Medical Loss Ratio – Guidance for California Small Businesses:

Employers must share insurance refund with employees who paid a portion of premium.

The Patient Protection & Affordable Care Act “PPACA” (aka Health Care Reform) requires health insurance companies to spend 80 percent of the money they collect for small group and individual plans on medical expenses. If an insurance company miscalculates and gives doctors, hospitals and other medical providers less than 80 percent, the insurance company must rebate, or refund, the money that should have gone to medical providers back to their members. This requirement is referred to as the “Medical Loss Ratio” or “MLR.” Here’s what a small business needs to know about the MLR. (Note: for Federal purposes a small group is one with 100 and fewer employees. For groups with 101 and more employees the MLR is 85 percent, which means that only 15 percent of revenue can fund insurance company expenses.)

Preparing for a Refund of Health Insurance Premium:

• Insurance company actions:
  In March 2012, Anthem Blue Cross sent a letter and contract amendment to its small group employers notifying them that the MLR requirement may result in a refund of premium. Blue Shield of California has created a detailed question and answer sheet on the MLR. Blue Shield will issue notices and refunds, if necessary, in August 2012. All insurance companies must comply with the U.S. Department of Labor’s Technical Release No. 2011-04, on the MLR requirements.

• Employers must refund premium to employees who paid for health insurance:
  The notifications from the insurance companies to small businesses have focused on the employer’s responsibility when receiving a health insurance rebate. Specifically, employers must share the premium rebate with the employees that paid part of the premium. This is important. Employees often pay a percentage of the cost for the health insurance for themselves and their dependent spouses and children. The law requires that the employees receive their portion of the refund. This seems fair: if employees paid for their health insurance they should also receive a commensurate portion of any refund.

• Employers should track the amount employees pay for health insurance:
  If a health insurance company must refund money; an employer will need to calculate the portion to be returned to employees. So, employers should ensure that their computer systems can gather the employee health insurance contribution amount. If insurance companies do offer rebates it will be for a specific period of time (i.e., 1/1/2011-12/31/2011.) Employers would then allocate the rebate to the company and to the employees who contributed to the health insurance premium. Terminated employees who contributed during the rebate time period would also be entitled to their share of the rebate.

Note: In 2011 Blue Shield of California (BSCA) returned nearly $450 million of premium to members. BSCA returned this money because of its pledge to keep only 2 percent profit and return the rest to its members. The refund was not due to the MLR requirement.  Blue Shield issued the refund checks to employers with little or no guidance as to how the refund should be shared with employees. The MLR refunds will be different.