From the depths of the Internal Revenue Services comes an attempt to clarify some ambiguities for the uniquely taxed Blue Cross Blue Shield insurers and their medical cost ratios.
Last year's "Cromnibus" federal budget brought a few Affordable Care Act insurance program tweaks, notably an allowance for Blue-licensed insurers to count quality improvement investments as part of their member spending equation, much as every other insurer can.
In its adjustment of the Blues' home in the U.S. tax code, section 833, the ACA originally left quality improvement activities out of the BCBS member spending calculation in their MCRs. The IRS for a time suggested that BCBS plans could count quality improvement expenses, but then in a final rule concluded that the ACA's language did not allow this.
The Cromnibus changed that, adding quality improvement to the BCBS MCR ratio, retroactively to 2010. But of course it's not that simple. In a new memo to the industry, the IRS Office of Chief Counsel attempts to answer some questions about calculating the ratios for tax purposes.
One question that has come up: If in one year a BCBS health plan did not meet the 80 percent MCR for the small group market but exceeded the 85 percent ratio for the large group market, "did the organization satisfy the 85 percent MLR for that taxable year?"
Basically, yes. The section 833 MCR does not have separate MLR requirements for the individual, small group and large group market segments, as the ACA MCR does for all other insurers, the IRS noted. "In this case, if the organization's section 833(c)(5) MLR computed on an aggregate basis is at least 85 percent, the organization will satisfy the section 833(c)(5) MLR for the taxable year."
Another question the IRS has been getting: If a BCBS insurer issued individual or group MCR rebates to enrollees for a reporting year, does this "necessarily indicate" that the organization did not satisfy the section 833 MCR for that taxable year?
"No, the fact that an organization issued section 2718 medical loss ratio (individual or group) rebates to enrollees for a reporting year does not necessarily indicate that the organization did not satisfy the section 833(c)(5) MLR for that taxable year," the IRS wrote.
Since the MCRs for non-Blue plans are computed by market segment and the Blues' section 833 MCR is aggregated, "it is possible for an organization to be required to issue section 2718 medical loss ratio rebates to enrollees by market segment for a reporting year, but on an aggregate basis satisfy the section 833(c)(5) MLR for that taxable year."
How about this: Can a BCBS insurer include any previous rebates as an expense in accounting for future tax years?
The Blues' MCR section relies on the non-Blues MCR section for following the Department of Health and Human Services's terminology, the IRS noted. But those methods are subject to some fluctuation year to year, so whether rebates can be included as an expense "depends on the HHS guidance in effect for that year," the IRS wrote.
A fourth question the IRS has received: Can BCBS insurers decrease their MCR denominator "for additional federal income taxes incurred with respect to an increased incurred but not reported reserve for the taxable year?"
They "can decrease its premium revenue by the amount of its federal and state taxes and licensing or regulatory fees as otherwise provided under" the section 2718 rules, the IRS wrote.
Other questions have asked the IRS to weigh in on some ambiguities in guidance from HHS' CCIIO, the Center for Consumer Information and Insurance Oversight.
For instance, CCIIO's MCR reporting form has fields for "adjusted incurred claims" as of December 31 of the reporting year and March 31 of the year following the reporting year. So, "which amount should be used when computing" the section 833 Blues MCR?
Go with March, the IRS wrote, citing final regulations elsewhere that addressed the issue. "45 C.F.R. section 158.140(a) provides that reimbursements for clinical services are based on claims incurred during the MLR reporting year that have been processed as of March 31 of the year following the reporting year," the IRS noted. "As a result, organizations must use the amounts reported as adjusted incurred claims as of March 31 of the year following the taxable year at issue under applicable HHS guidance."
Finally for the section 833 MCR, which "source document is more relevant," the National Association of Insurance Commissioners' Supplemental Health Care Exhibit or CCIIO's MCR form?
The Blues should use CCIIO's form, the IRS wrote. "There should be no need to prepare a reconciliation between information reported to the NAIC and information reported to CCIIO, because the information reported to CCIIO should be sufficient."