MLR and 833(c)(5) MLR

[cacornwell]

Is the MLR caculation for 833(c)(5) purposes for BCBS entities the same as the MLR calculation for paying rebates? It seems that the formulas are not exactly the same.

[Bruce]

We suggest that you consult with your tax counsel on this issue, as we are not in a position to offer you tax advice.

That said, the PPACA amendment that gave us 833(c)5 refers to the "percentage of total premium revenue expended on reimbursement for clinical services provided to enrollees under its policies during such taxable year (as reported under section 2718 of the PHSA)..." and was effective for taxable years beginning after December 31, 2009.

The MLR for rebate purposes is effective January 1, 2011. The HHS Interim Final Regulation issued December 1, 2010 defined the calculation of the rebate MLR in Section 158.220-158.22 in a much more complex way than 833(c)5 above - e.g., adjustments to the numerator for activities that improve health care quality, adjustment to the denominator for taxes, etc., credibility adjustments, combining multiple experience years, and so on.

I can certainly see why you would suspect that the "MLR" is not the same for the two purposes.

[Bruce]

As we investigate this issue, we'd like to share what we have learned to date. First there have been 3 IRS notices providing interim guidance issued on this topic, the most recent on May 29 (yesterday!). These are attached so you don't have to go hunting for them.

Here are the highlights, as we see them:
1) The 2010 notice refers to the "Section 833 MLR Numerator" and the "Section 833 MLR Denominator" - which indicates to us that they are not necessarily the same as the numerator and denominator for the MLR used for the rebate calculation.
2) Taxpayers must use the definition of "reimbursement for clinical services provided to enrollees" in the MLR and Rebate Interim Final Rule (IFR).
3) The Service will not challenge the inclusion of "amounts expended for activities that improve health care quality" as defined in the IFR.
4) Guidance is provided as to the need to file Form 3115 providing notice of a change in accounting.
5) Temporary relief is provided from losing status as a stock insurance company by reason of 833(c)5 if certain conditions are met.
6) The notices extend the "interim guidance" and "transitional relief" through the first taxable year beginning after December 31, 2012.

The most critical issues that seem ambiguous to us are:
1) The definition of "total premium revenue" for the denominator. There is no indication that we are allowed to deduct the taxes, etc. that adjust the MLR for rebate purposes.
2) Whether any of the other adjustments for new business, credibility, or (next year) combination of experience years that are part of the MLR for rebate purposes should or should not be used for the 833 MLR.

The most recent notice requests comments with a deadline of September 10, 2012, for the proposed regulations the Treasury and Service anticipate issuing. Thus, we cannot expect full clarity until sometime after that date. In the meantime, a contact for further information regarding the notice is provided at the end of the notice:

CONTACT INFORMATION
The principal author of this notice is Graham R. Green of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this notice contact Graham R. Green at (202) 622-3970 (not a toll-free call).