Medical Loss Ratio Rebates: Distributing Them Properly

While everyone seems to be talking about the constitutionality of the "individual mandate," there is another provision of health reform that has gone into effect and has seemingly flown under the radar: the medical loss ratio (MLR) rebate. Despite the fact that you may not be aware of this provision, the MLR rebate may affect you and your practice.

The MLR rebate provision essentially directs health insurers that cover you and your practice to spend at least 80 percent (85 percent for large group plans) of its adjusted premium revenue on healthcare claims and quality improvement. Consequently, your insurer can only spend a maximum of 20 percent of its premium revenue on things like marketing, administration, and profit. The first reporting year was 2011, so if your insurer did not meet these standards, your practice should have been issued a rebate on or before August 1, 2012.

The idea behind the MLR rebate is to reduce inefficiency and cut the overhead costs of insurance companies. This is an initiative that seems to make sense, as most of us would like to see our premium dollars go towards such things as quality measures and equal care standards, as opposed to executive bonuses and marketing schemes.

Although the idea behind the MLR rebate is generally agreeable, many questions arise when deciding what exactly to do with this rebate. If you are a physician acting as a policyholder of your practice’s medical plan, then you should have received the rebate directly from the insurer, and you have the freedom to do what you wish with your portion of the check. However, if your employees also paid a portion of their premium, then you are obligated to release a percentage of the rebate to them.

How the rebate is distributed amongst employees is conditioned upon whether your health plan is an Employment Retirement Income Security Act (ERISA) plan, a nonfederal governmental plan (i.e., state, municipal, or local governmental group health plan), or a church plan.

For ERISA group health plans, you must consider the portion of the rebate attributable to what your employees paid as plan assets and distribute them for the exclusive benefit of your employees who are plan participants.

This can be done in one of the following three ways:

1. Provide a refund check to each of the employees who were covered by the group health policy on which the rebate was based. The rebates can be divided evenly among employees or divided based on actual contributions to premiums.

2. Apply the rebate funds toward future premium payments, by decreasing the impacted employee’s salary contributions for a defined period.

3. Use the rebate to provide enhanced benefits for the participants. The term “enhanced benefit” is not explicitly defined, but is believed to involve either improving the group plan’s benefits or providing an improved health-related benefit to subscribers.

For state or local group plans and church plans, the rules are similar to the ERISA plan guidelines. You must allocate your employees’ premium share utilizing one of the following methods:

1. Reduce employee’s premiums for all members who, as of the date the rebate is received, are covered under any group policy offered under the plan.

2. Reduce employee’s premiums for members who, as of the date the rebate is received, are covered by the specific group policy offered under the plan

3. Provide a cash refund to employees enrolled in the group policy during the MLR reporting year.

There is no single way to handle these MLR rebates. However, it is important that you, as a policyholder, properly weigh the costs to the plan and the ultimate plan benefit as well as the interests of your employees. Be sure to talk with your advisor if you have questions, as I have only provided a very brief, and simple overview, of the rules.

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