Health Care Reform: Premium Stabilization Programs
The health care insurance exchanges under the Affordable Care Act (ACA) are designed to open the insurance market to a wider range of participants, many of whom have not had coverage before. Congress understood that given certain of the ACA’s insurance market reforms (e.g., the guaranteed availability requirement for health care coverage and the limitations on the factors that can be taken into consideration when underwriting coverages), and the demographics of those being covered for the first time, combined with the lack of experience covering this new pool of individuals might put many insurers at a disadvantage until they had developed sufficient experience marketing through the exchanges.
To address this issue, the ACA establishes three “premium stabilization programs.” Two of these are transitional, being designed to operate only through the first three years of exchange activity (i.e., the years 2014 through 2016). The third is designed to be a permanent program. Two of these programs will involve reallocating costs between and among insurers. The third, however, is likely to impose significant costs on employer-sponsored group health plans.
The transitional Risk Corridor Program applies only to individual and small group qualified health plans (QHPs) offered through or outside an exchange (though QHPs need not be offered outside of an exchange). This is a federally administered program that is designed to protect insurers against the likelihood of rate uncertainty by limiting the extent of the insurer’s losses and gains resulting from inaccurate rate settings. Broadly speaking, if an insurer’s profit or loss exceeds 3%, a part of the “excess” profit or loss will be shared with the federal government. By re-allocating the cost of risks among the insurers, this program intends to allow insurers to set premiums according to the average actuarial risk without building an additional risk component into the premium in anticipation of enrolling individuals with unknown health status. This program is funded by insurers.
The goal of the permanent Risk Adjustment Program is to mitigate the impact of potential adverse selection and to stabilize premiums in the individual and small group markets offered both inside and outside the exchanges. Covered individuals will be assigned a risk score (methodology yet to be determined) based on the diagnostic codes of their treatments. The program will be funded by transferring funds from insurers with relatively low risk enrollees to those with higher risk enrollees.
Transitional Reinsurance Program
The program with the most direct impact on employers, however, will be the transitional Reinsurance Program. While the other two programs will be funded by insurers so that there may be an impact on premium costs for those employers that insure their medical benefit programs, the funding mechanism for the transitional Reinsurance Program – a set fee payable on all covered lives -- will have an immediate impact regardless whether the employer chooses to provide benefits through insurance or self-funds those benefits.
Purpose and Terms - The Reinsurance Program is designed to “protect against the insurers’ potential perceived need to raise premiums due to the implementation of the 2014 marker reform rules, specifically guaranteed availability.” For 2014, under this Reinsurance Program, insurers will be eligible to be reimbursed up to 80% of individual claims that exceed an attachment point of $60,000 with a cap of $250,000. States are to establish this reinsurance program, but for states that decide not to do so, the federal government will.
Rates and Costs - To simplify the administration of the Reinsurance Program, the fees will be determined and collected on a national basis by the federal government, even in states that elect to establish their own reinsurance programs. To fund this program, a total of $25 billion is to be collected over the period 2014 through 2016. Twenty billion dollars will come from a per covered life fee on all persons covered under individual or group policies or self-funded group health plans. To fund this program, a total of $25 billion is to be collected over the period from 2014 through 2016 -- $20 billion will come from a per covered life fee on all persons covered under individual or group policies or self-funded group health plans, and an additional $5 billion will come from the U.S. Treasury.
The premium rate will be determined by taking the total amount required for the reinsurance pool, the amount contributed by the U.S. Treasury and the estimated administrative costs, and dividing these by the estimated number of enrollees for which contributions will have to be made. The recent guidance estimates that the fee for 2014 will be $5.25 per month per covered life, or $63 per year. It is the responsibility of the insurer to pay the fee where the coverage is insured (meaning premiums will likely increase to cover this cost in whole or in part), and the plan sponsor is responsible for paying the fee where the benefits are self-funded (though the actual payments may be made directly by the plan’s third party administrator).
Payment Schedule - These payments will be due towards the end of the calendar year; though insurers will likely build this cost into the premiums they collect throughout the year. By November 15 of 2014, 2015, and 2016, insurers and plan sponsors will have to submit their annual count of the covered lives subject to this fee. Within 15 days of submission of the enrollment or by December 15, if later, the DHHS will notify the contributing entity of the total amount to be paid, and payment will be due 30 days after the notification from the DHHS of the amount to be paid.
Determining the Number of Covered Lives - The guidance indicated that the number of covered lives may be determined using the various methodologies available for determining the number of lives for payment of the PCORI comparative effectiveness research fees. The only difference in the methodologies used for determining this fee and the PCORI comparative research fee is that the PCORI comparative effectiveness research fee can be determined on either a plan or policy year basis, while the Reinsurance Program fees must be determined on a calendar year basis.
Plans for Which Covered Lives Need Not Be Counted - The following types of coverage will not be subject to this Reinsurance Program fee:
- Vision and dental benefits provided as “excepted benefits,” as defined in HIPAA
- Health savings accounts (HSAs), though payments would have to be made for participants in the high deductible health plans (HDHPs) that entitle the individual to establish an HSA
- Health reimbursement arrangements (HRAs) that are integrated with an employer’s group health plan, though contributions for participants in the group health plan would be required
- Health care flexible spending accounts (FSAs)
- Employee assistance plans, disease management programs and wellness programs that provide ancillary benefits only and do not constitute major medical coverage
- Hospital indemnity coverage
- Disease specific coverages
- Stop-loss insurance
Moreover, where Medicare pays primary and the employer plan pays secondary, e.g., for retirees, the individual for which the plan pays secondary will not have to be counted as a covered life for which a contribution will have to be made under this transitional Reinsurance Program. If the employer plan pays primary to Medicare for a covered individual, then that person will have to be counted.
If an employer sponsors more than one group health plan, these plans may be aggregated for purposes of determining the amount of Reinsurance Program payments that need to be made. This will prevent double counting of individuals across various plans.
During 2013, plan sponsors should make a preliminary assessment of the number of covered lives in their plans for which this fee will need to be paid, and budget accordingly. For those who insure benefits, a conversation with their insurer or broker regarding how this fee might affect premiums will be in order.
If you have any questions about this transitional Reinsurance Program, any of the new premium stabilization programs under the ACA, any other aspect of compliance with the requirements of the ACA, or any other employee benefit issue, please contact one of the Honigman Employee Benefits attorneys.