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Implementing Health Reform: Young Adult Coverage



May 11th, 2010

Editor’s Note: Other posts by Timothy Jost provide analyses of regulations implementing provisions of the new health reform legislation governing standards for tax-exempt hospitalsthe Web portal, reinsurance for early retirees, and  the small employer tax credit.

On Monday, May 10, the Departments of Health and Human Services, Labor, and Treasury jointly released Interim Final Rules for Group Health Plans and Health Insurance Issuers Relating to Dependent Coverage of Children to Age 26 under the Patient Protection and Affordable Care Act.  (A Fact Sheet is available as well.) This regulation implements section 2714 of the Public Health Services Act, added by section 1001 of the Patient Protection and Affordable Care Act (PPACA).  Identical regulations were published by each agency.  The regulations complement a Notice issued by the IRS on April 27 implementing section 1401 of the PPACA, excluding from taxation insurance provided to adult children who have not turned 27 by the end of the calendar year. 

Section 2714 is one of the more straightforward provisions of PPACA, extending dependent coverage to adult children until the child’s 26th birthday. The regulation provides a very straightforward, if generous, interpretation of the statute.  The statute gives HHS discretion to define “dependent” by regulation.  In the interim regulation, HHS (and Labor and Treasury) effectively eliminate the dependency requirement from the statute, defining it to signify simply the parent-child relationship, and not to require that the child be financially dependent on the parent, unemployed, unmarried, or a student, or even that the child live with the parent. 

The child need not even be otherwise uninsured, although the regulation recognizes that under PPACA section 1251, a grandfathered group plan need not cover an adult child prior to 2014 if the child has access to other employment-based health insurance.  If a child has two parents who each have insurance that covers dependents, the child may choose either plan.  The requirement only extends to children, however, not to their spouses or their own children (the grandchildren of the insured person).  It also does not apply to plans that do not offer family coverage. 

Adult Dependents Must Be Treated The Same As Other Dependents

The rule requires, in what is perhaps its most important provision, that adult dependents be treated the same as other dependents.  Thus, if a plan distinguishes only between self and family coverage, adult children must be added with no additional premium. If, on the other hand, the cost of coverage increases with each additional dependent, an additional premium may be paid for each adult child added, but the premium can be no greater than that charged if an additional minor child were added.  If a child is added to a group policy, the cost will presumably be spread over the group.  

HHS’s mid-range estimate is that the provision will add a cost of $3,380 per child to group policies in 2011, increasing the cost of group insurance by seven tenths of a percent.  If an adult child is added to a nongroup policy, the premium will likely be increased to reflect the changed risk profile of the insured unit.  The agencies estimate that nongroup premiums will increase by $2,360 in 2011 for each additional child added, unless policies are community rated. 

The rule will take effect on the first day of the first plan year that begins following September 23, 2010, the six month anniversary of PPACA enactment.  For many plans and policies, this will be January 1, 2011, but it could be much later if the plan or policy is not on a calendar year basis.  More than 65 insurers, however, as well as many self-insured employers, have agreed to put the provision into effect immediately, often at no change in premium. 

Although the agencies have not yet released their regulations on grandfathered status, this release clarifies that plans or policies that are changed to cover adult dependents in compliance with the law will not thereby lose grandfathered status.  This means that plans or policies will not have to comply with all other PPACA requirements, once those requirements go into effect, just because the plan or policy was changed to comply with the adult dependent requirement.

If adult children have already been dropped from coverage or lose coverage before the effective date, the parent’s group health plan or health insurance issuer must give notice of renewed eligibility and offer a 30 day special enrollment period no later than the beginning of the plan year for which the provision becomes effective.  The child must be offered all benefit packages available to similarly situated individuals who did not lose coverage due to cessation of dependent status.  Adult children already on COBRA will be able to return to dependent coverage status.  Adult children will be able to purchase 36 months of additional COBRA coverage once they turn 26.

Favorable Tax Treatment Will Increase The Value Of Coverage For Adult Children

The IRS notice on income tax treatment of adult child coverage is an important adjunct to the coverage rule.  Many employment-related health plans currently cover adult children either voluntarily or under state law.  If the child is not a dependent for tax purposes, however, the coverage is currently taxable to the employee.  Under section 1401 of PPACA, payments by employer-provided health insurance, retiree health accounts, or VEBAs for health care received by adult children who have not turned 27 by the end of the calendar year are not taxable.  Employer contributions for insurance coverage for adult children are also not taxable, and coverage and reimbursements for adult children who have not turned 27 by the end of the calendar year are considered “qualified benefits” for purposes of section 125 cafeteria plans.  Payments by self-employed individuals for medical care insurance for adult children are also tax-deductible.  These provisions apply regardless of whether the adult child is otherwise a dependent for tax purposes.   This guidance is effective as of March 30, 2010, and significantly enhances the value of the adult child coverage.

HHS estimates that there are currently 29.5 million individuals in the 19-25 age range.  Of these, 9.1 million do not have an insured parent, 5.55 million are covered by their own employer sponsored insurance, 5.73 million are covered by their parents’ or spouse’s ESI, and 3.01 million are covered by Medicaid or another government program.  3.44 million are uninsured.  Many adult children are already covered on their parents’ policies because thirty-seven states already require coverage for adult dependents in the group market, although many of these states offer more restrictive coverage than the federal law.  HHS estimates that approximately 2.37 million young people will be potentially affected by the law, of whom 1.83 million are currently uninsured and .55 million covered by nongroup coverage.  HHS estimates that between one and two million of these young adults will obtain coverage under the new law by 2013, of whom between a third and a half will have previously been uninsured. 

This has been one of the most popular provisions of the new law.  Although this age group is on the whole quite healthy, it is far from invincible.  One study found that injury-related emergency room visits were more common for young adults than for either children or older adults, with nearly one-quarter of 18 to 29 year-olds having had an emergency room visit in the preceding year.

Pregnancies are also not uncommon in this age group.  Much of the care received by individuals in this group would otherwise have been otherwise uncompensated, and covering this group under their parents’ group policies is likely to cost much less than coverage in the nongroup market.  Group coverage is likely also to be much more comprehensive than coverage currently obtained through university-based policies.  The agencies, and in particular the insurers who have agreed to early implementation, are to be commended for their effort to get this policy in place.

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