THE REBATES ARE COMING—DO YOU KNOW WHAT TO DO WITH THEM?

On June 21, 2012, Health and Human Services (HHS) Secretary Kathleen Sebelius announced that 12.8 million Americans will benefit from $1.1 billion in rebates from insurance companies this summer, because of the Affordable Care Act’s 80/20 rule (85/15 in the large group market).  These rebates will be an average of $151 for each family covered by a policy. On June 1, 2012, insurance companies nationwide submitted their annual MLR reports for coverage provided in 2011 to HHS.

The health care law generally requires insurance companies to spend at least 80 percent of consumers’ premium dollars on medical care and quality improvement. Insurers can spend the remaining 20 percent on administrative costs, such as salaries, sales, and advertising. Beginning this year, insurers must notify customers how much of their premiums have been actually spent on medical care and quality improvement.

Insurance companies that do not meet the 80/20 standard must provide their policyholders a rebate for the difference no later than August 1, 2012.  The 80/20 rule is also known as the Medical Loss Ratio (MLR) standard.

Consumers owed a rebate will see their value reflected in one of the following ways:

  • a rebate check in the mail;
  • a lump-sum reimbursement to the same account that they used to pay the premium if by credit card or debit card;
  • a reduction in their future premiums; or
  • their employer providing one of the above, or applying the rebate in a manner that benefits its employees.

Insurance companies that do not meet the 80/20 standard will send their policyholders a rebate for the difference no later than August 1, 2012. Consumers in every state will also receive a notice from their insurance company informing them of the 80/20 rule, whether their company met the standard, and, if not, how much of difference between what the insurer did or did not spend  on medical care and quality improvement will be returned to them.

All of this information will be publicly posted on HealthCare.gov this summer, allowing consumers to learn what value they are getting for their premium dollars in their health plan.

Even if a health insurer decides to issue rebate checks, that doesn’t mean an affected consumer will necessarily receive any money. The vast majority of Americans generally, and the vast majority of people who are covered by an insurance policy that is due a MLR rebate, obtain that coverage through an employer group. In these cases the rebate money will be provided directly to the employer and funds may or may not be passed down to employees. The MLR rules allow employers to keep the portion of the rebate directly attributable to their employer contribution, which in most cases is a sizable portion of the rebate. The employer may use any remaining funds to benefit the employer plan generally or issue rebates to impacted employees via a check or a credit towards the employee’s future health insurance premium contributions.

Also, even though modifications to federal tax law were made to ensure that MLR rebates are not taxable income to individual insurance consumers, the IRS recently issued some clarifying guidance that indicates that if an employee paid his or her portion of a health insurance premium on a pretax basis, such as via a section 125 cafeteria plan, then any rebate received by the employee may be taxed.

Americans covered by insurance companies that failed to meet the MLR standard will receive an average rebate of $151 per family across all markets. The average rebate per family is expected to be $152 in the individual market, $174 in the small group market (which is generally insurance provided by employers with 100 or fewer employees), and $135 in the large group market.

Approximately 66.7 million consumers are insured by an insurance company that provides the required value for their premium dollars.  This means that a large majority of consumers are insured by companies that meet or exceed the MLR standard:  62% of consumers in the individual market; 83% in the small group market; and 89% in the large group market.

Over 1.8 million families, which include 3.3 million consumers enrolled in those policies, will see an average rebate of $174 provided to their employers in the small group market.  Insurance companies in the small group market will issue $321 million in rebates this year.  

Insurance companies in the large group market are expected to return $386 million in rebates. Generally these rebates will be paid directly to the employers to be distributed to their employees according to employees’ contributions to premium, benefiting approximately 2.9 million families or 5.3 million Americans.  

A widely circulated, undated internal DOL memorandum from many years ago still provides the best advice on this subject.  It stated:

We believe that experience rating dividends, refunds, and credits should be treated as plan assets to the extent that they are attributable to employee contributions. In general, determining the extent to which any particular dividend, refund, or credit is attributable to employee contributions will require careful analysis of the language of the documents and instruments governing the plan. Depending on the terms of the plan in question, a particular refund, credit, or dividend may be attributable to employee contributions, employer-paid premiums, or both.

The memo goes on to examine five different scenarios in which employers and employees could share costs. They can be summarized as follows:

  1. If the employer paid 100 percent of the cost, the employer would be entitled to keep the full amount of the dividend, refund, or credit.
  2. If employees paid 100 percent of the cost, the full amount of any dividend, refund, or credit should be held in trust for the exclusive benefit of the employees.
  3. If the plan required an employer and its employees each to pay a fixed percentage of the cost of insurance, any dividends, refunds or credits would have to be allocated in proportion to those percentages.
  4. If the plan provided that the employer would be responsible for paying a fixed amount of the cost of insurance—with employees being responsible for paying any additional costs—the full amount of any dividend, refund, or credit should be held in trust for the exclusive benefit of the employees, up to the total amount paid by the employees. If the dividend, refund, or credit exceeded the amount paid by the employees, the employer could keep the balance.
  5. If the plan provided that the employees would be responsible for paying a fixed amount of the cost of insurance—with the employer being responsible for paying any additional costs—the employer would be entitled to keep the full amount of any dividend, refund, or credit up to the total amount paid by the employer. If the dividend, refund, or credit exceeded the amount paid by the employer, the employees would be entitled to the balance.

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