By HILARY ROWEN, an attorney with Sedgwick, Detert, Moran & Arnold in San Francisco
Amid the furor over federal healthcare reform, the retroactive premium refund provisions of the Patient Protection and Affordable Care Act (PPACA) have received relatively little attention.
This low visibility is somewhat odd, as the "medical loss ratio" refunds apply to coverage in force on Jan. 1, 2011. In contrast, most of the highly publicized features of the bill President Obama signed into law last year-- including the individual coverage mandate--do not take effect until 2014.
Under the medical loss ratio provisions, large employers, and employees who contribute to premiums, will be entitled to retroactive premium refunds if their carrier spends less than 85 percent of premiums for reimbursement of clinical care and on "activities to improve health care quality."
For a small employer, which the law defines as one with no more than 100 employees, and individual health coverage, the trigger for refunds is 80 percent. (Through 2015, states can elect to classify businesses with less than 51 employees as small employers for medical loss ratio computation purposes.)
Unlike many of the healthcare law's provisions, the medical loss ratio requirements apply to "grandfathered" plans. In December 2010, the Department of Health and Human Services (HHS) issued a regulation establishing the methodology that carriers must use in computing medical loss ratios. Under the regulation, each carrier will determine three medical loss ratios for each state, one for large employer coverage, one for small employer coverage and one for individual products.
If the medical loss ratio is less than the percentage threshold-- 85 percent for large employer coverage or 80 percent for small employer and individual coverage-- the carrier must pay the difference between the actual ratio and the minimum target as a refund.
For employers with employees in more than one state, the applicable medical loss ratio will be determined based on the state where the policy was issued or delivered as stated in the contract. This will usually be the state where the company is headquartered, but may not be where the majority of the employees are located.
The medical loss ratio targets may differ from state to state. The law allows state legislatures to set higher medical loss ratios than the minimum under the federal statute. State insurance regulators can request approval from HHS for a medical loss ratio lower than 80 percent for individual coverage if imposing the 80 percent ratio will create disruption in that market. The law does not authorize downward adjustments to the medical loss ratios for small group or large group coverage.
The HHS regulation specifies expenses that will (and will not) qualify as "activities to improve health care quality." For its cost to the insurer to be included within the 80 percent or 85 percent cap, an activity must meet a four-part test.
The program must be designed to improve health care quality. A carrier's expenditures on health quality improvement activities that also produce cost savings are not automatically disqualified, as long as cost containment is not the primary purpose of the program.
The impact of the activity on health quality must be capable of objective measurement and of producing verifiable results. HHS considered, but rejected, proposals that carriers must provide quantified data on the magnitude of quality improvements achieved before the activity's costs could be included in the medical loss ratio. HHS determined such a requirement would stifle innovation.
The activity to improve health quality must be directed to individual enrollees or incurred for the benefit of specified segments of enrollees. Spillover effects that benefit the general population do not disqualify a program from recognition under the medical loss ratio formula, as long as there are no additional costs to reaching noninsureds.
The activity to improve health quality must be based on best clinical practices, evidence-based medicine or criteria issued by recognized professional medical associations and other nationally recognized health care quality organizations.
The HHS regulation lists types of programs, as long as they meet the four-part test, that would qualify as "activities to improve health care quality."
Examples include chronic disease management, programs to prevent hospital readmissions, programs to improve patient safety and reduce medical errors, and wellness programs designed to reduce an enrollee's health risk factors such as smoking or obesity.
With the creation of the medical loss ratio regime, HHS estimates that the percentage of total health premium spent on "activities to improve health care quality" will range from 1 percent to 5 percent, with an average around 3 percent.
The medical loss ratio regulation applies to health coverage in force on Jan. 1, 2011, and will be computed on a calendar year basis. For policies that do not have Jan. 1 effective dates, a portion of the premium will be allocated to 2011. Claims for clinical services provided during 2011, but paid in the first quarter of 2012, will be included in the data used to compute the medical loss ratios.
By June 2012, carriers must file reports with HHS and the states detailing premiums received and payments made for clinical care, activities to improve health care quality and other expenses that are not part of the medical loss ratio.
The reports will also include the computation of the medical loss ratios for each state and each coverage category. Any rebates owed must be paid by Aug. 1, 2012.
HHS projects that the average medical loss ratio across all carriers, all states and all three coverage categories will be above the trigger level. Rebates will be paid by those carriers with below-average medical loss ratios in specific states and for specific coverage categories.
Overall, HHS estimates that only a very small percentage of employees will be eligible for rebates for 2011, and did not attempt to estimate the number of rebate-eligible employers or the distribution of rebate eligibility by state.
Approximately 3 percent of employees in the small group market and 2 percent of employees in the large group market will be eligible for rebates. The average rebate per employee is projected to be $300 for eligible small employers and $160 for eligible large employers.
In contrast, HHS estimates that between 20 percent and 50 percent of individual coverage purchasers will be eligible for medical loss ratio rebates in the range of $160 by August 2012.
Medical loss ratio regulation may reduce the range of products offered in the market. As medical loss ratios are computed across the entire mix of small group or large group products that a carrier writes in a given state, carriers may decide to eliminate products with low medical loss ratios that pull down the average ratio in the state.
While the surviving products are likely to have a higher percentage of premium going to clinical care and "activities to improve health care quality," those products may also have overall higher premium rates.
Typically, employees pay a portion of employer-provided health premiums. The HHS regulations provide that a medical loss ratio rebate must be allocated between the employer and its employees based on the percentage of the total premium paid by the employer and each employee.
Frequently, the insurer will not have information on the contribution made by each employee covered under a group policy. The regulations permit the insurer to enter into an agreement with the employer to distribute the rebate to its employees and provide the required documentation to the insurer. However, the insurer will remain liable for the rebate payments if the employer does not perform.
The law bans annual limits on healthcare coverage. Under HHS regulations, the law's ban on annual benefits limits will be phased in between 2010 and 2014. The minimum permissible limit for plans with inception or renewal dates between Sept. 23, 2010 and Sept. 22, 2011 is $750,000. A number of employers with part-time, seasonal or transient employees offer "minimed" policies, with annual limits lower, sometimes substantially lower, than the PPACA requirements.
HHS will grant waivers from the minimum annual limit requirements for minimed coverage if imposing the minimum annual benefit requirements would result in a significant increase in premiums or a decrease in access to benefits. More than 200 waivers for employers with policies covering between 1 million and 1.5 million people have been granted.
While it has granted a substantial number of minimed waivers, HHS requires that carriers issuing minimed plans inform current and prospective insureds that their coverage does not meet the minimum limits and has received a waiver.
HHS has also prohibited carriers from issuing new minimed products, except where they are required to issue a limited benefit policy by state law or where a "grandfathered" minimed plan changes carrier.
April 1, 2011
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