Guest Article

(From the May 10, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

HHS Issues Interim Final Regulations on Temporary Early Retiree Reinsurance Program

The Department of Health and Human Services (HHS) last week issued much-anticipated interim final regulations to implement the temporary $5 billion early retiree reinsurance program ("Program") authorized by the Patient Protection and Affordable Care Act (PPACA). 75 FR 24450 (May 5, 2010).

Even though applications for the Program will not be available until sometime in June, the interim final regulations prompt interested employers to start pulling together the information needed to apply as soon as possible. Specifically, HHS will process applications on a first-come-first-serve basis, and has the authority to stop accepting applications based on the availability of funds. Employers submitting incomplete applications will not have the opportunity to cure defects, but instead will have to submit a new application. The new application will be processed based on when it is received. As a result, employers failing to submit complete applications as soon as possible after the application process begins run the risk of being denied access to the Program.

Following is a brief overview of the Program and provisions of the interim final regulations of most immediate interest to plan sponsors. Additional information about certain operational aspects of the Program will appear in next week's Washington Bulletin.

Basics of the Program

The Program will reimburse participating sponsors for a portion of the cost of providing health benefits to early retirees, their spouses, surviving spouses, and dependents. The reimbursement amount will be 80% of total claims incurred by an "early retiree" within a specific corridor during a plan year. The corridor of reimbursable expenses will be total claims exceeding $15,000 (the "cost threshold") but less than $90,000 (the "cost limit") for the plan year. The cost threshold and cost limit will be adjusted using the Medical Care Component of CPI-U for plan years starting on or after October 1, 2011.

An early retiree is someone who is at least 55 years old but not yet eligible for Medicare, and who is not an active employee of an employer maintaining, or currently contributing to, the employment-based plan or any employer that has made substantial contributions to fund such plan. This term also includes spouses, surviving spouses, and dependents of such retirees, even if such spouses, surviving spouses, and dependents are less than 55 years old and/or are eligible for Medicare.

Key Terms

The interim final regulations include an extensive section with definitions of certain technical terms relating to the Program. Most of these are identified and explained in context below. However, a working understanding of the following key terms is essential to navigating the interim final regulations.

Application Process

Sponsors must apply to the Program, and the sponsor's application must be approved by the Secretary of HHS, before submitting claims and requesting reimbursements. The application and instructions will not be available until sometime in June. Until then the interim final regulations provide helpful information about what will be required.

As noted, it will be important for sponsors to submit a complete application the first time. Incomplete applications will be denied, and the only recourse will be for the sponsor to submit a new application. The new application will be processed in the order it is received.

A sponsor will be required to submit one application per plan. Each application must identify the plan year cycle - that is, the starting month and day and the ending month and day. Once the application is approved and the plan is certified the sponsor will not need to submit an application with respect to that plan again. The plan and sponsor will continue to be certified and the application approved as long as the sponsor continues to meet the Program's requirements.

Some of the information the application will require includes:

The application will have to be signed by an "authorized representative" of the applicant, meaning "an individual with legal authority to sign and bind a sponsor to the terms of a contract or agreement."

Additionally, in order to participate in the program a sponsor will have to sign a plan sponsor agreement similar to what is required for participation in the Medicare Part D retiree drug subsidy program.

Effective Date and Transition Rule

The Program will begin on June 1, 2010. However, employers will be able to apply for plan years beginning before June 1, 2010 and ending after that date (e.g., calendar year 2010 plans). Claims incurred prior to June 1, 2010 are not eligible for reimbursement under the Program, but such claims up to $15,000 will count against the individual's cost threshold for the 2010 plan year. Also, claims incurred prior to June 1, 2010 exceeding $15,000 will not count toward the cost limit. The following example illustrates how this transition rule will work:

For this and all other purposes under the interim final regulations, the term "incurred" means "the point in time when the sponsor, health insurance issuer, group health plan or plan participant, or a combination of these or similar stakeholders, become responsible for payment of the claim.

Another important term introduced here and used throughout the interim final regulations is "plan year." This means the 12-month plan year specified in the plan document. If the plan document does not specify a plan year, or specifies a plan year that is not a 12-month plan year, or if there is no plan document, the plan year is: (1) the deductible or limit year used under the plan; (2) the policy year, if the plan does not impose deductibles or limits on a 12-month basis; (3) the sponsor's taxable year, if the plan does not impose deductibles or limits on a 12-month basis, and either the plan is not insured or the insurance policy is not renewed on a 12-month basis; or (4) the calendar year, in any other case.

Types of Plans Eligible to Participate in the Program

Group health plans sponsored and maintained by private employers, State or local governments, employee organizations, VEBAs, a committee or board of individuals appointed to administer such plan, or a multiemployer plan are eligible to apply to participate in the Program. Both self-funded and insured plans are eligible. Federal government plans are not eligible to participate.

Programs and Procedures for Chronic and High-Cost Conditions

In order to participate in the Program, a sponsor must have programs and procedures in place that have generated or have the potential to generate cost-savings for participants with chronic and high-cost conditions. The preamble to the interim final regulations makes clear that this does not mean sponsors have to ensure new programs and procedures are put in place just to participate in the Program.

The interim final regulations do not identify specific chronic and high-cost conditions that sponsors must have programs and procedures in place to address. Instead, the interim final regulations define "chronic and high-cost condition" as "a condition for which $15,000 or more in applicable claims are likely to be incurred during a plan year by one participant." So to participate in the Program a sponsor must have programs and procedures in place that generate or have the potential to generate cost savings for plan participants with conditions that are likely to generate $15,000 in claims for a plan year.

Significantly, the interim final regulations do not require sponsors to have programs and procedures in place to address all conditions that may result in claims exceeding $15,000 for one participant in a plan year. Instead, sponsors are required to take a "reasonable approach" to indentifying the conditions they must address.

Examples of the types of programs and procedures a sponsor might use to generate cost-savings with respect to chronic and high-cost conditions include a diabetes management program with "aggressive monitoring and behavioral counseling to prevent complications and unnecessary hospitalization." Another would be eliminating or reducing coinsurance or copayments, and/or eliminating or reducing the plan's deductible for treatment and visits related to the chronic and high-cost condition.

Determining Reimbursement Amounts

The 80% reimbursement rate will be applied to cumulative health benefits incurred in a given plan year and paid for a given early retiree that fall between the applicable cost limit and cost threshold. (These health benefit amounts do not include premiums paid by the sponsor or the early retiree.) For purposes of determining these cumulative amounts, costs paid by the early retiree (or his or her spouse, surviving spouse, or dependent) in the form of deductibles, copayments, or coinsurance are included in the amounts paid by the plan. Also, for purposes of determining amounts below the cost threshold and above the cost limit for any given early retiree, all costs for health benefits paid by the plan or by the early retiree for all the certified plan's benefit options the early retiree is enrolled in for the plan year will be combined. Thus, within a certified plan for a given plan year there is one cost limit and one threshold limit per early retiree.

Any negotiated price concessions obtained by a plan with respect to a health benefit must be reflected in claims submitted for reimbursement by the Program. In other words, reimbursements will be available only for actual amounts paid by the early retiree or the plan. So-called "post-point-of-sale negotiated price concessions" - defined as any negotiated price concession that an employment-based plan or insurer receives with respect to a given health benefit, after making payment for that health benefit - must be disclosed to HHS in a form and manner to be specified in future guidance. HHS has the authority to reopen and revise any reimbursement determination based on these disclosures, and in other circumstances.

Permitted Use of Reimbursements

Reimbursements will be made to the "sponsor," as that term is defined above. (In the case of a single-employer plan, the sponsor is the employer.) But the sponsor can only use reimbursements in either or both of the following ways:

The sponsor may not use reimbursements as general revenue. To prevent sponsors from circumventing this rule, the interim final regulations require sponsors to maintain their level of effort in contributing to support their plan or plans. In other words, a sponsor may not use reimbursements to reduce its premium contribution below the level it provided before the Program started. However, a sponsor may reduce its costs by using reimbursements to pay its share of any premium increases imposed by the insurer.

Even though reimbursements can be made only with respect to early retirees or their spouses, surviving spouses or dependents, the interim final regulations clarify that reimbursements can be used to lower health benefit costs for all plan participants, including retirees and their spouses and dependents as well as active employees and their spouses and dependents.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2010, Deloitte.