By John Reichard, CQ HealthBeat Editor
December 5, 2011 -- Consumers won't have to pay taxes on rebates they receive when health insurers exceed medical loss ratio (MLR) standards governing the percentage of premium revenue they must spend on medical care and quality improvement activities, under interim final regulations issued last week by the Centers for Medicare and Medicaid Services (CMS).
The regulations also propose that insurers will have to send notices to consumers showing not just the amount of any rebate but also what the medical loss ratio, or MLR, means and how it has improved under the health care law (PL 111-148, PL 111-152). And the regulations remind insurers that they can't exclude broker and agents' fees when adding up administrative expenses.
The final MLR regulation took effect at the start of 2011. But the recent announcement addressed such previously unresolved issues as the way insurers report MLRs and the mechanism for distributing rebates. It also disclosed progressively tougher MLR standards for so-called mini-med plans, which offer very limited benefits—typically to low-wage workers—and for "expatriate" health plans sold to Americans living abroad.
The news release announcing the changes quotes Marilyn Tavenner for the first time in her new position as acting CMS administrator. "If your insurance company doesn't spend enough of your premium dollars on medical care or quality improvement this year, they'll have to give you rebates next year," Tavenner said.
According to CMS, early estimates were that starting in 2012 up to 9 million Americans could get rebates totaling $600 million to $1.4 billion. But "early reports suggest insurers lowered premium growth rather than face the prospect of providing rebates—a win-win for consumers," the CMS news release said. Rebates under the MLR will be paid for the first time in 2012 and must be paid by August of next year.
Insurers must pay any rebate they owe to the group policyholder, which is usually the employer. The employer would keep part of the rebate and would have different options for distributing the rest to employees.
If the insurer owed the policy holder—say an employer—a rebate of $20,000 for example, and the employees paid 40 percent of premium costs, they would get 40 percent of the rebate, or $8,000. The employer could pay the $8,000 by lowering premiums by that amount the following year or by paying a cash refund to workers.
Rebates paid in 2012 will go to plan enrollees that year, not to enrollees in 2011, even though the data on medical and administrative outlays used to determine MLRs is from 2011. "We believe that this results in administrative simplicity, as it does not require tracking former enrollees," CMS says in the rule.
The MLR standards require that individual and small group plans pay out at least 80 percent of premium revenue for medical care or quality improvement and no more than 20 percent for administrative costs (including profits). In the case of large groups, the MLR standard is 85 percent.
MLRs are calculated by dividing a numerator—total medical and quality improvement expenses—by a denominator—total premium revenues. In the case of mini-med plans and "expatriate" plans sold to Americans living abroad, CMS has permitted sponsors to have a far lower total of medical and quality improvement expenses, which recognizes the heavy administrative costs involved in offering the plans.
But those standards will get tougher. For 2011, CMS is allowing a multiplier of two for the numerator in order to meet the MLR standard (thus if combined medical and quality improvement expenses of a mini-med plan totaled 40 percent of the premium dollar and the MLR requirement is 80 percent the plan would meet the requirement, because it could multiply the 40 percent by two).
In the case of mini-med plans, the multiplier will drop to 1.75 in 2012, to 1.5 in 2013, and to 1.25 for 2014. "In 2014, the use of annual dollar limits on coverage will be banned and we expect that these mini-med policies will cease to exist," a CMS fact sheet says. In the case of expatriate policies, the 2.0 multiplier will continue.
CMS said that mini-med MLRs will be posted publicly in the spring of 2012 "to further enhance transparency to consumers." The MLR requirements also allow insurers to consider certain costs involved in converting to the ICD-10 billing system as quality improvement expenses and to deduct certain taxes from total premium revenues.
The National Association of Insurance and Financial Advisers (NAIFA), a group representing insurance agents, expressed disappointment that the latest MLR regulations do not permit insurers to exclude agent and broker fees for administrative expenses. The National Association of Insurance Commissioners (NAIC) adopted a resolution last week urging Congress to quickly consider legislation that would ensure consumer access to broker services. CMS did not act on its own to ease that access by counting broker and agent fees as administrative.
"NAIFA is disappointed that the administration rejected the NAIC recommendation to take action that would ensure continued consumer access to professional health insurance agents in its Final MLR rule," said NAIFA President Robert Miller. "However, NAIFA remains hopeful that Congress will join the NAIC in recognizing the harm caused to consumers and make the necessary changes to the law."
