As a part of the Affordable Care Act, health insurers providing coverage that do not meet the medical loss ratio (MLR) must provide an annual rebate to each enrollee under such coverage, on a pro-rata basis.
The (MLR) provision is ensuring that insurance companies provide consumers value for their premium dollars.
The MLR is calculated by dividing the medical expenses of the carrier’s segment by the net earned premiums. Medical expenses include claims and activities to improve health care quality, such as efforts to improve patient safety.
Net earned premiums include premiums paid by the policyholder minus taxes, licensing and regulatory fees. The MLR threshold for large groups (51+ benefits eligible employees) is 85 percent and the threshold for small groups (50 or fewer benefit eligible employees) is 80 percent.
On December 7, 2011, the Department of Health and Human Services (HHS) issued final rules on the calculation and payment of MLR rebates to health insurance policyholders. Over the past few weeks, the health insurers have begun to issue the rebate checks.
Under the new health care law, rebates must be paid by August 1 each year. As a result, over 12 million Americans will see one of the following:
- Rebate check in the mail
- Lump-sum reimbursement to the same account that was used to pay the premium if it was paid by credit card or debit card
- Direct reduction in their future premiums
- Their employer providing one of the above rebate methods, or applying the rebate in a manner that benefits its employees
Consumers in every state will also receive notifications from their insurance company about the medical loss ratio rebates.
Expected Rebate Amounts
Americans covered by insurance companies that failed to meet the MLR standard will receive an average rebate of $151 per family across all markets.
The average rebate per family is expected to be $152 in the individual market, $174 in the small group market (which is generally insurance provided through small employers), and $135 in the large group market.
The states with average rebates above $500 per family are: Vermont ($807), Oregon ($777) and Indiana ($503) in the large group market; Georgia ($811), Ohio ($783), New York ($632), Alaska ($622), and Illinois ($551) in the small group market; and Mississippi ($651) and Alabama ($582) in the individual market.
Approximately 66.7 million consumers are insured by an insurance company that provides the required value for their premium dollars.
This means that a large majority of consumers are insured by companies that meet or exceed the MLR standard: 62% of consumers in the individual market; 83% in the small group market; and 89% in the large group market.
Delivery of Rebates
Individual market subscribers will get their rebates directly from their insurers, either as a check or as a premium credit applied toward the current year’s premiums.
Rebates in the small and large group markets generally will be returned to employers rather than to the employees insured directly. These rebates are required to be used to benefit employees to an extent at least proportional to the employee’s share of premium payments.
For example, if health insurance premiums are split evenly between the employer and employee, then employers are required to return at least 50% of the rebate to their employees. The employer can return this by either a check or as a credit toward the employee’s premiums.
Insurers that are not required to pay a rebate for 2011 are required to notify their subscribers that they met the MLR standard. This notification must be included with the first plan document the insurer provides to the subscribers after July 1, 2012.
To view frequently asked questions and answers from the IRS on the proper tax treatment of the rebates, please click here.
Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.
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