Medical-Loss Ratio (MLR) Rebates: Use 2012 Open Enrollment to Prepare for Future Rebates

August 16, 2012


The Patient Protection and Affordable Care Act requires health insurance companies that do not spend at least 85 percent of group health insurance premiums on health care to pay rebates to policyholders. The first round of these “medical-loss ratio” (MLR) rebates was paid August 1, 2012. The 2012 MLR rebate may have been unexpected for many employers. However, as explained below, employers should consider the possibility of future rebates in preparing plan documents and communications for the upcoming open enrollment season.

As background, when an employer sponsors an insured group health plan (including an HMO), the employer is typically the policyholder. If there is an MLR rebate under such a policy, the insurance company sends the rebate check directly to the employer. The employer is obligated to apply rules under the Employee Retirement Income Security Act (“ERISA”) to determine how the rebate is used. In some instances, the rebate must be used for the benefit of employees (for instance, through a reduction of employees’ premiums); but, in other instances, the employer is itself permitted to retain the rebate.

(Although our experience suggests that the employer is typically the policyholder, that is not always the case. If a plan or a trust holding assets of a plan is the policyholder, then the employer generally has no right to retain any portion of the rebate.)

Under guidance issued by the United States Department of Labor,[1] whether an employer (as policyholder) is permitted to retain a rebate depends on the terms of the plan documents and the employer’s and employees’ “understandings and representations.” Because 2012 was the first year for rebates, many employers’ existing plans and enrollment materials have not expressly dealt with rebates. If existing documents and communications do not expressly deal with rebates, a careful reading is needed to determine an employer’s obligations with respect to the 2012 rebate.

Although it is too late to amend plan documents to affect the allocation of the 2012 rebate, as part of their upcoming open enrollment period for 2013 coverage, employers should consider amending their plan documents and enrollment materials to expressly permit the employer to retain future rebates. For example, plan documents and enrollment materials might include provisions similar to the following:

“Participants in the plan are expected to pay a fixed amount as their share of the cost of health care coverage, and the company is responsible for paying any additional costs of coverage. As a result, any rebates, refunds or similar distributions paid by the insurance providers, as a result of the provisions in the Patient Protection and Affordable Care Act or otherwise, will be retained by the company.”

Of course, the appropriate wording of plan documents and communications and their effect on any employer’s ability to retain any rebates depends on each employer’s particular circumstances. We would be pleased to help our clients address this issue.

[1] DOL Technical Release 2011-04.