On December 2, 2011, the Department of Health and Human Services (HHS) released a final rule that addresses an assortment of issues with respect to the PPACA medical loss ratio (MLR) requirements. In conjunction with the new HHS final rule, the DOL has issued a Technical Release as well.
According to the existing MLR standard, private health insurers are required to spend 80% to 85% of consumers’ premiums on direct care for patients. 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.
Here are highlights of the DOL guidance for employer-sponsored plans:
Who Receives Rebates Related to Employer-Sponsored Plans
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. Applying those rules to MLR rebates, 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 also apply, including 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 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.
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. This trust non-enforcement policy that applies to insured group health plan sponsors who also sponsor a Section 125 Cafeteria Premium Only Plan will apply to the MLR rebates, providing the rebates are used within three months of receipt to pay premiums or refunds.
Non-Federal Governmental Group Health Plans Receiving Rebates
Group health plans maintained by non-federal governmental employers are not subject to ERISA, so HHS has issued separate guidance for these plans as interim final regulations. Under these regulations, the plan policyholder is required to use the portion of rebates attributable to the amount of premium paid by subscribers under the plan for the benefit of plan subscribers. This portion of the rebate must be used, at the option of the policyholder, either to reduce employee premium contributions or to provide cash refunds to employees covered by the group health policy on which the rebate is based. In either case, however, the rebate is to be used to reduce premiums for, or pay refunds to, employees enrolled during the year in which the rebate is actually paid rather than the MLR reporting year on which the rebate was calculated.
It should be further noted that the MLR rules have the potential to make receipt of insurance company payments a more common occurrence for plan sponsors. ERISA plan sponsors and advisors 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.
For additional information regarding the new rule, including details with respect to Expatriate policies and Mini-med policies, please refer to the CMS Fact Sheet and DOL Technical Release. You can also contact us via email at [email protected].
Medical Loss Ratio Requirements under PPACA, 45 CFR Part 158, 76 Fed. Reg. 76574 (Dec. 7, 2011)
ERISA Technical Release 92-01, 06/02/1992
ERISA Technical Release 88-1, 08/12/1988
DOL Release: http://www.dol.gov/ebsa/newsroom/tr11-04.html
CMS Fact Sheet: http://cciio.cms.gov/resources/factsheets/mlrfinalrule.html
Please note that the information contained in this document is designed to provide authoritative and accurate information, in regard to the subject matter covered. However, it is not provided as legal or tax advice and no representation is made as to the sufficiency for your specific company’s needs. This document should be reviewed by your legal counsel or tax consultant before use.