Employers Should Prepare Immediately for Early Retiree Reinsurance Program under PPACA

The Department of Health and Human Services (“HHS”) has released its Interim Final Rule, 45 C.F.R. § 149.1 et seq. (the “Interim Rule”) on the Early Retiree Reinsurance Program (“Program”) created by the Patient Protection and Affordable Care Act ("PPACA"), 75 Fed. Reg. 24450 (May 5, 2010). The Interim Rule is HHS’s first guidance describing how sponsors of retiree health plans may apply to “participate” in the Program — that is, how they may apply to be “certified” by HHS as eligible to receive reimbursements for retiree health claims. While applications will not be ready until June, sponsors should be ready to complete and submit an application as soon as HHS makes them available, or risk being excluded from eligibility.

What does the Program do?

The Program reimburses 80% of the cost of the health claims of “early retirees” — defined as former employees age 55 or older who are not yet eligible for Medicare (including, apparently, COBRA continuees), plus their covered spouses and dependents of any age. Reimbursement is capped at 80% of the medical claims incurred and paid in any plan year on behalf of each early retiree between $15,000 and $90,000 (indexed), net of negotiated price concessions. Only claims for “major medical” care are covered (and not, for example, long term care). For purposes of the $15,000/$90,000 floor and ceiling, the claims of each retiree and his or her spouse and covered dependents are apparently aggregated into a single claim, rather than counted individually.[1]

The Program covers claims incurred and paid in plan years ending after June 1, 2010. Claims incurred before June 1, 2010 are not eligible for reimbursement, but count towards determining whether the $15,000 threshold has been achieved.

Total reimbursements under the Program are capped at $5 billion.

Federal income tax treatment

Section 1102 of PPACA provides that reimbursements are not includible in the sponsor’s gross income. Any related health expenses paid by the employer are presumably deductible under the normal operations of Code section 162. It is not clear whether these deductions must be taken back into income as a “tax benefit” if ultimately reimbursed by the Program. Presumably, the tax benefit rule is trumped by PPACA section 1102, and no income inclusion is required. This is not entirely clear, however, especially in light of pre-PPACA section 139A of the Internal Revenue Code, expressly providing that an employer’s costs of retiree drug coverage were deductible even though reimbursed by a nontaxable subsidy under Medicare Part D. No such express rules are set forth in PPACA section 1102, and it is hoped that IRS guidance will clarify the question.

Application process

•           Sponsor applies to “participate.” HHS will provide applications in June 2010 by which sponsors can apply to participate in the Program. Only if the sponsor applies and its plan is “certified” by HHS can the sponsor seek reimbursement under the Program.

•           First come first served. HHS will process applications to participate in the order received. The regulation states that HHS may deny applications based on “projected or actual availability of program funding.” 45 C.F.R. § 149.45(a). Apparently, HHS will reject applications received after total projected reimbursements — which each applicant is required to estimate — exceed $5 billion.

•           Early shut-out foreseeable. The Program is available to all employer-sponsored plans, including state and local government plans (but not Federal government plans). Accordingly, it is likely that the $5 billion mark at which HHS may stop accepting applications will be hit soon after the application process opens.

•           One bite at the apple. An incomplete application will be rejected, and the applicant must submit a new application on a back-of-the queue basis. Incomplete applications are thus likely to result in exclusion from the Program. The preamble states that HHS will provide “assistance” to help applicants submit their applications correctly. 75 Fed. Reg. 24450, 24452. Given the likely volume of applications, and the likely importance of submitting completed applications immediately, taking time to solicit HHS “assistance” may put the plan sponsor at risk for Program exclusion.

•           Requirements for application. To submit an application, the sponsor must have certain programs in place, and certain information compiled and ready to submit to HHS.

»          Only one application required per plan. The definition of “plan” and other terms generally tracks the definitions in place under the Retiree Drug Subsidy Program.

»          PHI agreement with plan or insurer. The sponsor must certify that it has a Protected Health Information (PHI) agreement with its insurer or plan sponsor, authorizing the sponsor to release PHI related to the Program to HHS.

»          Fraud, waste and abuse. The sponsor must have “policies and programs” to detect and reduce “fraud, waste and abuse” and must certify that these are in place. While not found in the statute, this requirement has been added by HHS as a condition of applying to participate.

»          Cost savings program. The plan sponsor must have “procedures or programs in place” that “have generated or will potentially generate” cost savings with respect to plan participants with chronic and high cost conditions.

            A “chronic or high cost condition” is defined as any condition likely to generate $15,000 in claims per year per affected participant. Cost-savings programs can target any class of participants (or beneficiaries) — they are not required to be targeted at early retirees and their beneficiaries.

            “Cost savings” means measures for reducing costs for the participant, rather than the overall costs of any particular treatment. Thus, one example of “cost savings” in the preamble is a diabetes management program designed to “prevent complications and unnecessarily hospitalizations,” while a second example is a program reducing participant copayments and deductibles for cancer treatments. 75 Fed. Reg. 24450, 24454.

            The cost savings program must be “in place.” The Program is not, apparently, intended to serve as an incentive for new cost savings programs.

            The sponsor’s cost savings programs do not have to cover all high cost and chronic conditions. Sponsors must take a “reasonable approach” in identifying conditions for which cost-savings programs must be in place.

»          How funds will reduce participant or employer costs. The application must describe how reimbursements under the Program will reduce participants’ out of pocket costs, or reduce “health benefit or health benefit premium costs for the sponsor.” That is, reversing an earlier White House statement, the Interim Rule allows the employer to use Program reimbursements to offset employer costs under its health plan. By statute, however, the employer may not use Program reimbursements for its own “general revenue.” The Interim Rule clarifies that this requirement is satisfied if the employer satisfies the maintenance of effort requirement described immediately below.

            While reimbursements are paid only for the claims of “early retirees” as defined by the Interim Rule, the employer may use the reimbursements to reduce costs (participant or employer) related to all participants in the relevant plan. 75 Fed. Reg. 24450, 24458.This adds flexibility for plans covering both active and retired employees, and over-age-65 retirees.

»          Maintenance of Effort. The application must explain how the employer will maintain its same “level of effort in contributing to support” its plan. As an example, the preamble states that the sponsor of an insured plan must show it will use Program funds to “pay for increases in… the sponsor’s premium, or increases in other health benefit costs” [emphasis supplied]. 75 Fed. Reg. 24450, 24456.

            It is not entirely clear how the sponsor of a self-insured plan should demonstrate how it will satisfy the maintenance of effort rule. Possibly, the employer must show merely that expected Program reimbursements will not exceed the expected increase in aggregate employer costs under the plan — even if the expected increase is due solely to expected increases in plan population. But the employer may prefer to show that expected reimbursements will not exceed the sum of expected increases in per capita costs. The per capita approach is suggested by the preamble’s statement (as noted) that reimbursements can be used for “increases” in the “premium” or “in other health benefit costs.” Another example states that, for an insured plan, “if the premium increases, program funds may be used to pay the sponsor’s share of the premium increase from year to year…” 75 Fed. Reg. 24450, 24458. The per capita approach will be more useful for an employer whose aggregate plan costs are expected to go down because of, for example, a corporate divestiture. The history of an analogous maintenance-of-effort provision under Code section 420 shows that policymakers are torn about whether the employer’s effort should be measured on an aggregate or per-capita basis. The same indecision may affect HHS policymakers here.

            It is not required that the Program reimbursements for the first year of participation reduce costs for that year. For example, the employer may show that reimbursements for costs paid and incurred in the plan’s 2010 plan year will reduce participant co-payments and employer costs in its 2011 plan year.

            While reimbursements may be used to reduce either participant or employer costs, it is not clear whether at least some participant cost reduction is required. The preamble states that HHS “encourage[s]” employers to use reimbursements to offset both kinds of costs. 75 Fed. Reg. 24450, 24457.

»          Projected dollar amount of Program reimbursements in each of the first two years of the Program, must be estimated in the application.

»          All benefit options under the plan must be listed under which any early retiree might claim benefits.

»          Other information required includes an acknowledgment that the information is being provided to obtain Federal funds, and other ministerial information.