Health Care Reform – Medical Loss Ratio Rebates Issued
September 5, 2012
As provided under the Patient Protection and Affordable Care Act (PPACA), insurance companies that failed to meet the Medical Loss Ratio mandate with respect to group health plan policies, must now pay rebates to the policyholders (i.e., the group health plan itself or the employer). This does not apply to self-insured or excepted benefit plans (i.e., stand alone dental or vision plans that are not integrated with major medical plans).
Medical Loss Ratio (MLR) measures the percentage of the premium dollars charged that were actually used to provide medical services. Under PPACA, the large group market is required to have a minimum MLR of 85% while an 80% MLR applies to the small group and individual markets (generally speaking, the small group market includes employers with at least one but no more than 100 employees on business days during the prior calendar year). If the insurer does not meet the applicable MLR, PPACA requires that an annual rebate be issued to policyholders. Rebates may be issued in the form of premium credits or lump-sum payments. The first annual rebate was due August 1, 2012.
Employers receiving rebates must decide how to manage or use them. An MLR rebate triggers administrative and tax consequences. The tax consequences will vary depending upon whether the employee’s share of the premiums was paid on a pre-tax or after-tax basis. Fiduciary duties are also implicated when a rebate is received and the ERISA plan asset rules come into play. Plan sponsors of non-federal government plans (such as state and local government plans) and plans not covered by ERISA are subject to special rules regarding MLRs. The terms of the group health plan are particularly relevant. Employers may benefit from amending their plan documents to include clarifying language regarding the management of rebates. Employers must also be cautious when handling rebates and would be wise to consult with legal counsel before deciding whether to comingle the rebate with their general assets or set it aside as a plan asset and use it exclusively for the benefit of plan participants.