Health Care Reform Advisory #3
The Early Retiree Medical Reinsurance Program

As we have reported in earlier Advisories (Advisory #1 and Advisory #2), employers are preparing for the significant changes to the design of their group health plans that will be required by the Patient Protection and Affordable Care Act (the "PPAC"), signed by President Obama on March 23, 2010, and the Health Care and Education Reconciliation Act of 2010 (the "HCER"), signed on March 30, 2010.  These Acts together have been commonly referred to as "health care reform laws."  This Advisory will focus on the early retiree medical reinsurance program (the "reinsurance program").   

The health care reform laws establish, by June 23, 2010, a $5 billion reinsurance program to encourage employers to continue to offer group health plan coverage for certain early retirees, their spouses, surviving spouses and dependents.  Private employers, state and local governmental employers, unions, and voluntary employee beneficiary associations ("VEBAs") are eligible to apply with respect to either fully insured or self-insured health plans (this Advisory will focus on the requirements for employers).  The reinsurance program will end on December 31, 2013, since early retirees should be able to choose, in 2014, from additional coverage options that will be made available through each state's health insurance exchange that will be created as a part of the health care reform laws. 

In order to be eligible, an employer must have a plan that provides health benefits to "early retirees."  For purposes of the reinsurance program, an early retiree is defined as an individual who is at least age 55 and who is neither (i) an active employee of the employer maintaining the plan or an employer that has made substantial contributions to fund that plan; nor (ii) eligible for Medicare.  Health benefits include medical, surgical, hospital, prescription drug, and other benefits to be determined by the Secretary of Health and Human Services. 

In order to receive the assistance, a plan must apply to be a part of the reinsurance program, must document claims, must implement programs and procedures to generate cost savings with respect to participants with chronic and high-cost conditions, and must be willing to be subject to audit with respect to this program.  The application process is expected to be similar to the process employers use to submit applications for the retiree drug subsidy program. Guidance on the application process is expected to be issued soon. 

If an employer is approved to participate in the reinsurance program, the employer plan will receive payments from the program on behalf of early retirees and their families.  For each early retiree and the early retiree's spouse, surviving spouse and dependents, the plan will receive up to 80% of the costs, minus negotiated price concessions (such as discounts, direct or indirect subsidies, rebates, or direct or indirect remuneration), for health benefits between $15,000 and $90,000.  The minimum and maximum dollar limits for health benefits payable under the reinsurance program will be adjusted for cost of living each year.  Costs paid by the early retiree, the early retiree's spouse, surviving spouse and dependents in the form of deductibles, copayments or coinsurance are treated as amounts paid by the plan.  Although the program will begin in June, the statute specifies that all eligible plan-paid costs for the 2010 plan year will be eligible for the reinsurance program. 

Example:  Employer's plan pays $60,000 in benefits on behalf of an early retiree for the 2010 plan year.  Assuming the employer is approved to participate in the reimbursement program, the employer can expect to receive $36,000 in reimbursement (80% of ($60,000-$15,000)).

The amounts paid to the plan through the reinsurance program must be used to reduce premium costs for the plan or to reduce premium contributions, copayments, deductibles, coinsurance or other out-of-pocket costs for participants.  Payments received under the program will be excluded from the employer's income. 

Employers who do not provide benefits for early retirees, currently, could consider adding a new plan to provide these benefits.  However, employers should remember that funds appropriated to this reinsurance program are limited.  Additionally, if the plan providing benefits to early retirees is a new and separate program, it will need to meet the requirements for new health plans effective for plan years after September 23, 2010.  If an existing plan is amended for this extended coverage, please also note that the amendment may destroy a plan's grandfathered status for other health care reform law requirements.  Please see our earlier Client Advisory for an explanation of the requirements that will apply to new plans and grandfathered plans.

Employers interested in applying for the reinsurance program should keep an eye out for the application forms and procedures that will be published sometime in June.  The program will be available on June 23, 2010, and will run through December 31, 2013 (or until the appropriations have been exhausted).  The Secretary of Health & Human Services can stop taking applications if funding is no longer available.  This means that employers should take quick action to apply to ensure that funds are available for their eligible expenses once the reinsurance program opens. 

This is just the third in our series of Client Advisories that will be sent discussing the various provisions of the health care reform laws that are of interest to employers.  Watch for future Client Advisories as we continue to digest the provisions of this complex and significant legislation.

Our Employee Benefits Team is available to answer any questions you may have on health care reform or any other employee benefit matter.

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©2010 Sherman & Howard                                                                April 26, 2010