What will you do with your medical loss ratio rebates

March 18, 2012
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Employers sponsoring fully insured group health plans (as opposed to self-funded group health plans) may be receiving rebates beginning in August pursuant to the medical loss ratio rules of health care reform.

New guidance has been issued instructing employers as to what they may do with the rebates.

What are the MLR rules?

The purpose of the MLR rules is to require insurers to deliver transparency and value in connection with health insurance policies. Under the rules, insurers must disclose how much of the collected premium dollars associated with a policy are spent on claims vs. profits and indirect costs such as administration and marketing.

If an insurer of small group plans (generally, employers with 100 or fewer employees) does not spend at least 80 percent of premiums on claims and quality improvement, the insurer must provide a rebate. The 80 percent threshold is increased to 85 percent for large group health insurance plans.

Insurers must report their 2011 MLR data to the U.S. Department of Health and Human Services by June 1. If the MLR requirements for 2011 are not satisfied, rebates must be provided by Aug. 1. The same cycle applies for subsequent years (for example, 2012 MLR data must be reported by June 1, 2013, with any required rebates issued by Aug. 1, 2013).

Who gets the rebate?

For most employer plans, any MLR rebate will be issued to the employer in its role as the policyholder. To the extent the rebate is not considered to be a plan asset, the employer has discretion in using the proceeds.

However, this is not the case with respect to any portion of the rebate considered to be a plan asset. For employers subject to ERISA, generally, the portion of the rebate attributable to participant (vs. employer) contributions will be considered plan assets. ERISA fiduciary rules call for plan assets to be used for the exclusive benefit of participants and their beneficiaries.

While it is important for employers to carefully identify the portion of the rebate that constitutes plan assets and then apply that amount exclusively for the benefit of participants and their beneficiaries, the guidance does not require that amount be applied exactly in proportion to the premium activity of participants. Rather, the guidance provides employers with some flexibility.

It may be permissible to use the rebates for the benefit of current participants rather than former participants where the cost of tracking down former participants to provide the rebates is unreasonable.

The rebates may be used in a variety of ways as long as the method is consistent with ERISA fiduciary requirements. For example, rebates may be used to reduce future premiums (commonly referred to as a premium holiday) or to enhance benefits. While rebates may be distributed in cash, a distribution, particularly where participants paid their prior premiums on a pre-tax basis, raises taxation issues that the IRS is expected to address in future guidance.

Similar rules apply to fully insured plans sponsored by state and local governmental employers and church employers, even though the health plans of these employers are not subject to ERISA.

Mary Bauman is an employee benefits attorney at Miller Johnson and chair of the Health Care Reform Team. She can be reached at (616) 831-1704 or baumanm@millerjohnson.com

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