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New Medical Loss Ratio Rules Impact Employers with Fully Insured Health Plans

Employee Benefits Law Alert John L. Barlament

The Centers for Medicare & Medicaid Services ("CMS") issued new regulations providing final medical loss ratio ("MLR") rules. The new rules are similar to the prior rules: They require insurers to spend a certain portion of revenue on health benefits and other approved items. The new rules, along with new Department of Labor ("DOL") guidance, provide detailed requirements for what employers should do when they receive MLR-related rebates from insurers. These new rules only apply to fully insured health plans, not self-funded health plans.

CMS has previously provided some relief from the MLR rules for "mini-med" and expatriate plans. However, the relief for mini-med plans is phasing out and will be eliminated. CMS expects that mini-med plans "will cease to exist," apparently starting in 2014.

Overview of MLR Rules. The health care reform law, the Patient Protection and Affordable Care Act (now called the "ACA" by regulators) requires health insurers to follow the MLR rules. The MLR rules require insurers in the large group market (usually 100 employees, although a state may have a 50-employee cutoff until 2016) to spend 85 percent of their premium revenues on medical care and quality improvement activities. Insurers in the individual and small group market need only spend 80 percent (largely because administrative costs are higher in these markets than the large group market). Some expenses (such as broker commissions) are not included as part of medical care and quality improvement.

Effective Date. The CMS rules are effective January 1, 2012. The DOL guidance (discussed below) appears to be effective immediately. As a practical matter, the guidance will affect an employer when the employer first receives an MLR-related rebate. The first set of rebates (relating to the 2011 MLR reporting year) must be distributed from insurers by August 1, 2012.

Calculation of MLR Figures. In early 2012, insurers will gather their 2011 claims information to determine if they satisfied the MLR rules for 2011 (called an MLR "reporting year"). This information will be submitted by the insurers to CMS. The claims information is determined on an aggregate basis for each insurer, although the data is calculated separately across an insurer's different markets (large group, small group and individual) and different states in which the insurer operates. An insurer's MLR figure is not based on the experience of a single employer.

Who Will Receive the Rebate? By August 1, 2012, insurers who did not satisfy the 85 percent / 80 percent MLR rules in 2011 must provide a rebate to the "enrollee." An "enrollee" will usually be the employer who sponsors the health plan. Special rules may apply where the employer does not own the policy or for multiemployer plans or MEWAs. Insurers must provide a notice, usually to the employer, of this rebate.

Both the CMS and DOL guidance note that some portion of the rebate must be used to benefit participants, while some portion perhaps could benefit only the employer. This proportion is based on the amount paid by the employer compared to the amount paid by the participants. Note, though, that in some situations (such as when the full premium was paid from a trust), the entire amount may need to be used to benefit participants.

An example of this "split" between employer and participant contributions is as follows. Suppose an employer's rebate for the 2011 MLR reporting year is $10,000. The employer paid 60 percent while the employees paid 40 percent of the health plan premiums. The employer usually can retain $6,000 for its own uses, while $4,000 usually must be used to benefit participants.

Note that the MLR reporting year is based on a calendar year, while employers may operate their plans on a non-calendar year basis. In addition, employers may change the required employee contributions during the plan or calendar year. The new guidance is not clear on the impact of these variables when determining the "split" between employer and employee contributions.

Use of Rebate Depends on Type of Plan and Sponsoring Employer. Employers have options for how to use funds to benefit participants. The options for employers will vary, depending on whether the employer's plan is subject to ERISA. In addition, for non-ERISA plans, the CMS guidance distinguishes between governmental plans and non-governmental plans (such as certain church plans). The attached Exhibit A notes the various available options. However, employers should also review the governing documents (such as a plan document, summary plan description or insurance policy) to determine whether they contain other restrictions.

Other Concerns. The rebate raises other concerns for employers. For example, if an employer receives the rebate, the rebate may be a "plan asset" that should be held in trust. DOL Technical Release 2011-04 provides relief from the trust requirement, but only if the rebate is used within three months of the employer receiving the rebate. Employers will likely want to closely monitor this three-month "window" to ensure the funds are used in that time.

The new DOL and CMS guidance does not address other possible concerns. For example, if the rebate is used to reduce premiums, will this also cause a change to the COBRA rate the employer charges? If so, as of what date?  Also, are there any potential state law concerns or limitations that could also apply in addition to these new federal requirements?

Special MLR Calculation for Mini-Med and Expatriate Plans. Special, less-restrictive MLR rules apply to mini-med plans (those with a total annual limit of $250,000 or less) and expatriate plans (which generally cover employees working outside their country of citizenship). This is accomplished through a mathematical adjustment in the MLR calculation, where the total amount paid for health care quality improvements is multiplied by a factor (currently 2.0) but only for mini-med and expatriate plans.

For mini-med plans, this factor gradually decreases from 2.0 in the current year, to 1.75 in 2012, 1.50 in 2013 and 1.25 in 2014. According to CMS, this reduction in the factor, along with the ACA's prohibition on dollar-based annual and lifetime limits for essential health benefits, means that mini-med plans "will cease to exist," apparently in 2014. The factor does not decrease for expatriate plans, so those plans are expected to continue after 2014.

Links to Further Guidance. The CMS fact sheet describing these new regulations is here: The CMS regulations will eventually be available through this website, although, as of the date of this client alert, the links are listed but not working: DOL Technical Release 2011-04 is found here:

Exhibit A

Employer Options for Use of Participant Portion of Rebate

Caution: If governing documents (e.g., plan, SPD or insurance policy) provide for particular result, employer may need to follow that result and may not have all the options noted below.


ERISA-Covered Plans (per DOL Technical Release 2011-04) Non-ERISA, Governmental Plan (per CMS regulations) Non-ERISA, Non-Governmental Plan (e.g., Church Plan) (per CMS Regulations) Reduce Participant Premiums? Yes. Fiduciary decision whether to track participants with rebate (i.e., only provide premium discount for participants who were in plan during year which relates to rebate).

Apparently could be used in current year or future year, but guidance unclear.

Yes. Must be used to benefit participants who are enrolled during year in which rebate is received.

Only possible to use in future year. Unclear if new participants in future year can receive reduced premium.

Yes, if insurer and employer agree in writing to the use. Must be used to benefit participants who are enrolled during year in which rebate is received.

Only possible to use in future year. Unclear if new participants in future year can receive reduced premium. Provide Benefit Enhancements? Yes. Not specifically allowed. Not specifically allowed. Return in Cash to Participants?

Yes. Fiduciary decision and all factors should be considered.


May be only option if plan has terminated.


Technical Release unclear if cash amount can be paid to all current participants or only those who were in plan during year which relates to rebate.

DOL Technical Release does not address tax or withholding issues.

Yes. Must be used to benefit participants who are enrolled during year in which rebate is received.

CMS guidance does not address tax or withholding issues.

Yes, if insurer and employer agree in writing to the use. Must be used to benefit participants who are enrolled during year in which rebate is received.


If insurer and employer do not agree on the use of the rebate, insurer must distribute rebate to participants in equal amounts.

CMS guidance does not address tax or withholding issues.

For more information contact the author of this alert, John Barlament, at (414) 277-5727 / [email protected]. You may also contact any of the following Quarles & Brady employee benefits attorneys: Marla Anderson at (414) 277-5453 / [email protected]; Amy Ciepluch at (414) 277-5585 / [email protected]; Sarah Fowles, at (414) 277-5287 / [email protected]; Angie Hubbell at (312) 715-5097 / [email protected]; Paul Jacobson at (414) 277-5631 / [email protected]; David Olson at (414) 277-5671 / [email protected]; Robert Rothacker at (414) 277-5643 / [email protected] or your Quarles & Brady attorney.

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