The Catch: MLR Refunds

See the post this week entitled “Guidance for handling your MLR rebate” for DOL technical guidelines on this:

Many small employers may get rebate checks as a result of the new federal medical loss ratio (MLR) rules, but they probably should wait before using the money to pay off their credit card bills and or buy a trip to Disneyland.

Ed Fensholt, a regulatory analyst at Lockton Companies L.L.C., Kansas City, Mo., says the MLR rebate program likely will lead to complicated questions about who owns the rebate money and what plan sponsors can do with the rebate money that comes to them.

Congress included the MLR provision in the Patient Protection and Affordable Care Act of 2010 (PPACA) in an effort to make plans more efficient. Plans can set premiums at whatever level they want, but they must spend at least 85% of large group revenue and 80% of individual and small group revenue on health care and quality improvement efforts.

The MLR rules took effect in January, and the first round of MLR rebates could go out in August 2012, Fensholt says.

If a health plan is governed by the Employee Retirement Income Security Act (ERISA), and the plan or trust is the holder of the health insurance contract, “the insurance policy is an asset of the plan and all of the MLR refund is a plan asset,” Fensholt warns.

He describes the following scenarios:

  • If the employer is the  contract holder, and plan documents say what happens to any refunds, the plan documents might control what happens.
  • If the plan documents are silent about the rebate issue, and the employer pays all of the health insurance premiums directly, then the employer will probably get to keep all of the rebate
  • If the plan documents are silent about rebates, and the employees pay 100% of the cost of the coverage, then the employees likely will get to keep all of the rebate money.
  • If the plan documents are silent about rates, and the employer pays a fixed percentage of the cost of coverage and the employees pick up the rest of the tab, then employer will get some of the rebate money and the employees will get the rest of the rebate money.

If part or all of a rebate becomes a health plan asset, the plan’s fiduciaries will “owe an obligation of prudence and fidelity to the plan’s participants,” Fensholt says.

Some fiduciaries may decide to let the plan participants split the rebate money, but others may reinvest the rebate money in the plan, he says.

In many cases, he says, complications could arise.

A health insurer may find that some plans owed MLR rebates have shut down, and some plans may find that rebates are attributable mainly to employees who have left the employers that sponsor the plans, Fensholt says.

“Each situation must be considered by the plan’s fiduciaries, within the factual context,” Fensholt says.