<em>Capital Checkup</em> - Public Sector

January 13, 2012

How to Handle Medical Loss Ratio Rebates: Guidance for Insured Public Sector Plans

One of the insurance market reforms enacted by the Affordable Care Act¹ was a Medical Loss Ratio (MLR) standard that requires insurance companies to spend a certain proportion of income on health care for their insured population. If an insurer does not meet the MLR standards, it is required to issue a rebate to its policyholders. The MLR standards do not apply to self-insured plans. The Department of Health and Human Services (HHS) has also published standards for how non-federal governmental plans should handle MLR rebates.² This Capital Checkup provides an overview of the MLR rules, and a discussion of how plan sponsors should handle potential MLR rebates.

Background

The Affordable Care Act requires insurance companies in the large-group market (generally, those with at least 100 employees) to spend at least 85 percent of premium dollars on medical care and quality-improvement activities. Insurers in the small-group and individual markets must spend at least 80 percent of premium dollars on such care. The National Association of Insurance Commissioners (NAIC) developed guidelines for how to measure MLR, which were adopted by HHS in Interim Final Regulations issued in 2010 and amended in 2011.³ Separate methodologies were established for “mini-med”⁴ and expatriate policies.⁵ The Interim Final Regulations required that broker commissions must be treated as administrative costs when calculating MLRs, and this position was unchanged in the amended regulations.

Beginning in June 2012, insurers will be required to report 2011 data concerning MLR to each state in which they do business. In August 2012, insurers that did not meet the MLR standards for their 2011 policies will be required to provide a rebate to their enrollees.

When reporting data, the insurer will report aggregate premium, claims experience, quality-improvement expenditures and non-claims costs it incurs in connection with the policies issued in the large-group, small-group and individual markets in each state. Experience will not be broken down among products offered in the state, nor will it be reported for each individual policy. The experience for group coverage of employees in multiple states will be attributed to the state that regulates the insurance contract between the insurer and the employer.

Consequently, insurers will be calculating MLR based on their entire business in the large-group or small-group market, not based on a particular group health plan’s experience. Moreover, whether an MLR rebate is due to a particular plan sponsor will not be affected by the experience of its individual group or a particular participant’s claims.

Rebates to Enrollees in the Group Market

The Affordable Care Act requires an insurer that does not meet the MLR standards to provide an annual rebate to each enrollee under such coverage, on a pro rata basis. The rebate could be in the form of a premium credit, lump-sum check or lump-sum reimbursement to the same account that the enrollee used to pay the premium. However, in order to assure that the rebate does not represent taxable income to employees in a group health plan, HHS directed insurers in the group market to provide rebates to the group policyholder and to include protections designed to satisfy the objective of benefitting employees.

HHS Guidance for Public Sector Plan Sponsors

Although non-federal governmental plans are not subject to ERISA, HHS has direct regulatory authority over them. Consequently, HHS issued an interim final rule establishing how these plans can use rebates.

HHS directs that insurers distribute the entire rebate to the group policyholder. The group policyholder is then required to use the portion of rebates attributable to the amount of premiums paid by participants for the benefit of participants. For example, if an insurer pays a $20,000 rebate to a policyholder, and the employees paid 40 percent of the total premium, then the policyholder must use 40 percent of the rebate, or $8,000, for the benefit of the participants.

The subscriber portion of the rebate must be used in one of the following ways, to be determined by the policyholder:

Reduce participants’ portion of the annual premium for the subsequent policy year for all participants covered under any group health policy offered by the plan;
Reduce participants’ portion of the annual premium for the subsequent policy year for only those participants covered by the group health policy on which the rebate was based; or
Provide a cash refund only to participants that were covered by the group health policy on which the rebate is based.

At the policyholder’s option, the reduction or refund may be divided evenly among the participants, divided based on each subscriber’s actual contributions to premium, or apportioned in a manner that reasonably reflects each subscriber’s contributions to premium.

None of these options requires tracking former enrollees or determining who was covered by which issuer during the MLR reporting year (i.e., the prior year). All options require that the rebate be used to benefit those covered at the time the rebate is received by the policyholder, not those covered during the prior year.

Notice of Rebates

Insurers must provide notice of rebates, if any, to current group health plan participants, as well as group policyholders. The notice must include general information about the MLR, the issuer’s MLR, and the rebate, as well as other prescribed information that will vary depending on whether the plan is subject to ERISA or to HHS rules.

An additional new notice for insurers that do not owe a rebate has not been required, but HHS indicates it intends to amend the rule in the future to provide such a requirement.

Implications for Plan Sponsors

Plan sponsors with insured group health policies should review plan documents now to determine whether they address payment of rebates. Because many plan sponsors received insurance company distributions during the demutualization process in the 1990s and the following decade, some plan documents may have been amended to incorporate these policies. That language should be reviewed to assess its relevance today.

Insurance companies will report data in June 2012, and pay rebates in August 2012. Plan sponsors with insured arrangements should be alert for communications from their insurance carriers during the summer of 2012, and should be prepared to address rebate distribution.

While plan sponsors should be prepared to address rebates, it may be unlikely that rebates would have wide applicability in the large-group market. Studies published by the Government Accountability Office (GAO) found that, based on insurance company data reported to the NAIC in 2010, most insurers in the large-group market met or exceeded the 85 percent standard.⁶ However, it is wise to be aware of the HHS rules in case the MLR standard is not met in the future.

In light of the fact that the amended regulations did not change the requirement that broker commissions will be included in the administrative expense portion of the calculations (noted in the “Background” section above), some insurers have already begun to change their commission policies to remove or reduce brokers’ commission levels from premiums. Plan sponsors may want to ask brokers that currently receive commission to disclose any changes in how those commissions will be reported and charged to the plan in the future.

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As with all issues involving the interpretation or application of laws and regulations, sponsors of group health plans should rely on their legal counsel for authoritative advice on the interpretation and application of the Affordable Care Act and related regulations. Segal can be retained to work with plan sponsors and their attorneys on compliance issues and participant communications.

1: The Affordable Care Act is the shorthand name for the Patient Protection and Affordable Care Act (PPACA), Public Law No. 111-48, as modified by the subsequently enacted Health Care and Education Reconciliation Act (HCERA), Public Law No. 111-152. (Return to the Capital Checkup.)
2: That guidance was published in the December 7, 2011 issue of the Federal Register. (Return to the Capital Checkup.)
3: The NAIC guidelines are available on the NAIC website. The 2010 HHS regulations were published in the December 1, 2010 issue of the Federal Register and the 2011 amendments were published in the December 7, 2011 issue of the Federal Register. (Return to the Capital Checkup.)
4: “Mini-med” refers to policies that have annual benefit limits of $250,000 or less. (Return to the Capital Checkup.)
5: The guidance for mini-med and expatriate policies was published in the December 7, 2011 issue of the Federal Register. (Return to the Capital Checkup.)
6: See the following GAO reports: Early Indicators Show That Most Insurers Would Have Met or Exceeded New Medical Loss Ratio Standards (GAO-12-90R, Oct 31, 2011) and Early Experiences Implementing New Medical Loss Ratio Requirements (GAO-11-711, Aug 29, 2011). (Return to the Capital Checkup.)

Capital Checkup is The Segal Company's periodic electronic newsletter summarizing activity in Washington with respect to health care and related subjects. Capital Checkup is for informational purposes only and should not be construed as legal advice. It is not intended to provide guidance on current laws or pending legislation. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.

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