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What Must Employers Do Upon Receiving a Medical Loss Ratio Rebate

July 30, 2012


The Affordable Care Act requires an insurance carrier to rebate part of the premiums it receives to employers or other policyholders if the amount the carrier spends on health care costs and quality improvement activities for a year is less than the medical loss ratio ("MLR") standards prescribed under the law. For large employer plans, the ratio is 85 percent. Stated another way, no more than 15 percent of premiums may be spent on administrative costs, such as salaries, sales or advertising. Therefore, if an insurance carrier spends only 80 percent of its premium dollars in the large employer market for a calendar year on health care and health improvement activities, then it must rebate 5 percent of the premiums to its policyholders.

The law requires that the rebate pertaining to 2011 premiums be paid to employers and other policyholders by August 1, 2012, or be applied toward health insurance premiums otherwise payable by the policyholders on or after August 1, 2012.

The Department of Labor has issued guidance as to the manner in which the MLR rebates are to be handled, including in regard to the typical health plan arrangement by which covered employees pay a portion of the cost of their coverage on a pretax, Section 125 basis. This guidance is outlined below.

  1. Ownership of Rebates. If the provisions of the insurance policy and plan document can be best read to mean that the employer has ownership rights to insurance dividends, rebates and the like, then the employer is allowed to keep the full amount of the MLR rebate. Most insurance policies and group health plan documents are silent in this regard. As such, an employer typically would not be able to claim ownership of the entire amount of the rebate. Consequently, the employer would be permitted to retain its share of the rebate, but must apply the remainder for the benefit of covered participants.

  2. Multiple Insurance Policies. If an employer maintains multiple medical insurance programs (such as an insured PPO, an HMO and a self-insured plan), the rebate must generally be used for the benefit of the employees covered under the particular insurance policy for which the rebate was received.

  3. Classes of Employees to Benefit. An employer is not required to apply the rebate only for the benefit of employees covered under the policy for the year for which the MLR relates (i.e., 2011). For example, it could apply the rebate:

    • Only to employees covered in 2011, and who remain covered in 2012; or
    • To all employees participating in 2012, even if they were not participants in 2011.

  4. Method for Allocating Rebate. The amount of the rebate is to be split between the employer and participants. The portion to be used for the benefit of the employees is generally determined by reference to the employees' share of the premiums paid during 2011.

    For example, if employees must pay 25 percent of the total premiums charged to the employer, then 25 percent of the premium must be applied for the benefit of the employees.

    More typically, the employer will set a flat premium rate for employees, and pay the remainder. In that event, an employee's share is based on a denominator: the numerator of which is the total amount paid by the employee for the year at issue (2011), and the denominator of which is the total premiums paid for the year.

  5. Application of Rebate. The final decision to be made by the employer is how to apply the employees' share of the rebate. As a practical matter, an employer has two options:

    • Pay the rebate to members of the eligible class in cash (as additional taxable wages); or
    • Reduce the amount of the covered employees' health insurance premium payments for the remainder of 2012.

  6. Treatment of Small Rebate. As a matter of administrative convenience, an employer that receives a small rebate is not required to directly provide employees with an allocable share of such amount. Instead, the employer may elect to use the employees' rebate for the benefit of plan participants in some other manner, such as by means of enhancements to a wellness program.

For further information or questions regarding an employer's obligations in regard to a medical loss ratio rebate, please contact the Schwabe attorney with whom you work or Wally Miller at 541-686-3299 or