HHS Issues Final Rule for PPACA Medical Loss Ratio Rebates
by Patrick Haynes, Esq., LL.M
On December 2, 2011, HHS and CMS (the Departments of Health and Human Services and the Centers for Medicare & Medicaid Services) released new final rules that addresses an assortment of issues with respect to the PPACA medical loss ratio (MLR) requirements. In conjunction with the new rules, the DOL (Department of Labor) has issued a Technical Release as well. Keep in mind that PPACA’s MLR requirements do NOT apply to self-funded health plans.
According to the existing MLR standard, private health insurers are required to spend 80% to 85% of consumer’s premiums on patient care. Insurers must provide rebates to enrollees if their spending for the benefit of policyholders for clinical services and quality improving activities, in relation to the premiums charged, is less than the MLR standards established.
The new rule and related DOL guidance include information that makes fundamental changes to the existing interim rules. The releases address how plans sponsored by ERISA and non-federal governmental employers must use rebates received from insurers and how insurers must calculate the amount of rebates. The HHS final rule directs health plan issuers to provide any rebates owed to the group policyholder and it also contains information regarding the notice insurers must provide to employers and employees.
Below are some selected highlights of the DOL guidance for employer-sponsored, fully insured plans.
Who Gets the Rebates?
The biggest news in the guidance is the change in the rule on who receives the rebates. Under the final regulations, insurers must provide the rebates for individuals covered by group health plans subject to ERISA or the PHSA to the policyholder—typically the employer sponsoring the plan. Keep in mind that ERISA generally applies to private-sector employer plans, while the PHSA generally applies to non-federal governmental employer plans. According to HHS, the interim final rule had unintended administrative and tax consequences for insurers, employers and enrolled members. In an effort to correct these problems, the final rule permits insurers to apportion and pay rebates directly to policyholders. Rebates must be paid by August 1st of each year and if handled properly in accordance with the final rule, will not be subject to taxes.
Guidance for ERISA Group Health Plans Receiving Rebates
The DOL Technical Release, which applies to ERISA plans, explains that existing fiduciary duty and plan asset rules govern treatment of insurer rebates. If the Affordable Care Act’s ratios aren’t met and MLR rebates are paid, the DOL notes that they may qualify as ERISA plan assets, in whole or part, depending on various factors, including the terms of governing documents, whether the insurance policy is issued to the plan itself (or a related trust), and whether insurance premiums are paid from trust assets. Other considerations may also apply, such as the relative proportion of premiums paid by plan participants and the amount of plan administrative expenses paid by the plan sponsor. Any portion of a rebate that constitutes plan assets must be used for the exclusive benefit of plan participants and beneficiaries, and ERISA fiduciary principles must be followed in choosing how to use that portion/allocation of the rebate.
The DOL notes that, in choosing an allocation method, “the plan fiduciary may properly weigh the costs to the plan and the ultimate plan benefit as well as the competing interests of participants or classes of participants provided such method is reasonable, fair and objective.” Examples of allocation methods mentioned in the guidance include refunds to participants or reductions in future participant contributions or benefit enhancements. [And, for Section 125 Cafeteria plans (such as premium only plans), they may collect/obtain and distribute the rebates without the need for a trust or other plan-asset-holding mechanism, provided the distributions are made or used with three (3) months of their receipt In addition, the new Technical Release references previous DOL Technical Releases 92-01 and 88-1 that excuse certain insured group health plans from the obligation to hold participant contributions in trust. The DOL indicated in these previous releases that no violation would be asserted solely because an employer failed to hold participant pre-tax (Cafeteria) health plan premium contributions in trust].
While carriers’ MLR ratios have been at or near the required levels during the past few years, these rules envision the potential that the receipt of these rebates could become a bit more commonplace for plan sponsors. In light of that, those plan sponsors and employers that are unfamiliar with the applicable ERISA fiduciary rules may wish to study them and consider what steps might be advisable in advance of the August 1, 2012 due date for the first rebates. Preparations might include, for example, amending plan documents to address how the plan assets portion of a rebate should be determined or to address the propriety of using the plan assets portion of a rebate for plan administrative expenses paid by the employer.
Assuming you have a health insurance carrier (issuer) that does not meet the Medical Loss Ratio (as specified for your group’s size), here are the questions to be answered before you can absolutely determine who gets what premium rebates
- Who is the policyholder?
- Do participants pay the entire cost of the insurance coverage?
- Do the employer and the employee each pay a fixed cost for the coverage?
- Does the policy require the employer to pay a specific dollar amount or set percentage?
- What does the employer/s/plan sponsor’s plan document state with regard to any such rebates?
- Can the employer/plan sponsor guarantee that premium rebates will be used within three (3) months of receipt by the policyholder?
- Would the employer/plan sponsor prefer, for example, to direct the insurer to apply the rebate toward future participant premium payments or toward benefit enhancements adopted by the plan sponsor? What would those enhancements be?
Please contact your Account Manager or one of our Sales Executives to discuss your fully-insured plan’s specifications, to determine how your carrier is performing, and what efforts your organization would like to make if, when and should your coverages be subject to premium rebates.
DOL/HHS/IRS Links – Medical Loss Ratio