The Patient Protection and Affordable Care Act requires the Secretary of the Department of Health and Human Services (HHS) to establish a temporary “Early Retiree Reinsurance Program” (the Program). Although the Program was originally slated to start June 21, 2010, HHS recently issued interim final regulations (the Regulations) enabling the Program to commence on June 1, 2010. The Program will end on January 1, 2014.

The Program is intended to slow the decline in the number of employers providing health benefits to early retirees (i.e., retirees who are age 55 or older, but who are not yet eligible for Medicare). According to the Regulations, such retirees “often face difficulties obtaining insurance in the individual market because of advanced age or chronic conditions that make coverage unaffordable and inaccessible.”

To help combat this problem, the Program sets aside $5 billion to reimburse participating plan sponsors for a portion of the costs incurred in providing health benefits to early retirees and their eligible spouses, surviving spouses, and dependents (each, a Reimbursement Eligible Participant). Participating sponsors will be reimbursed for 80 percent of the costs of benefit claims of more than $15,000, but less than $90,000, incurred by a Reimbursement Eligible Participant in a plan year. Amounts reimbursed under the Program must be used to lower costs for the plan — either by reducing the plan sponsor's costs, or by reducing co-payments, deductibles, co-insurance, and/or other costs paid by plan participants (not just Reimbursement Eligible Participants).

Because reimbursements under the Program will be made on a "first come, first served" basis and are limited to the $5 billion set aside, interested employers should move quickly to apply for the Program.

Eligible Plans

The Regulations provide that sponsors of both self-funded and insured “employment-based plans” may be eligible to participate in the Program. Employment-based plans include group health plans maintained by private employers, state or local governments, employee organizations, voluntary employees' beneficiary associations (VEBAs), and multi-employer plans. The definition does not include federal governmental plans.

In order to participate in the Program, sponsors of employment-based plans must have in place or implement programs and procedures designed to generate cost savings with respect to plan participants with “chronic and high-cost conditions.” The Regulations define chronic and high-cost conditions simply as conditions for which applicable claims of $15,000 or more are likely to be incurred by a single participant during a plan year. The Regulations do not identify specific conditions that might be treated as chronic or high-cost conditions, noting that such conditions may vary significantly over geographic regions, age ranges, and so forth. The Regulations also do not specify what types of cost-savings programs and procedures must be in effect. This approach is intended to give plan sponsors greater flexibility to identify the chronic and high-cost conditions that are most prevalent in their own retiree population and determine the best method for generating cost savings.

Plan sponsors are not necessarily required under the Regulations to put new cost-saving programs and procedures in place just to participate in the Program — existing programs and procedures could be sufficient. Further, a plan sponsor need not put programs and procedures in place to address all possible chronic and high-cost conditions that may result in participant benefit claims exceeding $15,000. However, a plan sponsor must take a reasonable approach in determining which conditions it will address.

The Regulations contain the following example of a program or procedure that could be implemented to generate cost savings with respect to a chronic condition (in this case, diabetes):

[A] sponsor may determine that diabetes, if not managed properly, is likely to lead to claims in excess of $15,000 for a plan year for one plan participant. The sponsor may ensure implementation of a diabetes management program that includes aggressive monitoring and behavioral counseling to prevent complications and unnecessary hospitalization.

To combat a high-cost condition such as cancer, the Regulations provide that a plan sponsor “may ensure that its plan covers all or a large portion of the participant's coinsurances or co-payments, and/or it could eliminate or reduce the plan's deductible for treatment and visits related to the condition.”

Reimbursement of Claims

As noted above, the Program will reimburse a participating plan sponsor for 80 percent of benefit claims exceeding $15,000, but not more than $90,000, incurred by each Reimbursement Eligible Participant in the sponsor's plan. When determining the total amount of a benefit claim, a plan sponsor may include amounts paid by the Reimbursement Eligible Participant for the benefit (such as co-payments, coinsurance, and so forth), but only if the plan sponsor has actual proof that such amount was paid by such participant. The amount of the claim must be reduced, however, by any negotiated price concessions with respect to the benefit provided (whether applied before or after the benefit is provided).

These limits apply to the cumulative benefit claims incurred by a Reimbursement Eligible Participant during a plan year, not to each discrete claim for benefits. For example, assume that a Reimbursement Eligible Participant has 10 benefits claims relating to a variety of medical conditions of $10,000 each, totaling $100,000. Although none of the claims individually exceeds the Program's reimbursement threshold of $15,000, the total amount of the claims does. Assuming that all other criteria for reimbursement are met, the plan sponsor could receive a reimbursement of $60,000 (($90,000 – $15,000) x 80 percent). Note that amounts in excess of $90,000 cannot be considered when determining the plan sponsor's reimbursement.

Transition Period

As noted above, the Program begins on June 1, 2010. Plan sponsors whose plan years began before that date may, however, participate in the Program subject to certain transition rules. Claims of $15,000 or more incurred by a Reimbursement Eligible Participant prior to June 1, 2010 will be counted when determining whether the $15,000-claim threshold has been met. However, claims in excess of $15,000 that are incurred before June 1, 2010 will not be eligible for reimbursement and do not count towards the $90,000 cost limit. Only claims incurred after June 1, 2010 will be eligible for reimbursement.

Use of Reimbursement Funds

A plan sponsor must use the reimbursement funds to lower costs for the plan — either by reducing the plan sponsor's costs, or by reducing co-payments, deductibles, co-insurance, and/or other costs paid by plan participants. However, the plan sponsor cannot use the reimbursement money to lower its existing costs; rather, the plan sponsor is required to maintain its existing level of contributions to the plan. In such a case, the plan sponsor could use the reimbursement funds to lower future costs, such as its portion of any increased premiums due in a subsequent plan year, or to pay for increased benefits costs arising from inflation.

Required Application

HHS anticipates that there will be more requests for reimbursements under the Program than funds to pay for such requests. As a result, HHS suggests that plan sponsors “perform [their] due diligence when applying” for the Program in order submit a complete application on the first submission, keeping in mind that applications will be processed in the order in which they are received. Plan sponsors will not be permitted to correct a deficient application; rather, an incomplete application will be returned to the plan sponsor and only processed upon its return. A plan sponsor's application for participation in the Program must be approved before the sponsor may request reimbursements under the Program.

The application must include:

  • The plan sponsor's name, address, tax identification number, and contact information
  • An agreement signed by the sponsor's authorized representative providing that:
    • The plan sponsor has entered into a written agreement with its insurance issuer or the employment-based plan (as applicable), pursuant to which the issuer/plan agrees to provide HHS with any information, data, documents, and/or records necessary for the sponsor to comply with the Program's requirements
    • The application is being provided to obtain federal funds and that all subcontractors acknowledge that the information provided in connection with a subcontract is being provided in order to receive federal funds
    • The sponsor has policies and procedures in place to detect and reduce fraud, waste, and abuse with respect to the Program, and that, if requested by HHS, the sponsor will provide the necessary documentation to substantiate the existence of those policies and procedures
  • A summary of how the sponsor will use the reimbursements received under the Program, including:
    • How the reimbursements will be used to reduce plan costs for the sponsor and/or plan participants
    • The cost-saving procedures or programs the sponsor has put into place with respect to chronic or high-cost conditions
    • How the sponsor will use any reimbursements received to maintain its level of contributions to the employment-based plan
  • The specific amount of reimbursements the plan sponsor expects to receive from the Program during the first two plan-year cycles
  • A list of all benefit options offered under the plan in which a Reimbursement Eligible Participant may participate
  • Any other information HHS may require

The Regulations provide that a plan sponsor must file a separate application for each employment-based plan for which the sponsor will be requesting reimbursements. However, plan sponsors are not required to submit additional applications for each additional plan year for which reimbursements will be requested. HHS estimates that it will take approximately 35 hours to complete an application, so plan sponsors interested in participating in the Program should begin gathering the information needed to complete the application as soon as possible.

Application Process

Although the Regulations explain what information must be included in the application, they do not explain how the application is to be made (e.g., by mail or through a designated Web site) or state the first day on which an application may be made. These additional details should be forthcoming.