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Employers, Insurers Face New “Reinsurance” Fee of $63 Per Covered Life, Among Other Changes

Employee Benefits Law Update John L. Barlament

On December 7, 2012, the Department of Health and Human Services ("HHS") proposed regulations which would impose an estimated fee of $63 per covered life under an employer's major medical health plan (the "Reinsurance Fee" or "Fee"). The proposed regulations also make other changes, most of which are applicable to insurers.

Purpose of Reinsurance Fees. Beginning in 2014, certain health insurance issuers in the individual and small employer markets will become subject to new restrictions on how they price health insurance and the conditions under which they provide the insurance. These additional risks could cause some insurers to cover higher-risk populations and could adversely affect insurers' financial situation. The Affordable Care Act ("ACA") provides temporary "reinsurance" payments to insurers who cover these higher-risk populations. Unfortunately for employers, the reinsurance payments will be funded through a "reinsurance" fee, payable by employers.

Fee Applies for Limited Time. The Reinsurance Fee only lasts for three "benefit years" - 2014, 2015 and 2016. (A benefit year is a calendar year and is not based on a health plan's specific plan year.) The fee will collect approximately $10 billion in 2014; $6 billion in 2015; and $4 billion in 2016. Thus, the amount employers must pay will decrease each year before the Reinsurance Fee expires.

When Fee Begins. By November 15, 2014, plan sponsors of a self-funded plan will submit plan enrollment information to HHS. The information will describe the average number of covered lives for the 2014 benefit year. Generally within 15 days of that submission, HHS will notify the employer of the amount which must be paid as a Reinsurance Fee. The employer then has 30 days to provide the Fee to HHS. Thus, employers generally will pay the first year's Reinsurance Fee by the end of 2014.

Expected Amount of Fee. For the benefit year 2014, HHS expects the per capita contribution rate to be $5.25 per month (or $63 per year). This amount is an estimate and could change when HHS publishes a final amount. In addition, a state may choose to establish a separate, State-based reinsurance program. If so, the state apparently may collect more than the HHS-provided per capita contribute rate. Thus, the per capita fee may be higher than $63 per person. HHS notes that ERISA-covered plans generally would not be subject to any such state fee, as ERISA would pre-empt such a state fee.

Who is Liable for Fee. With respect to a fully-insured policy providing major medical coverage, a health insurance issuer must pay the reinsurance fee. For self-funded major medical coverage, the ACA technically requires a third-party administrator ("TPA") to pay the fee, on behalf of the plan it services. However, the new regulations clarify that the self-insured plan is ultimately liable for the payment, not the TPA. TPAs are likely to be relieved with this interpretation (although TPAs were likely to "pass along" the fee to their employer clients if the fee had directly applied to TPAs). The regulations allow a TPA to pay the fee on behalf of the plan sponsor.

The Department of Labor ("DOL") has not issued formal guidance about whether the Reinsurance Fee may be paid from plan assets of an ERISA-covered plan. However, in a footnote HHS states that the DOL has indicated that such a payment would be a permissible plan expense because the fee is owed by the plan directly (as opposed to being owed by the employer who sponsors the plan).

Coverage Which is Subject to Fee. The Fee is applicable to "major medical coverage," which is defined by HHS - somewhat vaguely - as "health coverage." HHS lists several types of health coverage which will not be subject to the fee. The HHS guidance is summarized in this chart.

Benefit Type Does Reinsurance Fee Apply? Comments
Dental Plan Usually not. Many dental plans are "excepted benefits" under HIPAA. If so, the Reinsurance Fee does not apply. In addition, the preamble to the regulations states that "stand-alone dental coverage" is not subject to the fee. It is not clear if this provides an additional exception for employers whose dental plan is not an "excepted benefit." Excepted benefit test: If there is a separate fully insured contract for the plan, then it is an excepted benefit. For self-funded plans, the plan must meet two tests to be an excepted benefit. The participant: (1) must be able to elect the benefit separately; and (2) if elected, must pay an additional premium for the coverage. Thus, self-funded, 100 percent employer-paid dental plans do not qualify as an "excepted benefit," and the Reinsurance Fee will apply to such plans.

In both situations, coverage must be limited to treatment of the mouth.

Employee Assistance Program Usually not. The Reinsurance Fee does not apply if the program does not provide "major medical coverage." Note that this test is different from other tests (such as the patient-centered outcomes research trust institute fee ("PCORI Fee") regulations, which focus on whether the EAP provides "significant benefits in the nature of medical care or treatment"). A separate Quarles & Brady alert on the PCORI fee is found here.
Dread Disease Likely not. The preamble to the regulations states that the Fee does not apply to "dread disease" coverage. However, the regulations do not further use or define the term, so its exact scope is unclear.
Disease Management Program Usually not. The Reinsurance Fee does not apply if the program does not provide "major medical coverage." Note that this test is different from other tests (such as the PCORI Fee regulations, which focus on whether the disease management program provides "significant benefits in the nature of medical care or treatment").
Expatriate Policy / Overseas  Result varies. The Reinsurance Fee does not apply if the policy was not "written on a form filed with and approved by a State department of insurance." If the policy was written on a form filed with and approved by a State department of insurance, the policy would be subject to the Reinsurance Fee. Individual coverage for overseas travel is treated similarly.
Governmental Plan Generally yes, although some limited exceptions exist. Likely not. Coverage offered by an issuer under contract to provide Medicare, Medicaid or CHIP coverage avoids the Reinsurance Fee. Similarly, federal or state high-risk pools avoid the Fee. The fee generally applies to governmental plans covering employees.
Health FSA No. Unlike tests in other situations (such as the PCORI Fee, which examines whether a Health FSA is an "excepted benefit"), the exclusion for Health FSAs appears to be categorical. That is, it does not appear to depend on whether the Health FSA is an excepted benefit.
Health Savings Account ("HSA") No. The high deductible health plan ("HDHP") relating to an HSA typically would be subject to the Reinsurance Fee.
HRA Results will vary. An HRA usually does not constitute an "excepted benefit" so that exception typically would not be available. However, no Reinsurance Fee applies if an HRA is "integrated" with a major medical coverage. Although several pieces of federal guidance discuss special rules for "integrated" HRAs, no guidance has yet defined the term.

A "non-duplication" rule can reduce (or eliminate) an amount owed with respect to an HRA, if the employer also maintains a separate self-insured health plan. The non-duplication rule is discussed below.

Prescription Drug Plan No. Coverage that consists solely of prescription drug benefits will not be considered "major medical coverage."
Hospital Indemnity Usually not. The preamble to the regulations states that the Fee does not apply to "hospital indemnity" coverage. However, the regulations do not further use or define the term, so its exact scope is unclear.
Medicare Secondary Payer Situations Sometimes. If an individual has both Medicare coverage and employer-provided group health coverage, the Fee applies only if the group health plan coverage is primary. If Medicare is primary (and the employer plan is secondary), the Fee does not apply with respect to that individual.
Stop Loss Policy or Indemnity Reinsurance Policy No. None.
Tribal Programs for Members Generally no. Health programs operated under the authority of the Indian Health Service are not subject to the Reinsurance Fee. In addition, a plan or coverage provided by an Indian Tribe to Tribal members, spouses and dependents (or certain others) in the capacity of the Tribal members as Tribal members is not subject to the Reinsurance Fee.

Although somewhat unclear, it appears that a Tribal plan covering employees would be subject to the Reinsurance Fee.

Vision Plan Usually not. Many vision plans are "excepted benefits" under HIPAA. If the vision plan is not an excepted benefit, the Reinsurance Fee would apply.

 
In addition, the preamble to the regulations states that "stand-alone vision coverage" is not subject to the Fee. It is not clear if this provides an additional exception for employers whose vision plan is not an "excepted benefit."

See above box, Dental Plan Comments, for "excepted benefits" test. Coverage must be limited to the treatment of the eye.
Wellness Program. Usually not. The Reinsurance Fee does not apply if the program does not provide "major medical coverage." Note that this test is different from other tests (such as the PCORI Fee regulations, which focus on whether the wellness program provides "significant benefits in the nature of medical care or treatment").

Amount of Fee. The Reinsurance Fee is determined on a yearly basis. The Fee is calculated by multiplying the number of "covered lives" by the "contribution rate" for the year for all covered plans. An employer will use one of four methods to calculate the number of "covered lives." The methods are similar - but not identical - to the methods provided under the PCORI Fee.

  • Actual Count Method - To calculate average covered lives using this method, add the total lives covered for each day of the first nine months of the benefit year and divide that total by the number of days in the first nine months of the benefit year.

  • Snapshot Count Method - To calculate average covered lives using this method, add the total lives covered on a date during the first, second or third month of each quarter of the first nine months of the benefit year, then divide that total by the number of dates on which a count was made. The same month of each quarter must be used (e.g., January, April and July). The date used for the second and third quarter must fall within the same week of the quarter as the corresponding date used for the first quarter. Note that this is slightly different than the PCORI Fee (which uses, for example, a 3-day requirement, rather than a "same week" requirement).
  • Snapshot Factor Method - The same as the Snapshot Count Method, but the number of covered lives will be based on whether only self-only coverage is offered. If only self-only coverage is offered, the number of lives covered equals the number of participants in the plan. In most situations, of course, an employer also offers family coverage. If such non-self-only coverage is offered, an employer also adds to the self-only participants a number to reflect those with other coverage. That number is the number of participants with such coverage, multiplied by 2.35.
  • Form 5500 Method - Under this method, the average number of covered lives is determined based on the number reported on the Form 5500 for the "last applicable time period" (a term which is not defined). The method for calculating the average varies, depending on whether the plan offers only self-only coverage or some other level of coverage (such as family coverage).

Special Rule for One Plan with Fully Insured and Self-Funded Options. If an employer offers a single plan with both fully insured and self-funded options, the employer must use either the Actual Count or Snapshot Count Method. The other two methods (Snapshot Factor Method and Form 5500 Method) are not available.

Multiple Plan Rule. Just as the PCORI Fee contains a "non-duplication" rule, the Reinsurance Fee contains a similar "multiple plan" rule. If a plan sponsor maintains two or more self-insured group health plans (including one or more group health plans that provide health insurance coverage) that collectively provide major medical coverage for the same covered lives, then the multiple plans are treated as a single self-insured group health plan for Reinsurance Fee purposes. Special rules apply when determining the number of covered lives in this situation. In addition, the employer must provide a report to HHS specifying the counting method the employer used and the names of the multiple plans which are being treated as a single plan. (The actual process to provide this information to HHS has not yet been specified.)

Record-Keeping Requirements. Future HHS guidance will specify what data must be submitted to HHS to verify that the employer's calculations are accurate.

Changes Other Than Reinsurance Fee. Most of the additional items from the regulation will primarily affect insurers. For example, the new regulation provides details about temporary risk corridors, permanent risk adjustment programs and how premium tax credits and cost-sharing reductions will apply to certain insurers.

SHOP Changes. Of more interest to small employers will be additional details on the Small Business Health Option Program ("SHOP"). The SHOP will allow small businesses to participate in an exchange. The new regulation provides details about some SHOP requirements, such as who is a "small employer" and how "full-time employee" will be defined. (The SHOP regulations generally incorporate the definition of these terms from the Pay or Play Rule.)

Further Guidance. The regulations can be found here. The Quarles & Brady PCORI fee alert can be found here.

For more information contact the author of this alert, John Barlament, at (414) 277-5727 / john.barlament@quarles.com. You may also contact any of the following Quarles & Brady employee benefits attorneys: Marla Anderson at (414) 277-5453 / marla.anderson@quarles.com; Amy Ciepluch at (414) 277-5585 / amy.ciepluch@quarles.com; Sarah Fowles at (414) 277-5287 / sarah.fowles@quarles.com; Angie Hubbell at (312) 715-5097 / angie.hubbell@quarles.com; David Olson at (414) 277-5671 / david.olson@quarles.com; Robert Rothacker at (414) 277-5643 / robert.rothacker@quarles.com or your Quarles & Brady attorney.