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Another Day, Another (Health Care Reform) Dollar: The ACA’s Transitional Reinsurance Program

Already-weary sponsors of group health plans must now prepare to calculate and pay yet another significant fee resulting from health care reform. The Department of Health and Human Services (“HHS”) has issued proposed regulations regarding a “transitional reinsurance program” under the Affordable Care Act (“ACA”). This program, which is designed to help stabilize premiums for coverage in the individual health insurance market, will be effective from 2014 through 2016.

Proposed Fee Amounts

Fees to support this transitional reinsurance program will be assessed against both insured and self-funded group health plans. The total amount of fees to be collected over the three-year period is $25 billion. Of this amount, $20 billion will fund the reinsurance program, while the other $5 billion will be paid to the U.S. Treasury.

The guidance explains that the $5 billion payable to the Treasury equals the amount appropriated by the ACA to fund the Early Retiree Reinsurance Program, which began in 2010. That program, discussed in our May 2010 article, exhausted its $5 billion appropriation well before its scheduled end date of January 1, 2014.

The $25 billion contribution amount is significantly frontloaded. The goal is to raise $12 billion for the transitional reinsurance program during calendar-year 2014. Reaching this goal will require an estimated annual contribution of $63 per covered life. HHS will likely finalize this contribution rate near the end of the 2014 calendar year, when it can better estimate the number of covered lives for the year.

The annual contribution amounts for 2015 and 2016 decline to $8 billion and $5 billion, respectively. The annual per-covered-life contribution rates for the final two years of the program should therefore reflect similar decreases. Even so, these amounts are significantly higher than the Patient-Centered Outcomes Research Institute (“PCORI”) fees (also known as “comparative effectiveness” fees) discussed in our May 2012 article. Those PCORI fees start at only $1 per covered life per year. (The IRS issued final regulations regarding the PCORI fees last week, as well.)

Tax and ERISA Treatment

In conjunction with the proposed regulations, the IRS also issued FAQs confirming that the reinsurance program fees are tax-deductible by plan sponsors as ordinary and necessary business expenses. And unlike the PCORI fees, the Department of Labor has indicated that these reinsurance program fees are permissible plan expenses under ERISA. This is welcome news for sponsors of self-funded health plans.

Covered Lives

Sponsors of self-funded plans may choose from three different methods to determine the average number of covered lives. These “Actual Count,” “Snapshot,” and “Form 5500” methods were summarized in our May 2012 article discussing the PCORI fees payable by self-funded plans. Insurers of insured plans may choose from four different methods.

Contributing Entities

The ACA provides that health insurers and third-party administrators (“TPAs”) – designated as “contributing entities” – are responsible for paying the transitional reinsurance program fees on behalf of insured and self-funded plans, respectively. The proposed regulations clarify, however, that a self-funded, self-administered plan – with no TPA – will pay this fee directly.

Payment of Fees

HHS will collect the reinsurance fees on an annual basis. By November 15 of each year, the contributing entity must submit the number of covered lives subject to the fee for that calendar year. HHS will notify the contributing entity of the total fee to be paid within 15 days of the submission, or by December 15, if later. The contributing entity must then submit its payment to HHS within 30 days of receiving notice of the amount due.

Exempt Coverage

The proposed regulations clarify that the reinsurance fees apply only to major medical coverage, and not to “excepted benefits” (as defined under the HIPAA rules). Stand-alone dental and vision coverage, along with most health flexible spending accounts, are therefore exempt from these fees. Additionally, the guidance notes that health savings accounts (“HSAs”), health reimbursement arrangements (“HRAs”) that are integrated with major medical plans, and hospital indemnity coverage are exempt from the fees. The same is true for employee assistance plans, wellness programs, and disease management programs – but only if they do not provide major medical benefits. In the case of both HSAs and HRAs, however, the fees will generally be payable by the related health plan.

Also of note, the proposed regulations state that a group health plan will be considered major medical coverage – and therefore subject to the fees – only if the plan pays primary to Medicare. Consequently, if a plan is secondary to Medicare with respect to an individual, that individual need not be counted as a covered life for purposes of calculating the reinsurance fees.

HHS has asked for comments on the proposed regulations. The information provided in this article is therefore subject to change. Please contact any member of Spencer Fane’s Employee Benefits Practice Group for the most up-to-date information.