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Fees to Fund ACA Reinsurance Program

August 22, 2012

The Patient Protection and Affordable Care Act (ACA) includes a number of revenue-raising provisions intended to offset the cost of other, revenue-losing ACA provisions. Among other things, the ACA contains a number of new fees that apply to insurers, employers that sponsor health plans and other entities (e.g., medical device manufacturers). In March, the agencies issued final regulations (77 Fed. Reg. 17220 (March 23, 2012)) on a new fee, referred to in the regulations as a "reinsurance contribution," for health insurers and administrators of self-insured health plans to fund a temporary reinsurance program under the ACA. Below we answer some of the most frequently asked questions we have received from plan sponsors regarding the new reinsurance contributions.

What do the reinsurance contributions fund?

Section 1341 of the ACA generally provides for the establishment by each state (or HHS) of a transitional reinsurance program to help stabilize premiums for coverage in the individual health insurance market from 2014 through 2016, the first three years that the state exchanges are operational. The reinsurance program is intended to mitigate the impact of potential adverse selection and reduce uncertainty by sharing risk in the individual market.

What entities are subject to the reinsurance contribution?

The ACA imposes the contribution on health insurance issuers and third party administrators on behalf of group health plans. The final regulations require a "contributing entity" to fund the reinsurance program by remitting a reinsurance contribution. The regulations define the term contributing entity as "a health insurance issuer or third party administrator on behalf of a self-insured group health plan." The ACA and final regulations do not specify whether the third party administrator or the self-insured plan is ultimately liable for the contribution, but nothing in the ACA or regulations prohibits a third party administrator from recouping the cost of the contribution from the self-insured health plan. In any event, the reinsurance contributions are likely to result in significant additional costs to employer plan sponsors.

Are any health care benefits exempt from the reinsurance contributions?

The final regulations provide generally that contributing entities are not required to make contributions on behalf of plans or health insurance coverage consisting solely of "excepted benefits" as defined in section 2791(c) of the Public Health Service Act (e.g., limited scope dental or vision plans). This appears to mean that a health flexible spending arrangement that satisfies the definition of an excepted benefit under IRS and DOL regulations would be exempt.

What is the amount of the reinsurance contributions?

The final regulations provide generally that the Department of Health and Human Services (HHS) will set a national contribution rate that will be calculated based on a per capita basis based on all covered lives of contributing entities. This rate will be announced annually by HHS in a notice of benefit and payment parameters, which will also set the proportion of the contributions collected under the national contribution rate going to reinsurance payments, payments to the U.S. Treasury and administrative expenses. States may elect to collect more than the amounts that would be required under the national contribution rate to provide funding for administrative expenses or additional reinsurance payments. If a State elects to collect more than the national contribution rate, it must notify HHS within 30 days of publication of the national contribution rate.

The ACA and final regulations indicate that reinsurance fee contributions collected must fund the following: (1) reinsurance payments that will total, on a national basis, $10 billion in 2014, $6 billion in 2015 and $4 billion in 2016; (2) contributions for deposit to the general fund of the U.S. Treasury of $2 billion in 2014, $2 billion in 2015 and $1 billion in 2016; and (3) additional amounts for administrative expenses of the applicable reinsurance entity or HHS when performing reinsurance functions. These total fee amounts will likely result in significant fees per covered life.

How will the reinsurance contributions be collected?

HHS will collect reinsurance contributions from third party administrators of self-insured plans. States that establish a reinsurance program have the option to collect contributions from insurers in the fully insured market or to have HHS collect the contributions. HHS will then distribute reinsurance contributions to the applicable reinsurance entity for the state after subtracting the State's share of U.S. Treasury contributions and administrative expenses. Reinsurance contributions will be collected on a quarterly basis, beginning January 15, 2014.

This column appeared in Second Opinions, a weekly PlanSponsor feature to help plan sponsors understand what they need to do to prepare for the impact of the Patient Protection and Affordable Care Act. Groom principals, Christy Tinnes and Brigen Winters, serve as the health care reform experts and field weekly questions regarding the new law.