The Transitional Reinsurance Program

The Health Care Reform Act established a transitional reinsurance program in an attempt to stabilize premium prices for health insurance plans in the individual market. Because the Health Care Reform Act prohibits insurers from denying coverage based on pre-existing medical conditions, there were concerns that the individual market would disproportionately attract individuals with significant unmet medical needs. The reinsurance contributions are intended to reduce the uncertainty of insurance risk with high-cost enrollees in the individual market by partially offsetting this risk with these contributions.

The program will collect fees from “contributing entities” for the 2014, 2015 and 2016 calendar years to fund administrative costs and make payments to issuers of individual market plans to avoid premium spikes.

Contributing Entities

Health insurance issuers and self-insured group health plans providing major medical coverage must pay reinsurance fees for their covered lives. Health reimbursement arrangements, health savings accounts, health flexible spending arrangements, employee assistance plans, wellness programs and health plans providing excepted benefits (i.e., stand-alone dental or vision) are, for example, excluded from this requirement.

Insurers are liable for making reinsurance contributions for insured plans. Plan sponsors are liable for making reinsurance contributions for self-funded plans.

For 2015 and 2016, self-insured group health plans can be excluded from paying reinsurance contributions if they do not use a third party administrator for the “core administrative functions” of claims processing or adjudications or plan enrollment. However, this is a narrow exclusion. To qualify, a self-insured plan cannot use the third party administrator for more than 5 percent of the plan’s core administrative functions. The Department of Human Health and Services (HHS) expects that few plans will qualify and estimates that this exclusion will have a small effect on the rates in the future.

While self-insured plans are responsible for these contributions, a third party administrator can be used to calculate covered lives and remit payment on behalf of a self-insured plan. However, a third party administrator is not required to perform these functions, if requested, barring some contractual obligation.

Fee Amounts

The contribution amount is $63 per covered life for 2014 and $44 per covered life for 2015. The amount for 2016 has not yet been announced, but it should be lower than the 2015 amount. These payments may be made from plan assets.

Deadlines and Requirements

Contributing entities must calculate covered lives and provide enrollment data to HHS by November 15 of each year. Contributions will be paid in two installments. The first installment will be invoiced by HHS by December 15 of that year. The second installment will be invoiced in the fourth quarter of the following calendar year. Both invoices will be based on the same enrollment count from the November 15 submission. Payment is due within 30 days of the invoice. Contributing entities have the option to pay the entire 2014 contribution amount in one payment no later than January 15, 2015. 

HHS requires that a contributing entity maintain documents and records sufficient to substantiate the submitted enrollment count for at least 10 years, and make the evidence available upon request from HHS in case of audits.

Counting Methods

A self-insured plan may use the methods below to count covered lives. A contributing entity is not required to use the same counting method from year to year throughout the transitional reinsurance program.

Actual Count Method

This requires adding the total number of lives covered for each day of the first nine months of the calendar year and dividing that total by the number of days in the first nine months.

Snapshot Method

This requires adding the total number of lives covered on any date (multiple dates can be used) during the same corresponding month in each of the first three quarters of the calendar year, and dividing that total by the number of dates on which a count was made.

The applicable regulations do not mandate that a certain month or week be used, but the regulations do require that the date used for the second and third quarters must fall within the same corresponding month and week of the date used for the first quarter. The example below, from HHS operational guidance, provides a helpful illustration.

Example: A self-insured plan elects to count the number of covered lives on March 5, 2014, June 5, 2014 and September 5, 2014. It counts 1,600 covered lives on March 5; 1,650 covered lives on June 5; and 1,650 covered lives on September 5. The total, 4,900, is divided by 3, resulting in 1,633.33 covered lives (round to nearest hundredth).

Snapshot Factor Method

This method is identical to the snapshot method, except the contributing entity must separately count the total number of participants with self-only coverage and the total number of participants with coverage other than self-only coverage (e.g., family coverage) on each designated date. The total number of participants with self-only coverage is added to the total number of participants with family coverage multiplied by 2.35. This number is then divided by the total number of dates on which a count was made (exactly like the snapshot method).

This method can be used when a contributing entity does not have data concerning covered dependents and spouses. However, a contributing entity must still have data distinguishing those participants with self-only coverage and those participants with family coverage. The table below, from operational guidance, demonstrates these calculations.

Form 5500 Method

This method requires adding the total participant counts at the beginning and end of the plan year, as reported on the most recently filed Form 5500, and dividing by 2 for a plan that only offers single coverage. If a plan offers single coverage along with other coverage (e.g., family coverage), the total number of lives is determined by adding the total participant counts at the beginning and end of the plan year, as reported on the most recently filed Form 5500, without dividing by 2. A contributing entity can find this information on Lines 5 and 6(a)-(c) on the Form 5500 filed for the previous plan year.

Counting Methods for PCORI Fees

The Health Care Reform Act requires the sponsors of self-insured health plans to pay a fee to the Patient Centered Outcomes Research Institute (PCORI) every year until 2019. The counting methods for this fee are similar to the methods for the reinsurance fee. However, a contributing entity does not have to use the same counting method for the reinsurance fee that is used for the PCORI fee.

Conclusion

Contributing entities should begin strategizing on which counting method to use. The data for the snapshot method and the Form 5500 method is likely accessible at this time. It would be prudent to begin calculating covered lives using these methods to determine which counting method is most cost-effective.