ALERT: MEDICAL LOSS RATIO (MLR) STANDARDS June 6, 2012

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1 ALERT: MEDICAL LOSS RATIO (MLR) STANDARDS June 6, 2012 The federal agencies have released a large amount of new guidance over the past month to assist health plans and employers prepare for the next steps in health care reform. This issue of Alert reviews the new medical loss ratio standards for insurers and HMOs. Sincerely, Your EPIC Employee Benefits Consulting Team The Affordable Care Act (federal health care reform) mandates that health insurers and HMOs spend at least 85% of premium on medical care. For small market plans, the required minimum is 80%. If an insurer or HMO fails to meet the required Medical Loss Ratio standard, it must rebate (refund) a portion of its premium revenue to the policyholders. Background: The Medical Loss Ratio (MLR) is the percentage of premium that the insurance company or HMO (carrier) spends on health care. Generally, the MLR is the amount spent on medical care (claims, clinical services and qualityimprovement activities) divided by the amount of net premium (premium after subtracting certain license fees and taxes). Starting with 2011 policy years, carriers must demonstrate that their MLRs meet the new minimum standards: 85% in the large group market or 80% in the small group market (or individual insurance market). The MLR standards apply only to insurance plans based on the carrier s total policies in each market segment in each state. There is no MLR requirement for self-funded plans. Mini-med plans and expatriate plans also are exempt. Carriers began reporting their 2011 MLR data to the various states in June 2012 and results also will be collected by the US Department of Health and Human Services (HHS). Consumers will be able to check the results online at Next Steps: Carriers that fail to meet the MLR standard must notify their policyholders and refund the excess portion of premium by August 1, Carriers that do meet the MLR standard will begin including a short advisory notice in plan materials. The following explains required actions for the two groups of carriers those that meet the MLR standard and those that do not to help employers prepare for next steps.

2 Carriers that Meet the MLR Standard: Carriers that meet the MLR standard for 2011 believed that they would not need to prepare or send any notices to their policyholders according to early federal regulations. Just recently, however, the Department of Health and Human Services (HHS) announced that notices will be required after all. Apparently HHS was concerned that people would be confused if their friends or neighbors received rebate notices and they received no communications. HHS now will require carriers meeting the 2011 MLR standard to provide a simplified notice to plan subscribers. For administrative ease, there is no requirement for a separate mailing or distribution. The notice will be provided with the first plan materials (such as open enrollment materials) distributed to subscribers on or after July 1, Electronic distribution is acceptable (existing Department of Labor rules apply). Here is a copy of the simple notice: [Carrier Notice to Policyholders/Subscribers when MLR Standard is Met Print in 14 pt bold type on front of plan material or as stand-alone document] Medical Loss Ratio Information The Affordable Care Act requires health insurers in the individual and small group markets to spend at least 80 percent of the premiums they receive on health care services and activities to improve health care quality (in the large group market, this amount is 85 percent). This is referred to as the Medical Loss Ratio (MLR) rule or the 80/20 rule. If a health insurer does not spend at least 80 percent of the premiums it receives on health care services and activities to improve health care quality, the insurer must rebate the difference. A health insurer s Medical Loss Ratio is determined separately for each State s individual, small group and large group markets in which the health insurer offers health insurance. In some States, health insurers must meet a higher or lower Medical Loss Ratio. No later than August 1, 2012, health insurers must send any rebates due for 2011 and information to employers and individuals regarding any rebates due for You are receiving this notice because your health insurer had a Medical Loss Ratio for 2011 that met or exceeded the required Medical Loss Ratio. For more information on Medical Loss Ratio and your health insurer s Medical Loss Ratio, visit Carriers that Fail to Meet the MLR Standard: Carriers (health insurers and HMOs) that FAIL to meet the MLR standard for 2011 must provide rebates to their policyholders by August 1, The amount of a rebate is not case-specific and does not reflect each employer s policy results; instead the rebate amount is based on the carrier s total result in a market segment in a particular state. If a rebate is due, the carrier also must provide a specific notice to the policyholder (employer) and plan subscribers (employees) regarding its MLR and the rebate. HHS has issued extensive regulations regarding MLR rebates and notice requirements for carriers that do not meet the MLR standard. (Details are available from the carrier or the HHS website at Rebates: Employers with group plans that may be eligible for a premium rebate need to ensure that they handle the rebate appropriately. Most employer plans, other than governmental employers or churches, are ERISA plans. Department of Labor rules for ERISA plans require the plan sponsor (employer) to use plan assets exclusively for the benefit of plan participants. Examples include paying premiums, reducing employee contributions, and/or enhancing benefits.

3 In many cases, employees make contributions (payroll deductions) to the plan so a portion of the rebate must be treated as a plan asset. Employers may use the entire rebate to reduce employee contributions (or provide additional benefits), but, at a minimum, the employer should administer the rebate in pro-rata shares between the plan sponsor (employer) and the plan participants (employees). Cash refunds should not be made to employees. Per recent IRS guidance, a cash refund to an employee would create a taxable event (unless the worker had previously contributed the funds on an after-tax basis). The plan document should include, or should be amended to include, language allowing for rebates and describing how they will be treated. The rebate, to the extent that the rebate is an ERISA plan asset, must be held in a trust if it is held longer than three months. Therefore, employers should use the rebate within three months of receipt in order to avoid potential trust issues. Special cases: The DOL rules for ERISA plans apply for the majority of employers (including for-profit companies and non-profit organizations). Non-ERISA plans, or non-employer groups, will need to review handling of rebates with appropriate tax or legal advisors. Examples include: Policyholder is not the employer. (For instance, the named policyholder is a trust or union.) Plan is a non-federal governmental plan, such as a city, municipality or school district. Plan is a church plan. (Non-ERISA church plans should review separate guidance provided by HHS. Some church plans, however, have opted into ERISA in which case the DOL rules apply.) Notices: Carriers that fail to meet the MLR standard must provide notices to their policyholders and/or plan subscribers no later than August 1, (Rebates also must be issued by this date.) Federal regulations require specific language in the notices along with variable sections that the carriers will complete. Here is a copy of the notice template: [SAMPLE Carrier Notice regarding Rebate (Failure to meet MLR Standard) Carrier will complete variable inserts per federal regulations] [August 1, 20XX] [Subscriber or Policyholder Name 123 Main Street Anytown, USA] Notice of Health Insurance Premium Rebate Re: Health Insurance Premium Rebate for Year 20XX]; Policy [#XXXXX] Dear [Subscriber or Policyholder Name]: This letter is to inform you that [Health Insurer] will be rebating a portion of your health insurance premiums through your employer or group policy holder. This rebate is required by the Affordable Care Act the health reform law. The Affordable Care Act requires [Health Insurer] to rebate part of the premiums it received if it does not spend at least [80/85] percent of the premiums [Health Insurer] receives on health care services, such as doctors and hospital bills, and activities to improve health care quality, such as efforts to improve patient safety. No more than [20/15] percent of premiums may be spent on administrative costs such as salaries, sales, and advertising. This is

4 referred to as the Medical Loss Ratio standard or the [80/20 85/15] rule. The [80/20 85/15] rule in the Affordable Care Act is intended to ensure that consumers get value for their health care dollars. You can learn more about the [80 /20 85/15] rule and other provisions of the health reform law at: [The Affordable Care Act allows States to require health insurers to meet a higher ratio. [Your State] sets a higher Medical Loss Ratio standard, so [Health Insurer] must meet a [XX%] Medical Loss Ratio, meaning that [XX%] of premiums must be spent on medical services and activities to improve health care quality, and no more than [XX%] of premiums can be spent on administrative costs.] What the Medical Loss Ratio Rule Means to You The Medical Loss Ratio rule is calculated on a State by State basis. In [your State], [Health Insurer] did not meet the [80/20 85/15 /target in your state] standard. In [20XX], [Health Insurer] spent only [XX%] of a total of [$YYY] in premium dollars on health care and activities to improve health care quality. Since it missed the [80 85 percent target / target in your State] by [X%] of premium it receives, [Health Insurer] must rebate [X%] of the total health insurance premiums paid by the employer and employees in your group health plan. We are required to send this rebate to your employer or group policyholder by August 1, [20XX], or apply this rebate to the health insurance premium that is due on or after August 1, [20XX]. Employers or group policyholders must follow certain rules for distributing the rebate to you. Ways in Which an Employer Can Distribute the Rebate If your group health plan is a non-federal governmental plan, the employer or group policyholder must distribute the rebate in one of two ways: Reducing premium for the upcoming year; or Providing a cash rebate to employees or subscribers that were covered by the health insurance on which the rebate is based. If your group health plan is a church plan, the employer or group policyholder has agreed to distribute the portion of the rebate that is based on the total amount all of the employees contributed to the health insurance premium in one of the ways discussed in the prior paragraph. If your group health plan is not a governmental plan or a church plan, it likely is subject to the Federal Employee Retirement Income Security Act of 1974 (ERISA). Under ERISA, the employer or the administrator of the group health plan may have fiduciary responsibilities regarding use of the Medical Loss Ratio rebates. Some or all of the rebate may be an asset of the plan, which must be used for the benefit of the employees covered by the policy. Employees or subscribers should contact the employer or group policyholder directly for information on how the rebate will be used. For general information about your rights regarding the rebate, you may contact the Department of Labor s Employee Benefits Security Administration at EBSA (3272) or review the Department s technical guidance on this issue on its web site at ebsa/newsroom /tr11-04.html. Need more information? If you have any questions about the Medical Loss Ratio and your health insurance coverage, please contact [Health Insurer] toll-free at [1-XXX-XXX-XXX] or [website or address]. Contact your employer or Administrator directly for information on how the rebate will be distributed. For general information about your rights regarding the rebate if your group health plan is subject to ERISA, you may contact the Department of Labor s Employee Benefits Security Administration at EBSA (3272) or review the

5 Department s technical guidance on this issue on its web site at ebsa/newsroom /tr11-04.html. Sincerely, [John Doe, Authorized Executive] [Health Insurer] For further information on this or other topics, please contact your EPIC benefits consulting team. This ALERT is offered for general informational purposes only. It does not provide, and is not intended to provide, tax or legal advice.