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.
Employers with insured plans may be receiving questionnaires from their insurers asking for information about employee count and other matters. The answers to these questions are used in determining MLR rebate eligibility.
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 an annual rebate to each enrollee on a pro-rata basis.
Employers 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.
