Medical Loss Ratio Rebates: Who Gets the Cash?

In early August 2012, some U.S. employers with fully insured employee health benefit plans received a medical loss ratio (MLR) rebate. These rebates were mandated under the Patient Protection and Affordable Care Act (PPACA) whenever health insurers do not spend at least a certain percentage (generally, 80 percent to 85 percent) of the prior year's health insurance premiums on health care services. The rebates received in August 2012 cover premiums collected for the 2011 plan year.

In June 2012, the U.S. Department of Health and Human Services announced that the MLR rebates paid out this year will total $1.1 billion and affect 12.8 million health plan participants. As of September, employers that are eligible for this rebate should have received the rebate check itself as well as a letter from their insurers letting them know the rebate is coming.

Once employers receive these rebates, they must decide what they are required to do with those funds and what options they may have. However, employers must act quickly because they only have 90 days to complete their handling and any distribution of the rebate.

In general, the amount of these rebates, particularly when calculated on a per-participant basis, are not large and are often in the range of $20 to $30 per participant. Some employers would just as soon skip this process altogether. "Just about everybody that I am working with wishes that they hadn't received a rebate because the amounts generally are relatively small and the effort involved in handling the rebate is probably greater than the rebates are worth," said Rich Stover, a principal in the Health & Productivity Practice at Buck Consultants in New York. For example, many larger employers received rebates for plans with limited enrollment in specific geographic areas.

The good news is that employers have some leeway when it comes to deciding how to distribute these funds. For example, if tracking down and cutting checks for former employees is prohibitively expensive, employers could decide to limit the rebate to current employees only. "My interpretation of the [available] guidance is that the Department of Labor does not want employers to have to spend hundreds of dollars to give someone a $20 rebate," says Heather Abrigo, counsel at law firm Drinker Biddle & Reath in Los Angeles.

Is the Rebate Part of Plan Assets?

When it comes to deciding how to distribute these rebates, the first question to ask is whether the rebate is considered part of the health insurance plan's assets. The plan document and the insurance contract may contain language explaining what is and is not a plan asset. "Look at the group insurance policy to see if it is in the name of the employer or if it is in the name of the group health plan," said Abrigo. "If it is in the name of the group health plan then the rebate is considered a plan asset." If the rebate is considered a plan asset, then it is important to remember that all plan assets must be used solely for the benefit of the plan participants.

If the plan document does not define plan assets, employers can move on to determining how much of the rebate, if any, should be attributed to employee contributions. In general, a rebate on any amount of health insurance premiums paid by the employer is not considered plan assets, while a rebate of any amount of health insurance premiums paid by employees is considered plan assets. Here are three potential scenarios:

1. If the employer paid the entire premium with no contributions from employees, then the rebate is not part of plan assets and the employer can keep the entire rebate.
   
2. If employees covered the entire cost of their health insurance premiums, the entire rebate would be considered plan assets and must be used for the sole benefit of the participants.
   
3. If employees contributed a portion of their health insurance premiums, employers need to determine how to apportion the amount of the rebate to be used for the sole benefit of the participants.

These are complicated decisions that impact an employer's fiduciary duty as a health insurance plan sponsor, so employers should contact legal counsel before making any final decisions.

Communication Is Key

No matter what approach employers use once they receive a rebate, they must communicate their intentions to employees. Each year, prior to the August deadline, insurers are required to send a letter to employees covered under the plan letting them know about the rebate. After receiving these annual notifications, employees are likely to contact their HR and benefit representatives asking about the rebates and amounts (if any) involved.

If the employer decides not to issue rebate checks to individual employees—for example, because the amounts are too small to justify the cost—it is important for employers to communicate that decision to employees and the reason for it as soon as possible. In these situations, "employees are expecting to get a rebate and so employers can't just ignore it," said Abrigo.

In some cases, employers are doing more than required when it comes to these rebates. "Some employers are not keeping any of the rebate money themselves even if they are entitled to it," said Stover. "Instead, they are giving it all back to employees because they want to avoid hassles and questions from employees."

In addition, the rebate does not have to be distributed in check form. "Employers could use the rebate to do some sort of premium holiday or benefit enhancement as long as they are using the money on behalf of employees," explained Mike Thompson, a principal with PricewaterhouseCoopers Human Resource Services in New York.

Even if employers did not receive a rebate this year, the MLR rebates will be an annual rite for insurance companies that do not maintain an appropriate MLR in their administrative operations. Therefore, employers should think through how they will handle a rebate situation in the future and take steps to improve the process if they have received a rebate this year.

Joanne Sammeris a New Jersey-based business and financial writer.