Medical loss ratio (MLR) is the amount of premium dollars that an insurance company spends on health care quality rather than marketing, salaries, and various administrative costs. Under the Health Care Reform law, HMOs and insurers must now pay medical loss ratio rebates to policyholders if they do not meet MLR standards. For individuals and small groups, the standard is 80 percent. For large groups, it is 85 percent. These rebates are due by September 30 of each year and are based off of the previous year’s claims.
Medical loss ratio rebates apply only to insured plans and all funds are paid to the policyholder rather than the employees who are enrolled in the plan. The MLR provision of the Affordable Care Act applies to all licensed health insurers, including health maintenance organizations and commercial health insurers. It is important to remember that self-funded plans in which an employer or plan sponsor pays for health care benefits directly are not considered insurers. This means that employers who use self-funded plans are not subject to the MLR provision. Learn more about medical loss ratio rebates and why you should talk to a benefits consultant today.
How Are Medical Loss Ratio Rebates Determined?
The medical loss ratio provision was put in place to ensure that a minimum percent of health insurance premiums were being spent towards claims. It also ensured that health insurance companies were not overspending in other areas, such as on administrative expenses and profits. Medical loss ratio rebates are determined on a state-by-state basis. Rebates are not based on just claims for your own insurance policy, but rather on all of the claims and premiums for a group of policies issued by the insurance company in the previous year.
Who Receives Rebates Checks?
There are certain guidelines in place that dictate whether or not you will receive a MLR rebate. If the claims for all of the policies in your state that were similar to your size in the previous year were lower than the required medical loss ratio percent, you will receive a rebate. However, if the claims for all of the policies in your state that were similar to your size in the previous year were higher than the required medical loss ratio, you will not receive a rebate.
As health insurance premiums are based on the amount of claims that an insurance company expects to pay, variations in actual claims can result in you not meeting the MLR requirement. If this occurs, you will not get a rebate. If you have an individual policy and are found to be eligible for a medical loss ratio rebate, a rebate will be automatically sent to you. Medical coverage that is provided through an employer is typically sent directly to the employer, not the employee. In most cases, you will not know the amount of the rebate until you receive the check in the mail.
Are Rebates Taxable?
Many employers wonder if the MLR rebates they receive are actually taxable. In most cases, your rebates will be taxable if you received tax benefits after deducting the premiums you paid on your tax return or if you pay your insurance premiums using pre-tax dollars. However, this general rule of thumb can differ depending on your unique tax situation and business type. If you are not sure whether or not you need to report your rebate as income when you file your next tax return, speak with a benefits consultant or your tax preparer about your unique situation.
What Expenses Improve Health Care?
Medical loss ratio is calculated using a simple formula that divides claims plus expenses by the carrier’s premium income. There are a number of expenses that would be considered expenses that improve healthcare quality. This includes programs designed to help individuals manage serious illnesses, such as heart disease or cancer. It may also include proper discharge planning for hospitals to reduce the need for readmissions. Other expenses that may improve healthcare quality include activities that help to reduce the number of medical errors and improve patient safety. A health insurance company may also put health assessments as an expense when used to manage certain health conditions.
Do Subscribers Need Notification?
If a rebate is issued to a policyholder, the insurer must send written notices to all subscribers informing them that a rebate has been provided. It is the responsibility of the plan sponsors to answer any questions that subscribers may have about these rebates and to clarify whether or not the sponsor intends to share the rebate with the participants. In the same manner, if an insurer meets all MLR requirements, all subscribers must be notified that no rebate will be issued. These notices are typically included with the plan document that is provided to enrollees.
Regulations set by the Department of Labor state that insurers must pay any rebates owed to the participants of a group health plan to the plan sponsor. The portion of a rebate attributed to participant contributions is known as plan assets. If a plan sponsor paid the entire cost of the health care insurance, no part of the rebate would be considered plan assets and the amount in whole would be given to the employer. However, if participants of the plan paid the insurance entirely, the rebate would then be subject to plan asset requirements set by ERISA.
Contact a Professional Benefits Consultant
Not long after becoming effective in 2011, the Affordable Care Act set forth a MLR rule that required health care companies to spend a certain amount of their received premiums on health care services. When health care companies fail to fulfill MLR rules, they owe rebates to their insurers. If you expect to receive a medical loss ratio rebate from your health care company, you will need to consider how the rebate will be used and distributed. For more information about medical loss ratio rebates or how they work, contact a professional benefits consultant today.