The Affordable Care Act (ACA or the “Act”) imposes two new temporary fees with respect to group health plans that go into effect in the near future:
- a fee to fund comparative effectiveness research that, in the case of calendar year plan years, is first due for plan years starting on or after January 1, 2012; and
- starting in 2014, a “contribution” in an amount to be determined by the Department of Health and Human Services (HHS) and collected at the state level that is part of the temporary reinsurance program established under ACA to help ensure the financial stability of the individual insurance market as further reforms go into effect (including the guaranteed issue requirement) and the Affordable Insurance Exchanges (“Exchanges”) become operational.
The entities subject to one or both of these fees are health insurers, self-insured health plan sponsors, and third-party administrators. These fees may apply to certain group health plans that are generally exempt from the Act’s health insurance reforms, such as retiree-only plans. Final guidance on the fees has not yet been issued. As the details of these new fees begin to appear, this advisory discusses some key aspects that should help group health plan sponsors prepare accordingly.
A. New Fee to Fund the Patient-Centered Outcomes Research Institute
The Affordable Care Act created the Patient-Centered Outcomes Research Institute (the “Institute”), a non-profit organization to advance “comparative clinical effectiveness research,” and to provide information regarding the effectiveness, risks and benefits of various medical treatments. The Institute is to be funded in part by a new fee on health insurers and sponsors of self-insured health plans (the “CER Fee”). Although no guidance has yet been issued, in Notice 2011-35, the IRS requested public comments regarding how the fee will be determined and paid.1 The Notice provides some background on the fee and some insights into issues the IRS is considering.
Who Pays, How Much and For How Long?
The CER Fee is imposed on both health insurers (including HMOs and similar arrangements) and employers and other sponsors of self-insured health plans (including governmental plans).2 Exempt from this fee are policies or plans under which substantially all coverage is of “excepted benefits,” as defined under HIPAA,3 such as stand-alone vision and dental coverage. Even though stand-alone retiree health plans are generally exempt from the Act’s health insurance reforms, stand alone retiree plans that are not otherwise an “excepted benefit” are subject to the CER Fee.
The fee applies for each plan year (policy year in the case of fully-insured plans) ending after September 30, 2012, but does not apply for policy or plan years ending after September 30, 2019. Thus, for example, if the plan year in the case of a self-funded plan is the calendar year, the fee applies to plan years 2012 through 2018. For policy or plan years beginning in October or later months, the fee will apply even earlier. (For example, a November 1 – October 31 plan year means the fee will apply from November 1, 2011).
For the first year for which the fee is effective, it is $1 multiplied by the average number of covered lives. The rate of the fee increases to $2 for the next year and is indexed thereafter based on any increase in the projected per capita amount of National Health Expenditures as published by the HHS.
The topics IRS highlighted for comment in IRS Notice 2011-35 include the following:
- Average Number of Covered Lives. The fee is calculated by reference to the “average number of lives covered” under the policy or plan. With respect to health insurers, comments were requested on reasonable methods that may be used to determine the number of lives covered under the policy,4 and whether future guidance should provide a safe harbor providing that the IRS will not challenge the health insurer’s calculation if it is based on the number of lives reported to state insurance bureaus.
With respect to sponsors of self-insured health plans, comments were invited on how future guidance could reduce administrative burden by providing for reasonable methods to determine the number of average covered lives; whether future guidance should provide a safe harbor permitting plan sponsors to compute the number of average covered lives using a formula without actually counting dependents; and on formulas and factors that could be used to determine the number of dependents.
Of particular interest to the IRS at this point is whether the information necessary to determine the average number of lives covered will be unavailable for the first year for which the fee is effective—i.e., the first policy or plan year ending after September 30, 2012. Some plans, (e.g., nonexempt health flexible spending arrangements (FSAs) and health reimbursement arrangements (HRAs)) may not currently track dependent coverage to the degree necessary to calculate the fee with respect to covered individuals other than the participant.
- Health FSAs and HRAs. Benefits provided under a health FSA as described in Code § 106(c) (2) are “excepted benefits” and thus not subject to the fee on applicable self-insured health plans, if other group health plan coverage not limited to excepted benefits is made available and the maximum benefit payable is not more than two times the participant’s salary reduction election (or, if greater, $500 plus the amount of the salary reduction election).5 For health FSAs that do not qualify as an excepted benefit under this definition, comments were invited on the variations that exist and which types of health FSAs would nonetheless be excluded from the fee. This could be the case, for example, if the health FSA provided only benefits for vision or dental benefits.
It is important to note that while the exception covers most FSAs, those that do not currently qualify as an excepted benefit under the HIPAA portability rules (e.g., because other non-excepted benefit coverage is not available) will be subject to the new CER Fee unless relief is provided in future guidance. Comments were also invited on the type or types of HRAs that would be excluded from the fee because they are excepted benefits under HIPAA and the basis for such a conclusion. The IRS also requested comments on whether there are types of HRAs to which the fee should apply.
- Annual or Quarterly Reporting and Payment. IRS Notice 2011-35 indicates that future proposed regulations could (a) require each issuer and plan sponsor to report and pay the fee annually as opposed to quarterly, and (b) require the reporting and payment to occur on the same calendar date regardless of the applicable policy year or plan year. Comments were invited on this approach and possible alternatives.
B. New Required Contribution to Fund the Transitional Reinsurance Program
The Affordable Care Act provides that each state must establish a transitional reinsurance program to help stabilize premiums for coverage in the individual health insurance market during the first three years (2014-2016) of operation of the Exchanges.6 This is one of three risk-spreading mechanisms that are provided under the Act that together are designed to mitigate the potential impact of adverse selection and provide stability for health insurers that issue individual and small group health insurance policies. Adverse selection occurs when each new health insurance purchaser understands his or her own potential health risks better than health insurance issuers do, and health insurance issuers are therefore less able to accurately price their products. As described by HHS, the reinsurance program is designed to reduce the uncertainty of insurance risk in the individual market by making payments for high-cost cases. Theoretically, this will reduce individual market rate increases that might otherwise occur because of the immediate enrollment of individuals with unknown health status, potentially including those currently in state high risk pools.
The reinsurance program is funded by contributions imposed on health insurance issuers and thirdparty administrators with respect to insured and self-insured plans in the individual and group markets.
On July 15, 2011, HHS issued proposed regulations regarding the reinsurance program, including the contribution requirement.7
The Contribution Requirement
To fund the temporary reinsurance program, the Act contains a contribution requirement on health insurance issuers and on third-party administrators (TPAs) on behalf of self-insured group health plans.8 States are required to establish reinsurance entities that will be responsible for collecting the contributions. The aggregate contribution required to be collected for the program for all states is $10 billion for plan years beginning in 2014, $6 billion for plan years beginning 2015 and $4 billion for plan years beginning in 2016. In addition, an additional aggregate contribution of $2 billion for 2014, $2 billion for 2015 and $1 billion for 2016 is to be collected for deposit into the U.S. Treasury as general revenues. States may impose additional contribution requirements on health insurers under the program as well, such as to fund administrative expenses.
The Act states that the Secretary of HHS is to determine the amount that issuers and TPAs must contribute to the temporary reinsurance program, and that the contribution amount may be based on (1) the percentage of revenue of each issuer and the total costs of providing benefits to enrollees in self-insured plans; or (2) a specified amount per enrollee.
Under the proposed regulations, the amount collected from each contributing issuer and TPA will be calculated by reference to a national contribution rate that will be set forth by HHS in future guidance based on its estimate of total premiums in the fully-insured market and medical expenses in the selfinsured market.9
Under the proposed regulations, health insurance issuers and TPAs on behalf of group health plans will be required to submit contributions in a frequency and manner determined by the state or HHS—for each state in which the entity issues health insurance. Issuers and TPAs may be required to submit contributions on a monthly or quarterly basis starting in January 2014. If the state establishes or contracts with more than one reinsurance entity, the issuer or TPA will be required to make payments to each reinsurance entity that covers the geographic area in which the contributing entity issues health insurance. Each issuer or TPA will be required to submit data to substantiate its contribution amounts.
Will the Contribution Requirement Apply to All Third-Party Administrators?
One question that self-insured plans should pay close attention to is whether the TPA contribution requirement will be limited to health insurers providing TPA services (i.e., through an administrative services only (ASO) contract), or whether the contribution requirement will apply to all TPAs of selfinsured plans. The Act does not provide a clear answer.10 The proposed regulations appear to adopt the more expansive interpretation by defining the term “contributing entity” as “any health insurance issuer and, in the case of a self-insured group health plan, the third party administrator of the group health plan.”11 “Third party administrator” is defined as “the claims processing entity for a self-insured group health plan.” The preamble to the proposed regulations states that, if a self-insured group health plan processes its own claims, the self-insured plan will be considered the TPA. Under this interpretation of the Act, all TPAs of group health plans would be required to make the contribution— not just health insurance issuers providing TPA services. 10