Health Care Law Blog

IRS Issues New Regulations Affecting the “Blues” Under Health Reform

The Treasury Department and IRS continue to roll out new regulations related to the implementation of the Patient Protection and Affordable Care Act ("PPACA"). On May 10, 2013, the Treasury Department and IRS released the draft regulations, "Computation of, and Rules Relating to, Medical Loss Ratio", which are intended to help Blue Cross and Blue Shield ("BCBS") organizations comply with the Medical Loss Ratio (“MLR”) rules created by the PPACA.

Background

BCBS organizations (and other qualifying health care organizations) currently receive favorable treatment under section 833 of the Internal Revenue Code (the "IRC"), which provides that such organizations are entitled to:

1. treatment as stock insurance companies;
2. a special deduction; and
3. computation of unearned premium reserves based on 100 percent (and not 80 percent) of unearned premiums under IRC section 832(b)(4).

PPACA section 9016 added IRC section 833(c)(5). This section requires organizations such as BCBS that use the IRC section 833 tax break to spend at least 85 percent of total premium revenue on reimbursement for clinical services provided to enrollees. In other words, it requires that the medical loss ratio for such organizations be no less than 85 percent.

The Treasury Department and IRS have released guidance on the application of section 833(c)(5) on five prior occasions, including Notice 2010-79 which invited comments on, among other things, coordination of the medical loss ratio computation under section 2718 of the Public Health Service Act (the "PHSA," which is administered by the Department of Health and Human Services) with the computation of medical loss ratio under IRC section 833(c)(5). This is the primary issue addressed by the new proposed regulations.

The Proposed Regulations

Determining the Medical Loss Ratio

The proposed regulations released on May 10 note that commenters have argued that the medical loss ratio computation under section 833(c)(5) of the IRC should be the same as the medical loss ratio computation under section 2718(b) of the PHSA. The Treasury Department and IRS agreed, providing in the regulations that "the meaning of terms and the methodology used in the MLR computation under section 833(c)(5) should be consistent with the definition of those same terms and the methodology under section 2718 of the PHSA."

The regulations further provide that the meaning of "reimbursement for clinical services provided to enrollees" found in IRC section 833(c)(5) should have the same as the meaning of that phrase for section 2718 of the PHSA and the regulations issued under that section. This means that amounts expended for clinical services provided to enrollees are to be included in the medical loss ratio numerator. However, the Treasury Department and IRS declined to adopt another suggestion from commenters that the medical loss ratio numerator include amounts expended for "activities that improve health care quality" as reported under section 2718 of the PHSA.

The regulations also provide that the term "total premium revenue" in the medical loss ratio denominator under IRC section 833(c)(5) should have the same exclusions as provided under section 2718(b) of the PHSA. Finally, in terms of the applicable time period used to compute the medical loss ratio, the regulations provide that the medical loss ratio for a taxable year under IRC section 833(c)(5) should be computed using the same three-year period used under section 2718(b) of the PHSA.

Consequences of Insufficient Medical Loss Ratio

The issue of what consequences an organization will face from having an insufficient medical loss ratio are also addressed in these regulations. Commenters requested that consequences be limited so that an organization having an insufficient medical loss ratio under IRC section 833(c)(5) would not lose its status as an insurance company under IRC section 833(a)(1), but rather should only suffer the loss of eligibility for the special deduction in IRC section 833(b) and the less favorable computation of unearned premium reserves based on 80 percent - not 100 percent of unearned premiums under IRC section 832(b)(4).

The Treasury Department and IRS did not adopt this recommendation, determining instead that the failure to comply with the medical loss ratio requirements should result in the loss of all, not some, of the benefits associated with treatment under IRC section 833. The determination of whether an organization's medical loss ratio is sufficient is made annually. Therefore, each year brings another opportunity to lose IRC section protection.

Conclusion

These regulations continue to establish the framework in which the PPACA will be administered. Comments are due 90 days after the official publication date. If you have any questions about the regulations, or the implementation of the PPACA more generally, please contact Gary J. McRay by using the form below.

Categories: Health Care Reform, Hospitals, Insurance, Physicians, Regulatory