Initial Guidance on Early Retiree Reinsurance Program

The Patient Protection and Affordable Care Act (PPACA) establishes a temporary Early Retiree Reinsurance Program to provide reimbursement to participating employment-based plans for a portion of the cost of providing health insurance coverage to early retirees. The Program provides an important opportunity for retiree health care programs – including those maintained by private and governmental employers, voluntary employee beneficiary associations, employee organizations, and multiemployer plans – to recoup costs for health benefits provided to early retirees. On May 3, 2010, the Secretary for the Department of Health and Human Services released an interim final rule describing the operation of the Program.

The purpose of the Program is to encourage sponsors of retiree health programs to continue maintaining those programs – particularly for early retirees who are not eligible for Medicare – until the state-based health insurance exchanges established by the PPACA become operational in 2014. At that time, it is anticipated that pre-Medicare eligible early retirees (who have traditionally faced difficulties finding available and affordable coverage in the individual insurance market) will have a marketplace where they will be able to obtain affordable insurance without fear of being denied on the basis of pre-existing conditions. Consequently, the Program represents a stop-gap measure to bridge the time between the passage of the PPACA and the time that the exchanges come online.

The PPACA requires that the Program be established by the Secretary no later than June 21, 2010, although the Secretary anticipates that the Program will be in place by June 1, 2010. By law, the Program is to expire no later than January 1, 2014. The Program's funding is limited to $5 billion, thus the Program could actually end before 2014 if the allocated funds are spent before then. In order to take advantage of this opportunity, employers and retirement systems offering early retiree health coverage should take action now to consider whether applying for the Program makes sense for their plan, and, if so, be prepared to submit their applications as soon as a process for doing so becomes available.

Early Retirees

The Program provides reimbursement to sponsors of employment-based health plans of certain costs for health benefits (including amounts paid by the retiree as co-pays, co-insurance or deductibles) for any retiree who is at least 55 years old and who is not eligible for Medicare coverage. Reimbursement is also available for claims incurred by the spouse, surviving spouse and dependents, regardless of the age of the spouse or dependent. In other words, spouses or dependents may be under 55 years old or eligible for Medicare and costs for their health benefits will still be eligible for reimbursement. It should also be noted that the term "dependent" is intended to include all dependents eligible under the retiree plan – not just individuals who would qualify as a tax dependent of the retiree. The interim final rule refers to both the retiree and his or her spouse, surviving spouse, and dependents collectively as "early retirees" for simplicity's sake, and this health reform article will do so as well.

An early retiree cannot be an active employee of the employer maintaining, or currently contributing to, the employment-based plan, or of any employer that has made substantial contributions to fund the plan. This latter limitation must be carefully reviewed. The interim final rule indicates that if a person is considered to be receiving coverage by reason of current employment status under the Medicare Secondary Payer rules, then he or she is presumed to be an active employee. You should immediately begin reviewing whether your records will reflect this distinction between retirees.

Amount of Reimbursement and Health Benefits

The Program annually reimburses 80 percent of the cumulative costs of health benefits for each early retiree (which, as noted above, includes the retiree's spouse, surviving spouse or dependents) that are between $15,000 and $90,000 in a plan year (which is generally the plan's designated plan year, the deductible or limit year used by the plan, the policy year, the sponsor's taxable year, or the calendar year – in that order). For plan years that start on or after October 1, 2011, these amounts will be adjusted based on the percentage increase in the Medical Care Component of the Consumer Price Index for all urban consumers for the year involved. Only costs that are actually incurred and paid are reimbursable (although it does not appear that the cost has to be paid during the plan year to be reimbursable). Interestingly, reimbursable costs include not only those paid by the plan sponsor, but also those paid by, or on behalf of, the early retiree, such as deductibles, copayments, or coinsurance (as long as those costs can be substantiated by the sponsor and are not otherwise reimbursed by insurance or some other third-party arrangement).

For purposes of determining an early retiree's health benefit costs and whether an early retiree's costs exceed the cost threshold of $15,000 and do not exceed the cost limit of $90,000, all of the benefit options in which an early retiree participates must be aggregated. In other words, if an early retiree is eligible for separate medical and prescription drug plans maintained by the sponsor, then the cumulative costs paid by both of those options are combined for meeting the cost threshold, for calculating the cost limit, and for determining reimbursement levels. In addition, reimbursements are reduced by any negotiated price concessions for goods or services covered by the plan to ensure that reimbursements are limited to actual costs that are incurred by the sponsor. If those price concessions are not known until the end of the plan year (which is common with prescription drug rebates), then the plan sponsor will have to submit these "post-point-of-sale" negotiated price concessions at a later time and the sponsor's reimbursements will be adjusted.

The interim final rule provides a transition provision for 2010 plan years that begin before June 1, 2010 (e.g., a 2010 calendar year plan). For claims that are incurred before June 1, 2010, up to $15,000 per early retiree may be counted toward the $15,000 cost threshold; however claims above $15,000 incurred before June 1, 2010, will not be eligible for reimbursement. All claims incurred on or after June 1, 2010, will also be counted toward the cost threshold (if it was not already satisfied before June 1, 2010), and the claims that fall between $15,000 and $90,000 will be reimbursed for that plan year at 80 percent. For a calendar year plan, this means that claims incurred between January 1 and June 1, 2010, can count toward reaching the $15,000 cost threshold, but claims that exceed $15,000 that are incurred before June 1 will not be reimbursed. If a sponsor has already incurred at least $15,000 in claims for an early retiree by June 1, 2010, then each claim dollar incurred between June 1 and December 31, 2010, up to $90,000 will be reimbursable at the 80 percent rate.

For purposes of reimbursement, "health benefits" means medical, surgical, hospital, prescription drug and such other benefits that may be specified by the Secretary. Such benefits include those for the diagnosis, cure, mitigation or prevention of physical or mental disease or condition with respect to any structure or function of the body. Health benefits do not include HIPAA's so-called "excepted benefits" which include limited scope dental and vision benefits, as well as long-term care benefits. The Program is available to both self-insured and fully-insured early retiree programs.

Chronic and High-Cost Condition Program Requirement

A sponsor's employment-based plan must be certified by the Secretary and must include programs and procedures that have generated or have the potential to generate cost-savings with respect to plan participants with chronic and high-cost conditions. The interim final rule states that chronic and high-cost conditions are those for which $15,000 or more in health benefit claims are likely to be incurred during a plan year by one plan participant. Plan sponsors are in the best position to analyze their own claims data to determine those conditions for which $15,000 or more in health benefit claims are typically incurred in their plans. The commentary to the interim final rule suggests that the requirement to maintain these programs and procedures should be flexible on a plan-by-plan basis. The commentary indicates that a plan sponsor might meet this requirement if it determines that diabetes, if not properly managed, is likely to lead to claims in excess of $15,000 for a plan year for a plan participant. The sponsor may implement a diabetes management program that includes aggressive monitoring and behavioral counseling to prevent complications and unnecessary hospitalization. The standard is apparently meant to be scalable, but the sponsor must be able to demonstrate if audited that its programs and procedures have generated, or had the potential to generate, cost savings.

Permissible Uses of Reimbursements

All reimbursements received under the Program must be used to: (1) reduce the sponsor's health benefit premiums or health benefit costs; and/or (2) reduce health benefit premium contributions, copayments, deductibles, coinsurance, or other out-of-pocket costs, or any combination of these costs, for plan participants (not necessarily just the early retirees). Both the PPACA and the interim final rule make clear that proceeds under the Program must not be used as general revenue for the plan sponsor.

Application Process

A sponsor must submit an application to participate in the Program and to submit costs for reimbursement. The application will request the plan year cycles (that is, the start month and day and the end month and day for a plan year cycle; no year is required). Once a plan is certified and the application approved, so long as the sponsor continues to meet the PPACA's requirements, the plan sponsor will automatically continue to be certified under the Program without any requirement to submit renewal applications for subsequent plan years.

The actual application process has not yet been announced; however the interim final rule details some of the information that must be provided with the application, such as:

1) the applicant's name, address, federal Tax Identification Number and other contact information;

2) a plan sponsor agreement that includes, among other things, assurances that the sponsor has an agreement with its insurer or plan that appropriate information will be disclosed to the Secretary for Program purposes and that the sponsor has procedures to detect and reduce fraud, waste and abuse;

3) a summary of how the sponsor will use reimbursements to reduce sponsor and/or participant costs;

4) a summary of the sponsor's procedures to generate costs savings for plan participants with chronic or high-costs conditions;

5) projected amounts of reimbursements under the Program for the first two plan years; and

6) a list of all benefit options under the plan for which early retirees are eligible and for which reimbursements may be claimed.

An application must be approved and certified by the Secretary before a sponsor may request reimbursements. You should begin immediately preparing the information described in this paragraph. If you are currently claiming the Medicare Part D subsidy, the Secretary has indicated that this process will be similar. You may want to start with your Medicare Part D application.

It is critical for interested sponsors to submit a fully completed application as soon as possible after the application process opens because the Secretary has the discretion to stop taking applications based on the projected or actual availability of program funding. Applications will be processed in the order that they are received. Incomplete applications will be returned to the applicant and a resubmitted application will be processed when it is resubmitted – not as of when the original incomplete application was received. The commentary to the interim final rule acknowledges that the Secretary expects more requests for reimbursement than there are funds to pay the requests. Given the limited funding of the Program at $5 billion, it is unclear how long the application process will remain open. The Secretary could close the application process at any time that she determines that the $5 billion will be completely exhausted by 2014 for reimbursements to the then-current set of approved applicants. The regulations warn that one should expect an early closure of the process.

Submission of Claims

At this point, the Secretary has not provided much detail on how reimbursement requests will be submitted. The interim final rule does tell us that no claims may be submitted until the $15,000 cost threshold is met for an early retiree. However, when claims are first submitted, the submission will have to include claims below the $15,000 cost threshold for the plan year in order for the plan sponsor to demonstrate that the cost threshold has been met. Of course, those first $15,000 in claims are not reimbursable. Costs may not be submitted until the claim has been incurred during the plan year, and has been paid. This appears to suggest as long as claims are incurred during a plan year, they may be paid after the end of the plan year and they will still be reimbursable. In addition, the interim final rule notes repeatedly that any reimbursement under the Program is conditioned on the availability of the $5 billion in Program funds.

A submission of claims will consist of a list of the early retirees for whom claims are being submitted and documentation of the actual costs of the items and services. Out-of-pocket costs actually paid by the early retiree may also be submitted and are reimbursable to the plan sponsor. The interim final rule requires that the sponsor provide "prima facie evidence" that the early retiree actually paid the cost, such as an actual payment receipt. Obtaining such evidence from the early retirees may be very difficult. As a result, many plan sponsors may only be able to substantiate and submit costs paid by the plan sponsor itself. The actual manner and form of this reporting has not yet been specified; however, the interim final rule states that many of the definitions and procedures set forth in the rule are modeled after and are intended to be consistent with the application and reimbursement procedure for the retiree drug subsidy provided by the federal government under the Medicare Part D program. It is expected that the application and reporting process for this Program will be quite similar to the retiree drug subsidy program. Finally, the interim final rule contains a general description of other administrative requirements such as document retention and availability requirements, auditing requirements, and appeals procedures for adverse claim determinations.

Conclusion

As more information becomes available about the concrete terms of the Program's application process and other Program details, we will provide more information. In the meantime, for more information regarding the Early Retiree Reinsurance Program, or for any other questions regarding how health care reform impacts group health plans, please contact Christopher Sears, Tara Sciscoe, Melissa Proffitt Reese, Shalina Schaefer or your Ice Miller employee benefits attorney.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.