EBIA Weekly Archives

Medical Loss Ratio Guidance Requires Insurers to Pay Employee Rebates to Policyholders for Employer-Sponsored Group Health Plans

From the December 08, 2011 EBIA Weekly

[Medical Loss Ratio Requirements under PPACA, 45 CFR Part 158, 76 Fed. Reg. 76574 (Dec. 7, 2011); Medical Loss Ratio Rebate Requirements for Non-Federal Governmental Plans, 45 CFR Part 158, 76 Fed Reg. 76596 (Dec. 7, 2011); DOL Technical Release 2011-04 (Dec. 2, 2011); HHS Fact Sheet: Medical Loss Ratio: Getting Your Money's Worth on Health Insurance (Dec. 2, 2011)]

MLR Final Regulations

Non-Federal Gov’t Plans Interim Final Regulations

DOL Technical Release

Fact Sheet

HHS has issued regulations and the DOL has issued related guidance on health care reform’s medical loss ratio (MLR) rules, making fundamental changes for employer-sponsored group health plans, including revised rules on who receives the rebates and how such amounts may be applied. As background, the MLR rules require insurers to report to HHS on how they spend premium dollars and to provide rebates unless at least 80% of each premium dollar—85% in the large group market—is spent on clinical services and health care quality improvement. The final HHS regulations amend prior interim final regulations (issued late last year) and address, among other things, how insurers calculate the amount of rebates and the notice they must provide to employers and employees. (See our article.) The DOL Technical Release and separate HHS interim final regulations address how plans sponsored by ERISA and non-federal governmental employers must use rebates received from insurers. Here are highlights of the guidance for employer-sponsored plans.

• Revised Rules on Who Receives Rebates Related to Employer-Sponsored Plans. The biggest news in the guidance is the change in the rules 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. (As background, ERISA generally applies to private-sector employer plans, while the PHSA generally applies to non-federal governmental employer plans.) According to HHS, requiring insurers to apportion and pay rebates directly to policyholders and each of their subscribers (who are generally employees) in the group health plan context (as provided by the interim final rule) had unintended administrative consequences as well as potential tax consequences for insurers, employers, and individuals.
• 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 (e.g., through employee salary reductions under a cafeteria plan) 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, this Technical Release provides that prior DOL Technical Release 92-01 (which generally excuses insured group health plans from the obligation to hold participant contributions in trust and from the obligation to file Form 5500 as a funded plan) will be treated as applying to MLR rebates, provided they are used within three months of receipt to pay premiums or refunds.
• Rules for Non-Federal Governmental Group Health Plans Receiving Rebates. Group health plans maintained by non-federal governmental employers (such as state and local governments) 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).

EBIA Comment: The MLR rules have the potential to make receipt of insurance company payments a more common occurrence for plan sponsors. (In the past, this has been generally limited to experience-rated insurance policies and other special situations, like insurer demutualizations.) 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 more information, see EBIA’s Health Care Reform manual at Section XIV.G (“Medical Loss Ratio Standards—Accounting for Costs and Rebate Requirement”); see also EBIA’s ERISA Compliance manual at Sections XIV.E.1 (“Insurance Company Distributions as Plan Assets”) and XVI.B.4 (“Other Trust Nonenforcement Policies for Certain Insurer Distributions”) and EBIA’s Cafeteria Plans manual at Section XVI.I (“Receipt of Proceeds From a Benefit Offered Under the Cafeteria Plan”).

Contributing Editors: EBIA Staff.