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From Health Law Daily, May 13, 2013

IRS proposes rules to clarify medical loss ratio for health insurers

By Paul Clark

The Internal Revenue Service (IRS) has issued proposed regulations that provide guidance to Blue Cross and Blue Shield organizations and other health insurance companies on computing and applying the medical loss ratio added to the federal tax code by sec. 9016 of the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148) (Notice of proposed rulemaking, 78 FR 27873, May 13, 2013). The regulations would apply to tax years beginning after December 31, 2013.

PPACA provision. Blue Cross and Blue Shield organizations, and other qualifying health insurance organizations, are allowed a special deduction from regular tax under Internal Revenue Code Sec. 833; PPACA sec. 9016 modified the Code to provide that these organizations will only be entitled to this special tax treatment if 85 percent or more of their insurance premium revenues are spent on clinical services, otherwise known as the medical loss ratio (MLR).

Health care quality costs. The IRS has concluded that the MLR numerator in Code Sec. 833(c)(5) does not include costs for “activities that improve health care quality.” The proposed regulations provide that the same exclusions that are permitted from total premium revenue under section 2718(b) of the Public Health Services Act (PHSA) are permitted exclusions from total premium revenue under Code Sec. 833(c)(5) because both Code Sec. 833(c)(5) and section 2718(b) of the PHSA use the term “total premium revenue.”

Accordingly, the proposed regulations provide that “total premium revenue” for purposes of Code Sec. 833(c)(5) means the total amount of premium revenue for purposes of section 2718(b) of the PHSA and the regulations issued under that section.

MLR computation. The IRS has also concluded that it is appropriate to compute the MLR for a tax year under Code Sec. 833(c)(5) using the same three-year period used under section 2718(b) of the PHSA. Therefore, beginning with the effective date of the rules, amounts used for purposes of Code Sec. 833(c)(5) (that is, total premium revenue and total premium revenue expended on reimbursement for clinical services provided to enrollees) for each tax year should be determined based on amounts reported under section 2718(a) of the PHSA for that tax year and the two preceding tax years, subject to the same adjustments that apply for purposes of section 2718 of the PHSA.

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