Lower Health Insurance Claims Experience
Shelter-in-Place orders have curtailed virtually all non-essential health care in the last half of March and throughout April and May. As a result, insurance carriers have been under increasing pressure (from regulators and the media) to provide partial premium refunds to policyholders. These refunds would reflect the reality that the suppressed claims experience in these months will lower actual claims experience for 2020 compared to projected claims experience, thus rendering current premiums higher than necessary.
Health Carrier Responses
Carrier Rebates Announced: Some carriers have responded by providing partial premium rebates for certain months. Other carriers are considering partial premium holidays. Still, others are offering the option of multiple future year rate guarantees in lieu of partial premium rebates. Dental and vision carriers have been “first to the party” in this discussion, with a few (but not all) medical carriers also joining in.
Claims Rebound Spike Potential: While essentially all carriers acknowledge that claims experience has been significantly below normal throughout the spring, many are concerned about a rebound effect once the economy (and specifically elective healthcare services) starts to re-open, and pent-up demand creates a potential counterbalancing claims spike. Nonetheless, many carriers have announced partial premium rebates and are in the process of finalizing those rebates now.
While premium rebates appear easy enough, it is not always as simple as it would seem. One would think an employer could simply accept the rebate and move on. However, there are two situations that require further administrative action from employers:
- Employee Contributions
- COBRA Premiums
Percentage-Based Contributions: To the extent that employee premium contributions are explicitly expressed as a percentage of premium, any premium reduction, rebate, or holiday would need to be passed through on a proportionate basis to employees who participate in the cost. The key here is that premium contributions are communicated as a percentage of premium, thus when the actual premium is reduced, it stands to reason that the contribution charged to the employee should be commensurately reduced.
Flat Contributions: There are conflicting views as to whether employers who express premium contributions as a flat dollar amount (and not as a specific percentage of the premium) can sidestep the requirement to pass through a portion of any rebate. On the one hand, one could argue that there is no implicit promise to have the employee contribution relate to the actual premium paid. On the other hand, the argument could be made that any full retention of a rebate where employees participated in the premium payment at all would be a violation of ERISA’s fiduciary requirements. This would be a matter of corporate judgment and acceptance of business risk.
Guidelines for Rebates: No specific guidance was provided for passing through premium contributions in the Notice. However, it is reasonable to rely on the extensive guidance provided for Medical Loss Ratio (MLR) rebates under the ACA.
De Minimis Amounts: The MLR rules allow employers to set a de minimis threshold under which rebates would not be processed. For example, if the amount of a rebate is less than the administrative cost of processing it, an employer can avoid passing through the rebate. It is important that this process is specifically documented and only applied to amounts less than a reasonable de minimis threshold.
A Full Plan Year Approach: Acknowledging that the administrative process could be significant for relatively small refund amounts (for any specific employee), it may also be possible for employers to apply a specific-month premium rebate across the employee contributions for the entire Plan Year. This will effectively reduce the overall impact of a single month’s premium rebate to a level such that the actual change in annual premium contribution (as compared to the promised percentage premium sharing) falls under a reasonable standard for not processing the refund under the de minimis threshold guidelines. It should be noted that this would be considered a very aggressive strategy.
Applies to COBRA: The premiums paid by COBRA Qualified Beneficiaries are, by statute, equal to premiums paid by employers (plus a 2% administrative fee). Thus, when carriers reduce premiums for employers, those premium reductions must be passed through to Qualified Beneficiaries, as well.
No Alternate Approach: While employers may have some latitude in passing through contribution rebates for active employees, such latitude is not available for COBRA premiums. Any discount to premiums should be fully passed through to COBRA beneficiaries.