Health care reform includes new costs for both fully insured and self-insured health plans. Insurance carriers and employers who self-insure their health plan(s) are responsible for the payment of fees in some cases, while employers with fully insured health plans may be affected through increased premiums. The three fees are discussed in more detail below:
Patient-Centered Outcomes Research Fund (PCOR) Fees
What is this fee?
Health care reform established the Patient-Centered Outcomes Research Institute to study the effectiveness of various medical treatments. The Institute's research will be supported by the PCOR fee. The PCOR fee, which is effective for all plan years ending after September 30, 2012, applies to both health insurance carriers (for fully insured plans) and employers (for self-insured group health plans) for a period of 7 years.
"Excepted benefits" which includes limited scope (stand-alone) dental and vision benefits, as well as HSAs are not subject to PCOR fees. However, certain FSAs and HRAs are subject to the fee.
Who pays the PCOR fee?
Responsibility for payment of the PCOR fee depends on the health plan's funding method. The insurer (carrier) has to pay the fee for fully insured group health plans (but not stop-loss policies issued in connection with self-insured health plans). The PCOR fees paid by insurance carriers are expected to be passed-through to the employers sponsoring the health plans in the form of increased premiums. The plan sponsor (generally, the employer) has to pay the PCOR fee for self-insured group health plans.
The PCOR fee will be reported on IRS Form 720 and is paid annually. The form and payment will be due July 31st for all plan years ending in the preceding calendar year:
- July 31, 2013 (for the October 1, 2012 - December 31, 2012 short year)
- July 31, 2014 (for the January 1, 2013 - December 31, 2013 plan year, etc. until July 31, 2020)
How much is the PCOR fee?
- Year 1 —> the PCOR fee is $1.00 per year multiplied by the average number of covered individuals.
- Year 2 —> the PCOR fee is $2.00 per year multiplied by the average number of covered individuals.
- Years 3-7 —> the $2.00 per year is indexed based on increases in national health expenditures.
The PCOR fee is based on the average number of covered individuals, not just covered employees (employees and all dependents). COBRA participants and covered retirees must also be included in determining this average.
How are the average numbers of covered individuals determined?
Insurance carriers and self-insured plans will choose from a number of alternative methods to determine the average number of covered individual. Carriers and self-insured plans can only use a single method in determining the average number of lives in a plan year but are not required to use the same method from year to year.
Insurance carriers will choose one of four methods to determine the average number of covered individual. Self-insured plans can use one of three methods to determine the average number of covered individuals. The methods that self-insured plans may use are:
- Actual count method—determined by calculating the total number of covered lives each day of the plan year and dividing the sum by the number of days in that plan year.
- Snap shot method—determined by adding the total number of covered lives on one day in each quarter or an equal number of dates for each quarter and dividing the total by the number of dates on which the count was made.
- Form 5500 method—for plans that offer family coverage, this count is determined by adding the participant counts at the beginning and ending of the plan year. For plans that offer employee-only coverage the count is determined by adding the participants counts at the beginning and ending of the plan year and dividing by 2.
What is this fee?
Effective January 1, 2014, the Insurers Fee applies to carriers for fully insured health plans (major medical, as well as dental and vision; HRAs, HSAs, and FSAs are excluded). This annual fee is required to be paid for each calendar year beginning after December 31, 2013. The Insurers Fee paid by the insurance carriers is expected to be passed-through to the employers sponsoring the health plans in the form of increased premiums. Unlike the PCOR fees (discussed above) and the Transitional Reinsurance Tax (discussed below), the annual fee on health insurers does not apply to employers who maintain self-insured health plans.
How much is this fee?
The aggregate annual fee for all carriers is referred to as the "applicable amount." The applicable amount is $8 billion for calendar year 2014, $11.3 billion for calendar years 2015 and 2016, $13.9 billion for calendar year 2017, and $14.3 billion for calendar year 2018. For calendar years after 2018, the applicable amount is indexed to the rate of premium growth. The aggregate annual fee is split among the carriers based on a ratio designed to the carrier's market share of the U.S. health insurance business.
For each carrier, the fee for a calendar year is an amount that bears the same ratio to the applicable amount as (a) the carrier's net premiums written during the preceding calendar year with respect to health insurance (for any United States health risk), bears to (b) the aggregate net written premiums of all carriers during such preceding calendar year with respect to such health insurance. The payment of these fees will not be tax deductible to the insurance carriers.
This fee is estimated to be in the range of 2.0 to 2.5% of premium in 2014, increasing to 3.0 to 4.0% of premium in later years. Insurance companies will likely begin to reflect this additional cost in their premium rates in 2013 or 2014. Further guidance is expected on the specifics regarding the Insurers Fee, such as collection and reporting requirements.
Transitional Reinsurance Tax
What is this tax?
The Transitional Reinsurance Tax impacts both fully insured and self-insured medical plans and applies starting January 1, 2014. The transitional reinsurance program is intended to help stabilize premiums in the individual market during the first three years that the state-based exchanges are in effect (2014, 2015 and 2016). Each state that operates an exchange (or the federal government if the state does not operate an exchange) is required to establish a temporary reinsurance program for the individual market, to which health insurers (for fully insured plans) and TPAs (for self-insured group health plans) are required to contribute. This is a tax on major medical plans only. Excepted benefits which includes limited scope (stand-alone) dental and vision benefits, as well as health FSAs, HRAs and HSAs are not subject to the Transitional Reinsurance Tax.
This program will only be in operation from 2014 through 2016 (this is a three year program). The tax is basically insurance for insurers; that is, it shifts the risk of covering high expenses from the primary insurer to a reinsurer. The contribution requirement is imposed on insurers in the case of fully insured individual and group health plan coverage, and on third-party administrators (TPA) on behalf of self-insured plans. Reinsurance payments are required to be collected on a quarterly basis beginning on January 15, 2014.
How much is this tax?
To determine the amount of the contributions, HHS will set a national contribution rate each year; the amount that each carrier or TPA must pay will be determined based on all covered enrollees of that entity. This tax applies on a per-covered-life basis. HHS is estimating the annual contribution rate for 2014 will be $63 per covered life ($5.25 per covered life, per month). A covered life would not be based on the number of employees participating in a group health plan, but rather on all individuals covered under the plan. For example, a family of four covered as a family under a health plan would be four covered lives. The methods for determining the numbers of covered lives under the plan are the same methods that are allowed for determining the PCOR fee (see above). These payments are tax deductible to employers as an ordinary and necessary business expense. The timeframe for Transitional Reinsurance Tax payments will be as follows:
- By no later than November 15 of each year (2014, 2015 and 2016), the contributing entity (the carrier or TPA) is required to submit the annual enrollment count of the number of covered lives subject to the contribution to HHS.
- Within 15 days of submission of the annual enrollment, or by December 15 if later, HHS will notify the contributing entity of the total contribution amount to be paid.
- The contributing entity will be required to submit its payment to HHS within 30 days of notification of the amount due (by January 15th at the latest for the prior tax year).
The fee will total $12 billion in 2014, $8 billion in 2015 and $5 billion in 2016. That means the per-covered life assessment will be smaller each year (around $40 in 2015 instead of $63). It will phase out completely in 2017 (provided that Congress does not decide to extend it).
How Does This Affect You As An Employer?
Employers that maintain only fully-insured health plans —> Employers are not directly responsible for the payment of these fees but should be aware that future health insurance carrier premium amounts are likely to incorporate these additional costs. Insurance carriers may provide specific information on how these fees impact employer-sponsored health insurance policies.
Employers that offer one or more self-insured health plan —> Employers are directly responsible for the payment of the PCOR Fee and will also be responsible for paying the Transitional Reinsurance Fee (via their TPA) for plans that are self-insured. The Insurers Fee does not apply to self-insured health plans.
What Should I Do Next?
Employers with self-insured health plans have the greatest responsibility regarding the payment of these newly imposed fees. Employer with self-insured health plans should: (i) decide which method will be used for the calculation of the average number of covered individuals for the PCOR fee. If necessary, engage both internal and external parties as necessary to coordinate the process which will be used to calculate and pay this required fee and (ii) self-insured employers who self-administer their health plan should await additional guidance regarding payment of the Transitional Reinsurance Tax.
Employers with fully-insured health plans should expect to see increases in premiums to offset these fees imposed on the insurance carriers and should plan for such increases accordingly.
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