On Friday, May 13, 2011 the Department of Health & Human Services’ Center for
Consumer Information & Insurance Oversight (CCIIO), which is now a part of the
Centers for Medicare & Medicaid Services, issued guidance titled “Questions and
Answers Regarding the Medical Loss Ratio Interim Final Rule.” This guidance provides
input on seven distinct issue areas impacted by the Medical Loss Ratio (MLR) rule.

To view the full article please click below.

On November 22, the Department of Health and Human Services issued its long-awaited medical loss ratio (MLR) regulation.  The document, some 308 pages long, sets out the requirements that carriers must follow under section 2718 of the Public Health Service Act.  This section requires that carriers in the large group market meet a target loss ratio of 85 percent, meaning that for every hundred dollars of premium received, $85 must be spent on either claims or certain specified quality-related activities.  In the small group and individual markets, that target is 80 percent.   The National Association of Insurance Commissioners (NAIC) on October 27 sent a set of recommendations to the Secretary of HHS.  The Secretary has now released an interim final rule, with a request for comments.  The regulation’s effective date is January 1, 2011.

The HHS interim final rule provides the following:

• definition of a plan year
• guidance for when plans must report their MLR        
• rules for how plans must aggregate their claims within the states in the large and small group markets, and provides rules for associations and trusts
• credibility adjustments for smaller plans without “credible” experience
• special rules for expatriate and mini-med plans
• special rules for newly issued plans under certain circumstances
• rules for the inclusion of group conversion charges
• definition of the elements of earned premium for use in the denominator of the MLR calculation, as well as the elements that will be included in the numerator
• the level and definition of state and federal taxes and fees that are deducted from the denominator of the MLR
• definition of claims and definitions of quality programs that can be considered part of the loss ratio
• accounting mechanisms for fraud and abuse programs
• accounting for expenditures for ICD-10 implementation and health information technology

The regulation also makes provisions for waiver requests by states for both solvency issues and “market disruption,” and generally adopts the October 27 recommendations of the National Association of Insurance Commissioners (NAIC).  Issues not addressed by the NAIC, such as the solvency impact that rebates may have on some carriers, how rebates, if any, should be returned to policyholders and in what format, and what kind of data retention, data access and reporting will be required annually, or, in some cases, quarterly are included in the HHS regulation. 

Companies need to be mindful of the enforcement mechanisms under the new rule, including HHS auditing requirements, the public nature of these audits, and the mechanisms for states and carriers to challenge their results.  The imposition of civil monetary penalties by the federal government is something carriers in the commercial market have not yet dealt with on a large scale, and will, over the next few years, also need to be carefully monitored.

For more information contact Randi Reichel, Esq., Mitchell, Williams, Selig, Gates & Woodyard P.L.L.C.
(301) 984-8352 | rreichel@mwlaw.com

On September 20, 2010 the U.S. Departments of Labor, Health and Human Services, Treasury and Internal Revenue Service issued a joint Invitation for Comment (IFC) reading the application of rules prohibiting insured group health plans from discriminating in favor of highly compensated individuals.

The rule, one of a long series of rules issued by the federal agencies as part of the implementation of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, together known as PPACA, is intended to implement the PPACA provisions regarding individual compensation which take effect for plan years beginning on or after September 23, 2010. Under existing IRS requirements, self-funded health plans have long been subject to this requirement.  Treasury Regulation Section 1.105-11 provides guidance on the application of IRS Code Section 105(h), which generally excludes from income any amounts deemed “excess reimbursement” for highly compensated individuals.  In instances where a self-funded health plan that fails to comply with the IRS requirements, those highly compensated individuals lose the tax-benefit generally enjoyed for employer sponsored health benefits.

Under the PPACA rules,  however, failure by an insurer to comply with Code Section 105(h) will subject the insurer to civil action to compel it to provide benefits, or subject “the plan or plan sponsor” to potentially significant civil monetary penalties.

Comments are requested by November 4, 2010.

NAIC NEARS COMPLETION OF MEDICAL LOSS RATIO CALCULATIONS

The National Association of Insurance Commissioners subgroups involved with health reform are nearing completion of their charge to develop the standardized methodology for calculating medical loss ratios (MLR) as required by the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act, together known as PPACA.  The two subgroups’ decisions are not considered final until they have been voted upon by the full NAIC Executive Committee and Plenary.  While one subgroup’s work has been completed, another critical piece remains preliminary. Once finalized, the NAIC will submit its recommendations to the federal Department of Health and Human Services, which will certify the methodology.

The project to develop a standardized methodology has two parts.  The first was a project to create a supplemental health exhibit that all carriers writing large group, small group or individual insurance business will be required to complete and file with their domiciliary regulator no later than April 1 of each calendar year.  The second is the project to create the actual methodology calculation itself. The supplemental health exhibit, with some few exceptions, has been approved and is final.

The methodology and its interpretation, when finalized, will have significant impact on health plans and insurers writing coverage subject to the calculation.  For all policies in effect on January 1, 2011 the MLR requirements are 80% in the small group and individual market and 85% in the large group market.  Self-funded employer sponsored group health plans are not subject to the MLR.  Carrier ASO business, therefore, is not impacted.  Carriers whose business has already been priced, developed and approved for sale (where applicable) for 2011, then, should be aware that these rules will apply despite their not having been developed in time for incorporation into the policies they impact.

Issues that the NAIC subgroups have considered and have not yet decided preliminarily include:

• The treatment of taxes – that is, whether the NAIC should adopt a literal reading of the PPACA statutes and permit the deduction of all state and federal taxes from premiums in the calculation, or instead, to severely limit the scope of the deduction;
•  The ultimate inclusion of expenses for implementation of ICD-10, calculated to run into multiple millions for many carriers between now and 2013 when the data collection methodologies involved are required to be operational;
• Treatment of coverage for expatriate citizens and their families.

Issues that the NAIC subgroups have decided on a preliminary basis, include the following.  Note that all are subject to change by the NAIC commissioners.  It also remains unclear whether HHS will accept the NAIC recommendation without change.

• How small blocks of business that do not reach statistical credibility will be treated in the calculations and what type of adjustments will be made for them;
• How rebates paid during transition years 2011 – 2014 will be treated;
• Whether there will be any transition to the 80%/85% MLR and if so, what it will look like;
• The scope of the calculation as applying only to small group, large group and individual major medical business;
• The definition of “quality” activities (with certain caveats, such as ICD-10 expenses, noted above) 
• The combination of entities within states for rebate purposes;
•  The ability of companies to pool claims
• The treatment of reinsurance and stop loss
• The appropriate run-out for claims experience; and
• How rebates should be reported and to whom.

Next Steps

The “preliminary resolutions” will be combined into a draft regulation which is anticipated to be released before the end of the month.  Upon its adoption by the subgroup members, both it and the preliminary resolutions upon which it is based will be referred to the NAIC’s Life and Health Actuarial Task Force, to the Health and Managed Care (B) Committee, and ultimately to the NAIC Executive and Plenary. This may occur as early as mid-October at the NAIC’s Winter meeting.

 Other Health Reform Issues of Note

• The NAIC Health and Managed care (B) Committee and its task forces and working groups are developing model legislation to implement the following PPACA provisions, among others:

             **        Pre-existing condition exclusion prohibitions for children under age 19;

             **        Utilization Review requirements;

             **        Grievance requirements;

             **        Lifetime and Annual Limits restrictions;

             **        Preventive Services requirements;

             **        Rescission prohibitions;

             **        Rate review and transparency standards;

             **        Health Insurance exchanges; and

             **        Standardized definitions and terminologies

While much has been written about health care reform, there has been little discussion on the impact these reforms, particularly the immediate reforms, will have on employers, both large and small. The primary focus has been on the implications for insurers – from executive compensation restrictions to medical loss ratios to benefit decisions. But many provisions of health care reform will impact not only the plans and the benefits they provide, but also employers, and the benefit plans they are able to provide to their employees.

This article takes a look at the provision of the health reform bill that impact self-funded employer-sponsored plans, and will examine what kind of changes these provisions will require for employer health plans.

Published: September 15, 2010, Bureau of National Affairs, Inc. (BNA), ISSN 2154-8986

Health care coverage as we all recognize it today will profoundly change over the course of the next few years. This means that the business of deciding how best to provide health care coverage to employees and their dependents, and the business of deciding whether to provide health care coverage at all will change just as profoundly. Historically, the federal government has played a minor role in issues relating to commercial health insurance, limiting itself primarily to the areas around the Medicare and Medicaid programs and the State Children’s Health Insurance Program. This was a rational limitation, given that the government was making decisions about the scope of the services for which that it was willing or able to pay, and the rules for obtaining those payments. With passage of the federal health care bill, titled “The Patient Protection and Affordable Care Act” or “PPACA” the landscape changes radically as the federal government takes a much more robust role in the private marketplace, usurps decisions traditionally made by state legislators or large employers, and sets up what could be a collision course between state and federal regulators with respect to rate regulation and solvency.

What’s an Employer to do?

PPACA contains a controversial “individual mandate” — that by 2014 all individuals over a certain income threshold must purchase insurance either individually or through their employers or face a financial penalty. Employers will face a similar choice – provide insurance to their employees or pay a penalty. What that coverage is, and how much it will cost in comparison to the penalty will in large part drive the employer decision to pay or provide coverage. Also in 2014 a number of new requirements will become operational and will have a profound impact on the cost of financing health care, either through an insurer or through self-funding coverage. It is, of course, unclear precisely how much employers will be required to pay if they decide to provide coverage to their employees. Most analysts anticipate that premiums will rise steeply as the reform elements are phased in over the next few years. The “penalty” to employers for failing to provide coverage will be at or near $200 per employee. If the federal agency responsible for implementing health care reform, the Department of Health and Human Services (HHS), structures coverage options that cost significantly more than the penalty amount, it provides a disincentive for employers to continue health care benefits.

Exchanges Play a Big Role

Beginning January 1, 2014, individuals and small employer groups will have access to state-based exchanges, which will have a minimum of four choices of policy forms, depending on the level of coverage desired. This coverage will be “guaranteed issue,” meaning that individuals and small employers may not be turned down for coverage based on pre-existing conditions. The four “precious metal” policies, as they have been termed, have four levels of benefits in increasing value: bronze, silver, gold and platinum. The Secretary of HHS will make the decision what those four policy choices look like – that is, what benefits are “essential” or baseline for all policies. These baseline benefits will comprise the bronze plan, and the Secretary will also decide what benefits may be added on for the remaining three options.

Carriers then must decide if they will offer coverage only within the exchanges or within and outside the exchanges, where some flexibility in benefits may still be permitted. Employers, particularly in the small-employer market, then must decide if they will continue to offer employer-sponsored coverage, which they will choose from the options in the exchange or if, instead, they will simply pay the penalty and let their employees choose from the options for individual coverage in the exchange. By making the exchanges a one-stop-shop for guarantee issue coverage, PPACA has in some ways severed, or at the very minimum altered, the employer-employee relationship with respect to health benefits. Where historically employers provided health benefits in order to lure the best talent, that will no longer be necessary as the same plans and programs will be available to individuals and to groups. It is possible that employers – particularly smaller employers – will do the math and decide that it is economically beneficial to give employees a one-time raise and pay the annual penalty rather than to commit to providing increasingly more expensive health benefits. How the exchanges are structured, and how and by whom they are regulated and operated, will have a critical, but as yet unknown, impact on these decisions.

Large Employers have more options.

In the large employer market, the calculus of penalty versus benefits will differ due to the size of the operation and the design of the workforce. Health plans serving the large employer market may expect those employers to shift their employees into self-funded plans rather than limit their options to the exchanges and to avoid the most onerous of the reform provisions. Those wishing to grandfather existing insured coverages may find that the minimum loss ratio provisions and the overly rigid regulations recently released by HHS make that impossible; a move to self-funding will be an attractive alternative. In addition, the National Association of Insurance Commissioners is in the process of drafting rules that will implement the mandatory minimum loss ratio (MLR) of 80 percent for policies issued in the individual and small group markets and 85 percent for large group policies. As these rules are crafted, employers may find that they foreclose carriers’ ability to provide many of the programs that employers have historically wanted, such as workplace wellness, disease and formulary management, and drug safety and compliance programs in an insured environment. Self-funded plans will not operate under these restrictive and harsh requirements, and companies will be able to provide wellness incentives and structure their benefits payments with significantly more flexibility than will be permitted under the HHS rules for the commercial insurance market.

Conclusion – Changes on the Horizon Need Careful Consideration

The new federal requirements change the benefits that are going to be available in all insured markets, and for the first time, reach in to the self-funded market as well. PPACA tasks the NAIC and the Secretary of HHS with developing standardized benefits forms and rate disclosure forms. The loss ratio requirements will severely limit carrier ability to provide “quality” programs, fraud control, or coordinated care. In addition, from a carrier perspective, it is unclear how deeply the federal regulators will dive into the regulation of solvency and rates. The idea of “unreasonable” rate review oversight is completely new and not at all understood. Both the plans, and their counsel, will need to be prepared to pivot between oversight at the state and at the federal level, and the very real possibility that both will attempt to exercise authority simultaneously. When these quite radical changes are fully implemented health plans and the employers who purchase their products will face unprecedented challenges and will need to carefully consider the most appropriate way to structure benefit plans in a swiftly changing environment.