldn't be the first person to do so. But, here is the way I view the last three-plus years in the evolution of the ACA. First, the bill was getting very close to having enough support to pass. Then, Scott Brown (R-MA) was elected to fill the senate seat vacated by the death of Ted Kennedy (D-MA). This gave the Republicans 41 seats, enough to stop the Democrats from invoking cloture. The Democrats outmaneuvered the Republicans in working around the rules of the Senate and the bill was passed and signed into law. It was trumpeted as we all know quite famously that it would expand coverage, reduce the cost of coverage for most, and if you like your health plan, you can keep your health plan, PERIOD. Then came a website rollout so atrocious that even many of the most ardent supporters of the Obama Administration criticized it. Enrollment deadlines were delayed and insurers were told to reinstate policies for which they had already provided cancellation notices.

Somebody never worked in the insurance industry. Reinstatement is not that easy. And, there is also state insurance law to deal with here. So, many who wanted insurance were left without it. Yes, some number of previously uninsured had found their way to "get covered" as the Administration likes to say, but many who had been covered were left out in the cold.

Now, according to the HHS Bulletin, these same people can go on to the exchange and buy catastrophic coverage. This is the type of coverage that has been labeled as a substandard policy by some in the Administration.

Yes, my mind is boggled.

I was not one of those people who had said that health care did not need reforming. I always thought that it did and I still do. But, this is a perfect example of what happens when debate is cut off and 535 people who between them have little cumulative expertise on a subject (yes, I know there are some physicians in the Senate and the House) and who don't read the bill go ahead and vote on it anyway. Agencies are then left the unenviable task of regulating it and it always seems that, at the very least, a sizable minority of the people don't like the regulations.

So, enforcement apparently will be done as the HHS Secretary, presumably speaking for the President (this is entirely my guess), sees fit.

Silly me, I thought it was a law.

When You Know a New Tax is Bad

It seems that every year, there is a new tax that I or someone that I know has to pay or a new tax credit or both. Oftentimes, it can be taken care of on Form 1040 or some form that I already file in one line item, even if it feels like a random number generator fills in the amount that I get to send to my good friends at the Treasury Department.

As all my readers know, the Affordable Care Act (ACA, PPACA, ObamaCare) wasn't just any old law. And, since even the most optimistic of all proponents of the law knew that it would cost a lot of money, new taxes were needed to pay for it. These aren't just any old taxes. I'm talking about two in particular -- the 3.8% Medicare surtax on investment income for those individuals earning over $200,000 and for couples filing jointly earning over $250,000, and the 0.9% additional Medicare tax on earned income in excess of those same thresholds. (By the way, just like perhaps the worst structured tax in history -- the Alternative Minimum Tax -- those thresholds are not indexed.)

I looked at many of the personal taxes in the Internal Revenue Code. Almost without exception, when taxes apply to individuals or to couples filing jointly, the dual threshold is either twice the individual threshold, or at least meaningfully (50% or more) higher.

But, these are not your ordinary taxes.

All you lucky people (maybe you are just hard-working and it's not just luck) who will be subject to these taxes get to fill out not just one new form, but two new forms. That's right, you have to fill out Form 8959 to determine if you (and your employer) paid enough Medicare tax for you [and your spouse]. And, you need to fill out Form 8960 to determine if you were both a lucky earner and a lucky investor for the year.

I'd link you to the forms, but they are only available as drafts right now. And, I'm sure you don't really want to see them anyway.

Suffice it to say that as of now, Form 8960 looks like an easy one, but Form 8959 must have been jointly produced by the makers of Tylenol, Advil, and Aleve. You will have to have your Form W-2(s) in front of you while you suffer through the calculations and the eventual answer. Then if you are really lucky, you get to attach these two forms to your Form 1040 and send more money.

My conclusion? A tax (I know, it's really two taxes, but it looks like one to me) that requires two new forms can't be a good tax. Let's just get rid of it. I want to go back to the original income tax provisions -- pay 1% of your income in excess of $3,000. I'll even accept that the $3,000 is not indexed.

The Curious Tale of Prescription Drugs and The Affordable Care Act

Much has been written about the Affordable Care Act (ACA, PPACA, ObamaCare) with regard to keeping your plan and keeping your doctor. For many enrollees, one of the most critical and little-known elements in choosing your ACA plan may be the prescription drugs they take.

Consider this. If you enroll in a Bronze plan (the cheapest alternative considering only premium costs), you will have the highest deductible and highest out-of-pocket limits. On the other hand, if you enroll in a Platinum plan (highest premiums), you will have the lowest deductible and the lowest out-of-pocket limits.

Simple enough so far, isn't it?

So, as a plan member, you would assume that you can continue to take your standard medications. And, since it's all part of a government-mandated benefit program, you would also assume that the same prescription drugs would be available under each plan.

You would be wrong.

An ACA plan's treatment of a particular drug is a function of whether or not that drug is in the plan's formulary. For people who prefer simpler terminology, each plan's formulary is the listing of drugs that are covered by the plan. If a drug is covered by your plan, you will get discounted (think in-network) rates and your payment for that prescription will count against your deductible and out-of-pocket maximum. If it's not covered, however, then your payments will be full retail (not discounted) and will not count against your deductible or out-of-pocket maximum.

If prescription drugs are a significant part of your annual health care costs, then that leaves you with an easy solution in choosing a plan, doesn't it? You will simply look at the plan's drug formulary, compare it to what you are taking and consider how that will affect your annual cost.

Not so fast.

I actually know something about this law. My online search capabilities are as good as the next person's. I've been to the websites of several plans that can be found on the "marketplace" and in only one case thus far have I been able to find the formulary.

Suppose I find the formulary for every plan for which I am eligible. Then, of course, I can make an intelligent buying decision, can't I?

Think again. Even if you know the formulary, there is no data that I could find telling me what the discounts are under the various plans. But, I heard from someone who said he spoke with a pharmacy benefit manager (PBM) on this topic. He said he was told that pricing may vary wildly under ACA marketplace plans..

So, you tell me. Do you now know how to make your ACA buying decisions? I don't.

Politics Doesn't Fix Health Care

It doesn't matter which party is making the decision. Politics doesn't fix health care.

It seemed clear to me that President Obama's November 14 decision to allow insurers to renew certain cancelled policies for 2014 was done entirely for political expediency. I have not yet found anyone who disagrees with me. So, now everything is fixed and everyone who had a policy that they liked in 2013 can keep that for 2014, right?

Wrong!

First, state regulators have to grant approval for this to happen. In a number of states, regulators have already said that they will not allow these sub-standard, non-compliant policies to be renewed.

Second, there have been increases in health care costs over the last year. The natural extension of this is that premiums must increase. This requires actuarial calculations to determine the correct increase. Actuarial work takes time. And, the actuaries who would do this may have other priorities right now. That some politicians(s) thought something was a good idea does not create more hours in the day, more days in the week, or more weeks in the year for any actuaries that I know, and I know a lot of actuaries.

Third, health insurance plans require administration. In the 21st century, plan administration requires software. Software requires time to be created or updated. And, it needs to be checked for glitches (see, for example, healthcare.gov). That some politicians(s) thought something was a good idea does not create more hours in the day, more days in the week, or more weeks in the year for any programmers that I know.

And, then there is the business decision that insurers must make. Despite a general public hatred of insurance companies, people tend to be somewhat loyal to their policies if not their insurers. Suppose you have a policy with, for example, Aetna and they decide to not reinstate it, but your friend who has a policy with, say, Kaiser, gets theirs reinstated, how will that make you feel about Aetna? On the other hand, if you find out that the Kaiser policy got reinstated with a large increase in premiums, you might feel even worse about Kaiser. It creates a frankly unhealthy guessing game.

But, wait, there's more.

According to the guidance we have received, these reinstated policies are simply a one-year fix. They will not be grandfathered, or so it seems. So, even if your policy is reinstated, come this time or thereabout, in 2014, you will be facing the same dilemma of trying to work out your health insurance arrangement for 2015. Well, at least healthcare.gov may be working properly by then.

John's Adventures at Healthcare.Gov

Chapter 1 -- Down the Sign-Up Hole

It all started on an October afternoon. I wanted to see for myself what all the ruckus was about. Surely, finding out what it would cost to sign my family up for the Affordable Care Act (ACA, PPACA, ObamaCare) could not be too hard. After all, I am reasonably computer savvy. I understand health care and health insurance better than the average person. My IQ tests to which I was subjected in childhood and early adulthood suggest that I am at least as intelligent as the average American.

My first task was to select a username and password. That I recall, each was required to be between 6 and 70 characters -- quite a range, I would say. I chose a pretty unique username of 20 characters containing an assortment of letters, numbers, and the dreaded special characters. The system told me that this username was already taken. I tried another one of 21 characters. The system told me that one was already taken. I tried one of 34 characters created randomly by banging on the keyboard of my laptop with my eyes closed until I was satisfied. This one, too, was already taken.

At this point, I screamed that word that one screams when one does not believe what has happened. You know the word. It starts with a B and ends with a T and has a total of 8 letters. Assuming that my characters were chosen fairly well at random, the odds of this username being a duplicate were approximately 1 in 36 raised to the 34th power. Excel tells me that this is a 53 digit number.

A few minutes passed and my e-mail inbox greeted me. The Health Insurance Marketplace informed me that my username and password had been accepted. The key question was which one.

Chapter 2 -- My Own Pool of Tears

I wanted to cry. I'm not sure if they were tears of joy or frustration. Finally, I decided they were tears of laughter. I clicked on the verification link and there it was: healthcare.gov was instructing me to log in. And, believe it or not, one of my log-ins was working.

I began to enter data. I chose Georgia, this having been my state of residence for more than 25 years now. I told the system some stuff about me.

I'm curious. Why does it ask if I am of Hispanic, Latino, or Spanish heritage? The question after that asks me for my race. Why not save a question and just ask my race? Obviously, I am missing something. And, in order to insure me, why does healthcare.gov need to know my race anyway?

Chapter 3 -- Chasing My Tale

The system asked me for my Social Security Number and for the name on my Social Security card. I typed it in.

Wrong, you idiot.

The system said there is no such person.

Well, I was looking at my Social Security Card while doing this. I held one next to the other and I was not wrong. So I tried again. Failure. Alas, the third time was a charm. I guess whoever said it was correct. Try, try, and try again.

Then I had to do the same things for my other family members. Just out of curiosity, what happens if you don't have some of this information handy?

Finally, all of the required information was entered for all of my family members. As you must after each tidbit of information that you enter, I clicked on "Save and Continue."

Success?

No, of course not. I clicked again ... and again ... and again. No luck.

So, I logged out and logged back in. And, I had the same problem. And, I tried it another day. And, again I had the same problem. So, I cannot tell you yet what will happen in Chapter 4 -- Obamacare Sends a Bill.

Populating Your Web Site

So, you're in a business related to benefits and or compensation. You have this really nice website. It's pretty glossy and glitzy, but you don't have enough substance on it. You need some technical or opinion articles, but either you don't have the time or you just don't like to write.

Have you ever considered specifying what you want on there and have someone else write it for you? You're here reading my blog. You know that I write on a wide variety of topics.

So, have me do it for you.  Contact me and we'll work out the details.

IRS HDHP Notice that Had to Be

Yesterday, the IRS published Notice 2013-57 confirming that a High Deductible Health Plan (HDHP) can, in fact, still be an HDHP if it offers preventive health care without being subject to the deductible. The IRS got this one very right, despite Congress having missed a few technical details.

Here's the rub. The Affordable Care Act (ACA, PPACA, or ObamaCare) clearly contemplates HDHPs and health savings accounts (HSAs). The law tells us all of the following:

• For an individual to make (or for the individual's employer to make on the individual's behalf) tax-favored contributions to an HSA, the individual must participate in an HDHP.
• Further, the HDHP must not pay any benefits to the individual until the [high] deductible is satisfied.
• The ACA requires that a health plan must provide first dollar coverage for certain preventive care services.

Thankfully, the IRS made a completely reasonable decision. It determined that those benefits that must be provided should not preclude the use of an HSA. IRS went further by saying that anything that is preventive care under Notices 2004-23 or 2004-50 is preventive care for this purpose whether or not it is specified as preventive care under the ACA.

Phew! And, you were worried that this little glitch was going to blow up ObamaCare.

The Need For Honest Debate

It's that time again, it's time for a rant. But, I hope that it will be instructional as well. I'm going to talk about our need for honest debate in our legislative process. And, because this is a blog that, at least in theory, deals with benefits and compensation, I'll use benefits and compensation issues to illustrate my point.

For those who are wondering, the antagonists here are the large part of the 535 (that's the usual number) elected officials who in combination are the voting members of Congress. The protagonists, if there are any are the other 315 million or so of us who get to live by what the 535 come up with.

Let's start with nearly everyone's favorite whipping boy, the Affordable Care Act (PPACA, ACA, or ObamaCare). We all know what happened. President Obama really wanted to reform the US health care system. At various times, he indicated that he wanted to move toward a single payer system. Many of his fellow Democrats among the 535 also wanted a single payer system, but knowing that was unlikely to get enough support to become law, they settled for a bill that eventually became PPACA. The Republicans banded together to vote against it, unanimously. My distinct impression is that most didn't care what was in it. It was to be a landmark piece of Democrat-sponsored legislation and Republicans were voting against it. My distinct impression was also that most Democrats didn't care what was in it either. It was going to be a win against Republicans, so Democrats voted for it. As Nancy Pelosi (D-CA) famously said (and I am going to include the whole quote so that it is not taken out of context):

You've heard about the controversies within the bill, the process about the bill, one or the other. But I don't know if you have heard that it is legislation for the future, not just about health care for America, but about a healthier America, where preventive care is not something you have to pay a deductible for or out of pocket. Prevention, prevention, prevention -- it's about diet, not diabetes. It's going to be very, very exciting. But we have to pass the bill so that you can find out what is in it, away from the fog of the controversy.

Did Ms. Pelosi know what was in the bill when she voted for it? She probably had a general idea, but didn't know the specifics. How about the other 534? I'd wager that most of them had neither read more than a page or two, at most, of the legislation and had not been briefed on it by anyone who had read it.

Where was the debate? Where was the opportunity for individual members of Congress to discuss the good parts and the bad? Even among the most ardent Republicans who voted against the bill, I suspect it would be difficult to find many who think that mandatory preventive coverage and coverage of kids up to age 26 are bad things. On the other hand, the medical device tax that was inserted deep in the bill's bowels as a revenue raiser would probably not get support today from more than a few Democrats who voted for the bill.

Suppose the bill had truly been debated. Suppose the good parts had been picked out as the foundation for a bill that might have gotten some bipartisan support. Suppose the parts that virtually all of us can agree don't make sense had been left out. What would debate have taught us? It would have confirmed that our health care system needed some reform. It would have confirmed that providing health care coverage to millions of uninsured costs money. It's not budget neutral. It's certainly not helpful to the budget. But, we didn't have good, honest debate and we eventually have learned what was in the bill.

Dodd-Frank was another bill that was passed without a whole lot of what I might refer to as crossover voting. That is, a few Republicans voted in favor and a few Democrats voted against. But, to call it bipartisan is a bit of a stretch. The bill was massive. Many who voted for or against had a pet little provision in there that triggered their votes.

The bill was supposed to clean up Wall Street and protect consumers. I know this to be true because of the full name: The Dodd-Frank Wall Street Reform and Consumer Protection Act. Names of laws don't lie, do they? Say it ain't so.

Somehow, it became important to get Title IX in there -- the part on executive compensation. And, Senator Robert Melendez (D-NJ) managed to sneak in what regular readers know to be my personal favorite, the pay ratio provisions in Section 953(b).

I've communicated with a few people who follow Capitol Hill closely, Congressional reporters. None of them are sure how this provision actually got into the bill. They all agree that it was not debated. What happened?

Implementation of Section 953(b) will require some simple mathematics, or arithmetic if you prefer. Senator Menendez, the purported author of the section was a political science major before attending law school He was also a member of a Latin fraternity. He first entered politics at the ripe old age of 20.

I looked hard. I cannot find any evidence of Senator Menendez' mathematical prowess or of his knowledge of executive compensation. Perhaps that is why Section 953(b) is so incredibly messed up -- bad enough that I have written about it enough times to finally learn how to type the word ratio without placing an n at the end of it even though my fingers seem to prefer to type ration.

To the credit of the 535, Dodd-Frank was debated ... as a bill. But, it's tough when you have a bill that, at least in one printing, contains about 3200 pages to debate every provision. Section 953(b) escaped debate. It became part of the law.

It is bad law. Despite what the AFL-CIO says, Section 953(b) is bad law. There, I said it. Perhaps it should have been debated. Perhaps Ms. Pelosi should have said that [we] have to debate the bill so that we can put useful provisions in it. Perhaps I am dreaming.

Getting Around Code Section 162(m)(6)

This is an article that I wrote that was published by Bloomberg/BNA. They have the exclusive copyright. You may print an article for your own use. You may not distribute it physically or electronically without the express written consent of Bloomberg/BNA.


I am working to remember how to embed it in this blog, but in the meantime, you can go to it by clicking on this link.

ACA Delay or Treasury Blogs and People Take Notice

It has to be a sign of the times. Yesterday, Mark Mazur, the Assistant Secretary for Tax Policy at the US Department of Treasury announced delays in implementation of the Patient Protection and Affordable Care Act (PPACA, ACA, or ObamaCare) through a blog post on the Treasury Department blog.

The stated reason for the delay is that the Treasury Department has been discussing employer and insurer reporting requirements with a number of larger (undefined term) employers who already offer broad-based health care coverage to their employees. Treasury has learned, in what can only be considered a startling revelation if tongue is planted firmly in cheek, that employer and insurer reporting required under ACA is going to be overly complex and place a significant burden on affected businesses.

Now, tell the truth -- if Treasury hadn't blogged about it, would you have known this would create a burden?

So, Treasury has announced that Treasury will be announcing (I can't make this stuff up) the following:

• There will be a one-year delay (until 2015) until mandatory employer and insurer reporting requirements begin.
• Treasury will issue proposed rules this summer for information reporting by insurers, self-insured employers and others that provide health insurance.
• The Administration will work with reporting entities to seek voluntary, but not mandatory, compliance with the not yet effective reporting rules during 2014.
• Because of this relief, Treasury will not be able to determine which employers owe "shared responsibility" payments for 2014, so these will be delayed until 2015.
• During 2014, Treasury strongly encourages employers to maintain or expand health care coverage.

Translation: the law is to complex and tangled and the government needs an extra year to figure out what to tell employers they have to do. My readers are smart; they probably knew this was going to happen.

New Pay Limit for Covered Health Insurance Providers and Maybe a Way Around It

Perhaps you like the Patient Protection and Affordable Care Act (PPACA, ACA, or ObamaCare). Perhaps you don't. You are entitled to your opinion. I think we can all agree that it has its good provisions and it has those that perhaps could have been better thought through. One that falls into the latter category is the [relatively] new Code Section 162(m)(6) dealing with the limit on compensation for Covered Health Insurance Providers (I'll refer to them as CHIPs because it's much easier for me to type). In a nutshell, the section and its new proposed regulations limit the deduction for compensation that can be taken by a CHIP to $500,000 annually with respect to any person.

If you want to read the regulation like I did, you can find it here. If you want a good technical overview with the requisite cynicism, I direct you to Mike Melbinger's blog.

If you would like a solution, read on.

In a nutshell, you are a CHIP if 2% of the gross revenues received by your controlled group are from health insurance premiums. Yes, that means that if you happen to be part of a controlled group that contains a health insurer, you are likely a CHIP. Congratulations!

Most of Code Section 162(m) deals with deduction of compensation (as a reasonable business expense). The parts that limit it generally limit it to $1 million, except for CHIPs. And, for CHIPs, and only for CHIPs, the determination of whether an individual's compensation exceeds $500,000 includes deferred compensation earned, nonqualified plan benefits earned, equity compensation awarded, and severance benefits paid. The calculation is not easy, but this post is not about that. If you'd like to know more about the calculation, contact me and I'll be happy to charm you with its details.

I said I have a solution, and for many companies, I think I do. What was left out? Did you notice that qualified plan contributions and accruals were left out? And, for qualified plans, we have an objective set of nondiscrimination rules.

The solution involves a technique often referred to as a QSERP. What this technique does is to take nonqualified deferred compensation amounts and moves them from a nonqualified plan to a qualified plan. In this case, it has lots of advantages:

• Frequently immediate tax deductibility
• Tax-favored buildup
• More security
• Pooling with significant other obligations in a large trust

Most often, QSERPs are utilized in a defined benefit context. But, realizing that many companies no longer have defined benefit plans providing for current accruals, QSERPs can be utilized in a defined contribution context as well. 

Again, the explanation is long and has been covered elsewhere, so I'm not going to bore my readers here, but if you'd like a detailed explanation, contact me directly.

I know the cynics among you will say that this deduction limitation is the right thing to do. For you, I will say that you should have asked Congress to craft the law in a way that doesn't leave creative minds the opportunity to find loopholes.

If you're reading this today (it's a Friday) or even if you're not, have a great weekend whenever that may come for you.

Higher FICA Taxes on the Horizon

Health care reform in the guise of the Patient Protection and Affordable Care Act (PPACA) came to us with many new benefits. In order to pay for those benefits, the government had two options -- cut costs or raise revenue (spelled T-A-X). Here we talk about one of those new taxes.

Beginning January 1, 2013, high earners will be required to pay additional HI (Medicare) taxes under the FICA program. The additional tax is 0.9% of compensation in excess of $200,000 for individual filers or $250,000 for couples filing jointly. The employer portion of FICA will not increase.

First, this is going to need to be administered differently from traditional FICA taxes which generally are paid through payroll deduction. Here, your employer has no obligation to know how you file (in fact, you don't need to decide until you actually file), and your employer has neither the obligation nor the right to know your spouse's income. So, presumably, higher earners will simply have an additional tax tacked on to their Form 1040.

Think about this. What are FICA wages. Generally, they are compensation first vested and reasonably ascertainable in a year. For most deferred compensation plans, the amount of compensation that has been deferred is reasonably ascertainable. However, for plans such as defined benefit SERPs or for certain stock plans, this may not be the case. Regulations under Code Section 3121(v) allow taxpayers to early include such deferred compensation. In the case of individuals with significant SERP benefits in particular, they may want to discuss the possibility of early inclusion with their employers. While the tax hit for 2012 could be meaningful, it may lessen the long-term blow.

On the other hand, we don't yet know the outcome of the 2012 presidential election. Mitt Romney has pledged to repeal PPACA if elected. Its repeal would eliminate this tax.

Planning isn't as easy as it used to be.

Much Ado About a Tax

The arguments among the cognoscenti have been going on for months. Does the Patient Protection and Affordable Care Act (PPACA or ObamaCare) violate the United States Constitution?

The arguments that I heard most frequently centered around whether or not the Act violates the Commerce Clause or the Necessary and Proper Clause.

Attorneys, especially those who practice constitutional law are far more versed in these subjects than I, but they are also far more versed than most of my readers. So, when they refer to Ayotte v Planned Parenthood or to Hooper v California, many eyes will glaze over. This is intended for those glazing eyes.

For those lay people who want to know what happened, here you go. Note: I have no formal legal training and I do not practice law.

Article 1, Section 8 of the Constitution discusses the powers given to Congress. Among them are the right to regulate commerce among the several states. Many argued that this would be the point on which the constitutionality of PPACA would turn. And, most of the experts seemed to believe that forcing an individual to make a purchase was beyond the scope of the Commerce Clause. The Supreme Court agreed.

Article 1, Section 8 also contains the so-called Necessary and Proper Clause whereby Congress has the power to make all laws which shall be necessary and proper for carrying into execution the other powers granted by Article 1, Section 8. Since there was nothing in that section which needed to be executed, the Necessary and Proper Clause did not apply.

Some may recall that the Obama Administration had pledged that those families earning less than $250,000 per year would not see a tax increase. Therefore, the amount that individuals who choose to remain uninsured would pay was written as a penalty, not as a tax.

But, and now for the legalese. the Court through the decision handed down by Chief Justice Roberts, looked to Hooper v California, which says in pertinent part that "every reasonable construction must be resorted to in order to save a statute from unconstitutionality." In English, that means that if there is any way to find a law to be constitutional, then that way should be found.

So, the Supreme Court labeled the penalty to be a tax. And, the first clause of Article 1, Section 8 begins that '[T]he Congress shall have the power to lay and collect taxes ..." So, to the extent that the penalty is, in fact, a tax, Congress was within its constitutional powers to impose said tax.

Much of the law becomes effective in 2014. Of course, we have a major election coming in November and its anyone's guess as to what this will do to the inhabitants of the White House and the Capitol building. If there are big changes, we could see changes to the law. If not, then this law will stand at the very least through 2016.

Health Care Reform Year-by-Year

I've got no original material for you here, but I happened upon this government website that tells its readers what happens under the Patient Protection and Affordable Care Act year-by-year.

Here is the link.

The Cynic In Me Says Watch Out For the Health Insurance Industry

Yesterday, I attended the Traveling Seminar in Atlanta put on by the Conference of Consulting Actuaries. Well, actually, I instructed for part of the day and attended for part of the day. It's a really good day of continuing education and I would highly recommend it even if I am one of the instructors. You can read more about here so that you can see why perhaps you should attend a Traveling Seminar next year.

But, that's not my point in this post. I'll get to that in a second. One of the four sessions yesterday was on health care in the US, essentially health care reform, PPACA, or whatever glorious name you might choose to attach to it. As I listened, I noticed some analogues between the Dodd-Frank Act that was intended to keep the financial services industry in check and PPACA which among other things appears intended to keep the health insurance industry in check.

So, I digress. Dodd-Frank created lots of new rules. In fact, 2800 pages or so of legislation has a tendency to do this. Among other things, it restricted some of the practices of the banking industry that lawmakers had judged were pretty nefarious. The banking industry saw that its profits, especially on the retail side were declining. So, what did the banks do? They started to put more and different fees in place. Some of them, such as the $5 per month (that was usually the number, I think) fee for using your debit card even once, faced public uproar and outrage and were repealed. But, they are finding other ways that will not be so in your face. If you ever find out about them, you won't like them, but chances are that you can't find out whether they are in your bank's disclosures or not.

So, what does that have to do with PPACA? Well, the more I listened to yesterday's presentation, the more I heard about health insurers losing some of their margins. And, many of them have shareholders to report to. And, those shareholders expect profits. And, the profits may be ready to decline. So, my message to you is that since the health insurers can't easily deal with declines in their profits, they'll have to get them back somewhere ... somehow.

So, ladies and gentlemen, I don't know how they will do it. But, hold onto your wallets. The insurers need their profits. They are in business, after all, to make money.

Surprise ... Hide the Children -- There's a Flaw in Health Care Reform

It took a while to find it, but ... sit tight ... hide the children ... put down your drink ... there is a costly glitch in health care reform (PPACA, if you prefer). It's hard to believe that it could happen in a law that was so carefully read by each member of Congress before they gave it a thumbs up or a thumbs down, but buried in the 2700+ pages, there is a provision that would allow retirees to ignore their income from Social Security in determining their eligibility for Medicaid.

In English, this means that as currently written (and remember it is the law), PPACA is a whole lot more expensive than the projections and forecasts have said it is.

How could that happen? The Republican Party has been informing me ad nauseam that they are flawless. Not to be outdone, the Democrat Party has assured me that the Republicans are mistaken, and the Democrats are flawless.

Oops, you mean neither one is flawless? Could it be that, in fact, they have no idea what they vote on? No! Hide the children even better. This is truly alarming.

At first, the White House responded by saying that this provision was always intended. Then, when they heard the cost, they admitted their might be a mistake. President Obama has assured us that this will be fixed.

Wait! We have a flustercluck here.

This can't be fixed by Executive Order. It will take a vote. Could this be one where one party will choose to hold the other party hostage? I can see it now. In the House (Republican controlled, by the way), a bill will be introduced to fix this provision ... by repealing PPACA. And, in the Senate (Democrat controlled), a bill will be introduced to fix this provision.

I believe that both need some education. There is a wonderful book out there that all of our elected representatives who engage in such foolhardiness should read. My kids were familiar with it when they were quite young. It was written by a wonderful author with the birth name of Theodore LeSieg. Some of you may know him by a different name, but in either case, check out the "Butter Battle Book." It makes far more sense than much of what goes on at Capitol Hill.

The Non-Event That is Making News ... The Supreme Court Doesn't Rule on Health Care Reform

It's the biggest benefits news of the day, and all because nothing happened. Attentive readers, as well as all other people who have not been hiding under a very large rock will recall that there are a whole bunch (I think 16 is the number) of lawsuits out there trying to have all or a part of health care reform (PPACA) declared unconstitutional. Some have gone the way of the Obama Administration. Some have not. This is to be expected. Anyone who has read the court decisions to date on this issue can see what is happening. District Court judges who tend to be viewed as liberal have found PPACA to be constitutional. District Court judges who tend to be viewed as conservative have found at least parts of PPACA to be unconstitutional.

Predictable, huh?

So, what happened now? Opponents of the law would like to have the Supreme Court rule on this once and for all. If the Supremes rule against the law, then states can stop the expensive process of implementation. Proponents of the law would be thrilled if the Supreme Court were to rule quickly in their favor, but obviously not so happy if the ruling went against them.

I'm showing my ignorance here as I don't know all the rules of procedure for the courts. I do know that in the ordinary course of things, a case that is ruled upon at the District Court level, if appealed, then goes on to the level of the Circuit Court of Appeals. The next level of appeal after that is the Supreme Court.

Apparently, there is a procedure referred to as fast-tracking whereby the Appeals Court gets circumvented and the case goes directly from the District Court to the Supreme Court. In this particular case, the Supreme Court had been petitioned to hear it immediately so that states would know whether to continue the PPACA implementation process, or not, as the case may be. And, for something with consequences this far-reaching, of course the Supreme Court would decide to fast-track this case, make a quick ruling, and let us move on. There was no doubt about it, was there?

Hold on. The Supreme Court essentially answers to nobody. We don't elect them. They don't have term limits. And, in their collective humble (or not) opinion, this case just doesn't merit fast-tracking.

The Supreme Court is not founded on convenience. It is not founded on the expenditure or saving of a few billion dollars. It exists to rule on matters of law, and historically, only those issues that are of extreme importance, AND where undue harm or duress could come as a result of their not fast-tracking a case have been fast-tracked.

So, your top headline for today is that nothing happened. But, now we know that nothing has happened with regard to the PPACA litigation. Presumably, this case will make it to the Supreme Court docket for the session beginning this fall. This means that we are likely to see a ruling next spring, or more likely, summer. That is right around the time of the presidential nomination conventions.

Oh, the speeches we will hear.

In the meantime, we can all go back and hide under our rocks. This case sits still for the moment.