The Medical Loss Ratio (MLR) provisions of the Affordable Care Act require insurers to spend at least a specified percentage of employees’ premium dollars on clinical care, rather than on administrative expenses such as executive salaries, overhead, marketing and profit. If an insurer does not spend enough on patient care to satisfy the MLR provisions, the insurer must make financial adjustments and provide rebates to customers. The first MLR rebates were distributed last year. Insurers are gearing up for distributing the second round of rebates this month.
Insurer rebates to employer policyholders can be paid either in cash or in form of reduced premiums.
MLR rebates to group health plans may be considered plan assets. If this is the case and if the policyholder’s (employer’s) plan is subject to ERISA, the policyholder is required to comply with ERISA’s fiduciary provisions with respect to handling the rebates. Determining the plan sponsor’s portion of the rebate as compared to the plan participants’ portion of the rebate may depend on the terms of the plan and how the plan sponsor and participants have shared the cost of the coverage.
If the employer paid the entire cost of the insurance coverage, then no part of the rebate with respect to the policy would be attributable to participant contributions and the employer could retain the entire cash rebate or premium reduction. However, if participants paid the entire cost of the insurance coverage, then the entire amount of the rebate would be attributable to participant contributions and considered to be plan assets, due back to the participants. If participants and the employer each paid a fixed percentage of the cost, a percentage of the rebate equal to the percentage of the cost paid by participants would be attributable to participant contributions, with the remainder attributable to the employer. The Department of Labor has instructed that in general, rebates will have to be applied to appropriate uses within three months of receipt.
The allocation of the MLR rebate must be reasonable, fair and objective. There is no standard requirement for allocating rebate dollars. The plan sponsor will have to determine if the rebate will be allocated to only active employees, to former employees, and/or to COBRA participants. The plan sponsor is permitted to factor in the cost (and benefit) it would incur in allocating the rebate to former participants. If costs for sharing the rebate with former participants would exceed the amount of the rebate, the allocation can be limited to current plan participants. Moreover, if it is not cost-effective to distribute cash payments to plan participants (for example, if the rebate amount is small), then the rebate may be used for other permissible plan purposes, such as benefit enhancements or premium reductions.
Employers should look out for their MLR rebates from insurers, and be prepared to apply any rebates received.
