Insurers May Exclude Some Producer Comp From MLR Calculations

An official at the Center for Consumer Information & Insurance Oversight (CCIIO) has described situations in which health insurers can exclude agent and broker compensation from minimum loss ratio (MLR) calculations.

The official, Samara Lorenz, acting director of the CCIIO oversight group, gives the guidelines in a bulletin criticizing insurers for what CCIIO believes to be improper efforts to exclude producer fees and commissions from the earned premium figures used in MLR calculations.

In the bulletin, Lorenz also answers a question about whether consumers who buy health coverage using Patient Protection and Affordable Care Act (PPACA) premium tax credits can get MLR rebate money.

CCIIO is an arm of the Centers for Medicare & Medicaid Services (CMS), which is, in turn, part of the U.S. Department of Health and Human Services (HHS). CCIIO is in charge of running the PPACA-related HHS programs that affect the commercial health insurance market.

The PPACA MLR provision requires insures to spend 85 percent of large-group revenue and 80 percent of individual and small-group revenue on health care and quality improvement efforts.

Agents and brokers have tried to get regulators to exclude producer comp from the MLR calculations. Producers and their groups have argued that producers serve the customers, not the insurers, and that insurers simply collect the producer comp payment from the customers as a courtesy to the customers.

HHS rejected that argument. It adopted a regulation stating that earned premium includes "all monies paid by a policyholder or subscriber as a condition of receiving coverage from the issuer."

Insurers must include "agents and brokers fees and commissions" in their administrative cost total, because paying those fees and commissions is generally a condition of receiving coverage, Lorenz writes in the bulletin.

Some insurers have tried to exclude producer comp from earned premium by requiring "policyholders, as a condition of coverage, to sign a statement that the policyholder retained the agent or broker and negotiated the fee independently of the issuer, even where it appears that such statement was not factually accurate," Lorenz says.

Lorenz lists seven conditions that insurers and producers must meet if insurers want to exclude producer comp payments from MLR earned premium.

The seven conditions:

1. Under the law of the state in which the policy is issued, the producer is not a representative of the issuer.

2. The consumer is not required to use an agent or broker to buy insurance, and the consumer can buy the coverage directly from the insurer.

3. Consumers who use producers select, retain and contract with the agents or brokers on their own.

4. Consumers negotiate and are responsible for paying the fees or commissions separately and apart from the premiums.

5. The issuer does not include the agent or broker fees or commissions in rate filings.

6. The policyholder voluntarily chooses to pass the fee or commission through the issuer and is not required to do so, or the policyholder pays the fees or commissions directly to the agent or broker.

7. The policyholder issues the 1099 to the agent or broker, if a 1099 is required.

Lorenz also talks about how CMS will enforce the producer comp guidance. To see what she says about enforcement, keep reading.

CMS producer comp enforcement

PPACA requires health insurers to pay rebates when they fail to meet MLR targets.

To enforce the rebate requirement, CMS requires health insurers to send in data on premium revenue and spending.

CMS will enforce compliance with the new seven-condition producer comp exclusion test "as part of its ongoing MLR monitoring efforts, including examination as part of an audit," Lorenz writes.

"If CMS determines that an issuer has incorrectly calculated rebates or has incorrectly reported MLR data, it may require issuers to take appropriate corrective actions, such as paying any difference in rebates owed (with interest) to enrollees, and reporting the corrected amounts to CMS," Lorenz says.

See also: 5 more ways a Republican Congress could change PPACA

In another section of the bulletin, Lorenz handles the following question: "If an issuer is required to provide a rebate because the MLR standard was not met for a given reporting year, and a portion or all of the policyholder's health insurance premium obligation was paid with advance payments of the premium tax credit, to whom must the issuer provide the rebate?"

Can consumers who pay for health coverage with PPACA tax credits get MLR rebate money?

The MLR system does not distinguish between consumers who use tax credits to pay for coverage and those who don't, Lorenz writes.

"When a policyholder is owed an MLR rebate, and a portion or all of that policyholder's health insurance premium obligation was paid with a premium tax credit, the issuer must provide the rebate to the policyholder," Lorenz says.