Each year, health insurers must report information about their medical loss ratio to the Department of Health and Human Services. The medical loss ratio (MLR) is the cost of claims plus the amount expended on health care quality improvement as a percentage of total premiums. If an insurer spends too much on administrative expenses instead of on providing benefits, it will fail the MLR requirements.
Insurers must provide a rebate to policy holders if the MLR is less than a specified amount. The required MLRs are 85% in the large group market and 80% in the small group and individual markets. If the MLR is less than the specified percentages, the insurer must provide anannual rebate to each enrollee on a pro-rata basis.
HHS has recently issued guidance on when agent and broker fees and commissions can be excluded from the MLR calculation. Such amounts may be excluded only if the following circumstances apply:
- The law of the state in which the policy is issued does not deem the agent or broker to be a representative of the issuer;
- The policyholder is not required to utilize an agent or broker to purchase insurance and may purchase a policy directly from the issuer;
- The policyholder selects, retains, and contracts with the agent or broker on his or her own accord;
- The policyholder negotiates and is responsible for the fee or commission separate and apart from premium;
- The issuer does not include these agent or broker commissions and fees in rate filings submitted to the applicable regulatory agency;
- The policyholder voluntarily chooses to pass the fee or commission through the issuer and is not required to do so, or the policyholder pays the fees or commission directly to the agent or broker; and,
- The policyholder issues the 1099 to the agent or broker, if a 1099 is required. If any condition in the above list is not met, then the issuer must include the agent or broker fees and commissions in earned premium for MLR reporting purposes.
If any of these requirements are not met, the issuer must include the agent and broker fees in the calculations.
The government also released guidance on notices that insurers must send to policyholders receiving a rebate. The notice must be provided by September 30 of the year following the MLR reporting year for which the rebate is being issued. Notices of rebates based on the 2014 MLR reporting year must be provided by September 30, 2015.
Employers with insured plans should look out for their MLR rebates. Rebates may be made in either a premium credit or a lump sum payment. They are generally considered plan assets, and employer sponsors of ERISA covered health plans must use the rebates for the benefit of plan participants.
Generally, rebates may be used as follows:
- To reduce future premiums for current participants;
- To enhance benefits;
- To pay reasonable plan expenses;
- To pay current participants;
- To pay former participants.
An employer who receives a rebate will have to conduct an analysis to determine what portion of the payment should be given back to employees and what portion of the payment can be retained. An employer will also have to decide if the rebate will be shared with only active employees or returned to COBRA participants, as well. Employers will have to act quickly, because rebates must be used within 3 months of receipt.
