Health Care Reform Update: Understanding Premium Rebates
Let's Talk About Health Care Reform:
What was the premium rebate I received in August and what can I do with it?
One of the early tangible benefits of health care reform for consumers occurred at the end of July, when health insurance premium rebates for 2011 were mailed to many policyholders. I have received a number of questions about the reason for the rebates and how they can be used. The rebates were issued under a provision of the 2010 health care reform law, known formally as the Patient Protection and Affordable Care Act (PPACA) or, in a more abbreviated form, as the Affordable Care Act (ACA). Colloquially, the ACA is known as "Obamacare." The average rebate for a family in California was reported to be $65. In other parts of the United States, the average rebates reached as high as $800 per family.
One of the objectives of the ACA is to see that consumers receive value for health insurance premium payments. Among the less-heralded features is a requirement for insurers offering group or individual health insurance to contain their administrative costs or rebate the excess. This "medical loss ratio rebate" is required annually when certain medical loss ratios are exceeded for the plan year.
What is a Medical Loss Ratio?
After January 1, 2011, the expenditures for medical services or activities to improve health care for large group plans – plans with more than 100 employees – must be no less than 85 percent of the premium revenue. For issuers to the small groups and individuals, the ratio is 80 percent. In effect, the insurer must absorb its excess administrative costs, which is an inducement to control overhead and become more efficient. A noteworthy feature is that individual states have authority under the Act to impose even higher ratios.
What Should I Do With the Rebate?
Health insurers were required to send rebates for 2011 to policyholders no later than August 1, 2012. If you are an employer-policyholder or an individual insured, you may have received a rebate and be wondering what you can or must do with it. If you are an individual, you may use the rebate any way you wish. If an employer is the policyholder, then the employer must treat the rebate as an asset of the plan under which health benefits are offered unless all of the plan documents, taken together, can be fairly read to permit the employer to use the rebate outside the plan. If an employee plan or a trust is the policyholder, then the rebate is an asset of the plan or trust, it is subject to the fiduciary obligations of ERISA, and it must be applied according to the terms of the governing plan documents.
If employees, as plan enrollees, paid some portion of the premium, they are entitled to share in the rebate on a proportional basis. This assumes the simplest case -- a plan offering a single policy option. Plans with multiple policies require closer analysis. Importantly, the employer has only three months from receipt of the rebate to ascertain what is required and take the actions compelled by ERISA.
For example, as a general principle, if 20 percent of the premium was paid by plan enrollees, then 20 percent of the rebate must be used for their benefit. While the plan could distribute the rebate to enrollees on a proportional basis, refunds of premiums paid with pre-tax dollars, being effectively wages, have tax consequences for the employee and the employer. An alternative is to reduce the enrollees’ portion of the annual premium for the current policy year for all enrollees covered under the policy offered by the plan. Other alternatives may be considered when a plan offers multiple policies, but in all instances the application of funds must be solely in the interest of enrollees and without partiality toward any group. Because the average rebate per family paid under California plans was relatively small, the most cost-efficient treatment likely will be to apply the enrollee portion of the rebate to reduce the enrollee contribution to this year's premiums.
When and How Do I Apply the Rebate?
The rebate is used to reduce premiums or is paid to persons enrolled during the year in which the rebate is actually paid, rather than the reporting year on which the rebate was calculated. This potentially benefits individuals who did not participate in the prior plan year but is still allowable. Use of a rebate generated by one plan to benefit enrollees of another plan is not permitted, however, and is considered a breach of fiduciary duty.
If enrollee contributions are paid out of a cafeteria plan for which no trust exists and the employer wishes to avoid the expense of creating a trust to hold rebated funds, then the employer must either refund to enrollees the enrollee portion of the rebate or apply it to reduce the enrollees' portion of the next premium due within three months of receipt with a corresponding adjustment to the enrollee's wage deduction. Beyond three months, retention of funds in the plan without benefit of a trust violates ERISA.
What about “grandfathered” plans?
The rules concerning medical loss ratio rebates apply whether or not the plan is "grandfathered" under other rules of the ACA. Grandfathering, a topic for another time, exempts plans existing as of March 23, 2010 from certain requirements of the ACA but has no effect on the application of medical loss ratio rebates.
This article presents a generalized summary. Special facts, such as enrollees who are no longer with the employer, or plans with several levels of benefits, will require individual attention under the applicable regulations and Department of Labor guidance. Specific questions should be referred to your attorney or benefits consultant.