A provision in the Affordable Care Act (ACA) requires insurers to spend a specified percentage of collected fully insured plan premiums on claims for those covered under the plan. For Small Group health plans and individual health plans, the Medical Loss Ratio (MLR) is 80%. That means the plan must spend at least 80% of all premium dollars on members’ medical claims and activities that improve the quality of care. Conversely, that also means that no more than 20% of the premiums collected can be spent on administrative costs, such as marketing, broker commissions, salaries, profits, etc. For large group health plans, the MLR is 85% — leaving 15% for commissions, administrative expenses, etc.
How MLR rebates work
If an insurer does not meet the required MLR for claims and activities to improve health care quality, the company is required to refund excess premium to policyholders in the form of a rebate. For group health plans, distributions are made to the employer sponsoring coverage. Insurers have until September 30th each year to distribute rebates on plans for the prior calendar year.
Who gets the rebate
According to the Society for Human Resource Management (SHRM) and the U.S. Department of Labor’s Technical Release on handling MLR Rebates, the distribution of rebates depends on who pays the coverage. If the employer pays the full cost, there is generally no portion of the rebate that’s payable to plan participants (members). If employees pay the full cost of their health insurance, the entire rebate goes to them, in most cases. If costs for coverage are shared, the rebate is often split between the participants and the employer, based on the percentage of the premium contributed by each. Or, it is used to enhance future benefits, or used to reduce impacted employees’ premiums. Counsel with an ERISA attorney is highly advised in this area.
Rebate distribution options
The Department of Labor (DOL) provides several options to employers for distributing rebates:
- Reduce subscribers’ portions of the annual premium for the subsequent policy year for all subscribers covered under any group health policy offered by the plan.
- Reduce subscribers’ portions of the annual premium for the subsequent policy year for only those subscribers covered by the health policy on which the rebate is based.
- Provide a cash refund only to subscribers who were covered under the group health policy on which the rebate is based. (This option is not recommended as it could create potential tax consequences depending on how participants paid the group health premium – and whether it was on a pre-tax or after-tax basis)
The law gives employers 90 days following receipt of a rebate to take action. It does not require employers to track down former employees for MLR rebates; however, COBRA participants must be included in the rebate distribution, if applicable.
It bears noting, according to the Kaiser Family Foundation, that if an employer’s total MLR rebate for its group health plan is less than $20, the insurance carrier is not obligated to process rebates due to the cost of the required administrative efforts against the nominal amount of the MLR rebate.
Depending on the amount rebated, your clients may want to solicit employee feedback about how they would like to see rebates used.
Rebate Calculator and other resources
Word & Brown has developed a proprietary MLR Rebate Calculator to help your clients calculate MLR payment disbursements for employers who want to refund employees directly. You’ll find the MLR Rebate Calculator in our “ACA Calculators” section in the Compliance Center on our website. The calculator is updated annually.
The rebates paid in 2021 for calendar year 2020 exceeded $2 billion nationwide; $95,372,541 was paid to California policyholders and $10,443,945 was paid to Nevadans, according to the Kaiser Family Foundation. Those amounts include individual, small group, and large group rebates.
Paul Roberts’s article, Medical Loss Ratio (MLR) Rebate Checks in 2021, may be of interest to you. Paul will author a 2022 update when information on MLR rebates for calendar year 2021 is available.
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