CMS Premium Rebate Guidance – Implications for States and Other Stakeholders
Jason Levitis, Levitis Strategies
On August 4, 2020, CMS released guidance permitting health insurance issuers to provide certain premium rebates for 2020. The guidance explains the conditions rebates must meet and clarifies the impact of individual market rebates on ACA provisions like the premium tax credit. The guidance provides welcome news about the impact of rebates on consumers, but it may pose challenges for issuers that have already been providing rebates. This piece summarizes the guidance, explains how it affects key stakeholders, and notes some questions that remain unanswered. (The CMS guidance uses the term “premium credits” for premium discounts and holidays, but this piece uses “premium rebates” to avoid confusion with premium tax credits.)
The COVID-19 pandemic has led to a substantial reduction in commercial health insurance claims. With issuers holding extra cash and enrollees and employers facing financial hardship, some issuers have responded with premium holidays or discounts. There is a clear appeal to such moves, and many state regulators have been supportive.
But premium rebates also raise questions, both about the conditions under which such rebates are permitted and about interactions with other law, especially Marketplace subsidies.
Are Rebates Allowed? Federal and state laws generally require issuers to finalize their premiums before the plan year. Rebates amount to midyear premium changes, so it is not obvious that they are permitted.
CMS has in the past expressed openness to rebates that satisfied certain conditions, but it has never been specific about the conditions. Guidance released in 2012 generally defers to states on whether rebates are permitted, while noting that “HHS expects that the premium holiday would be provided in a non-discriminatory manner, meaning that it is offered to every policyholder in a state’s market and not based on product type or the experience of a particular policy.” The 2012 guidance does provide specific rules on the required amounts of rebates or other conditions.
CMS also addressed a related issue in June 2020, explicitly authorizing the advance payment of medical loss ratio (MLR) rebates for 2020.
Impact on Marketplace Subsidies. Under the ACA, the premium tax credit (PTC) (and therefore advanced premium tax credit (APTC)) is capped at the premium for the consumer’s plan, referred to as the “enrollment premium.” The cap is binding only where the subsidy covers the full premium. Consumers who receive APTC based on their projected income must reconcile with the PTC on their tax return.
This raises a key question for premium rebates: If the enrollment premium in rate filings is $300, but a rebate makes the net premium $250, which premium is used to determine APTC, and PTC? Given reconciliation, using a lower premium for PTC than for APTC could create additional tax liability.
On the one hand, the purpose of the cap seems to require using the lower premium ($250), since otherwise PTC could exceed the actual premium paid. The PTC regulations are not clear on this point but seem more consistent with this approach: they call for the enrollment premium to be “reduced by any amounts that were refunded.”
On the other hand, the IRS does not require MLR rebates – which also amount to a late premium adjustment – to be taken into account in determining PTC. That said, the IRS FAQ on the subject notes that this is because MLR rebates are received after the plan year is over – which is not the case with the rebates currently being considered.
Regardless of the legal rule, it is clear that to date Marketplaces have been issuing APTC based on the full, undiscounted premium. That’s because issuers are not systematically reporting rebates to Marketplaces, so Marketplaces cannot recalculate APTC using the lower premiums. Thus, if it’s right that the enrollment premium must be reduced by any rebate, issuers have in some cases been receiving too much APTC – more than the full amount of the premium.
This creates two risks for consumers. First, if APTC is based on the full premium but PTC on the reduced premium, some consumers may owe back money at tax filing – even though those affected by the enrollment premium change generally do not benefit from rebates because they already have no personal contribution. Second, even if consumers are protected from repayment, there is a risk that the excess payments to issuers would be unwound in a way that would impose additional administrative burdens on consumers, even though the tax reconciliation process is already quite complicated.
(There’s also a second premium that affects the premium tax credit – the second lowest-cost silver plan premium, also called the benchmark premium. Treasury regulations make clear that this premium is not changed after the fact, so they should not be affected by premium rebates.)
The New Guidance
The guidance released August 4 rather humbly claims to “not have the force and effect of law.” But citing “the urgent need to help facilitate the nation’s response to the public health emergency posed by coronavirus disease 2019 (COVID-19),” it clarifies or announces several key federal policy positions. It announces enforcement discretion to permit premium rebates in the individual and small group markets, lays out the conditions under which such rebates are permissible, clarifies the impact of rebates on APTC and PTC amounts, indicates how changes to credit amounts will be operationalized, and addresses several other issues.
Rebates permitted if certain conditions are met. The guidance notes that issuers in the individual and small group markets are generally prohibited from “reduc[ing] premiums that are otherwise due” under a number a federal provisions, including the ACA’s rating rules. The guidance promises relief from these requirements through “relaxed enforcement” to permit premium rebates in 2020, provided that certain conditions are met:
- Must be pre-approved by the state’s Marketplace and rate review authority. CMS will generally approve rebates that satisfy the standards in the guidance and encourages states to do the same. CMS will not consider states that do so to have failed in their regulatory responsibilities. Rebates may only be applied prospectively to future months, and any requests for rebates must be submitted to CMS no later than October 1, 2020. CMS will release a template that may be used for this purpose.
- Must be a fixed percentage of the premium for all members of a market in a state.
- May not reduce qualified health plan premium for abortion coverage below $1 per month. Final regulations released in December 2019 generally require qualified health plans to send – and enrollees to pay – a separate bill of at least $1 each month for certain abortion services. A rebate may cover the entire regular premium, but it may not reduce the abortion premium below $1 per month.
Interactions with Marketplace subsidies and operations. The guidance confirms that the enrollment premium for both APTC and PTC purposes is the discounted, i.e., lower, premium (while the benchmark premium is not affected by rebates). CMS will adjust enrollment premiums and APTC in its enrollment data, thereby clawing back excess APTC from issuers as part of the normal APTC reconciliation process between CMS and issuers (not to be confused with the tax reconciliation process for consumers). Issuers must report rebates to their Marketplace, and Form 1095-A reporting must reflect net premiums and correct APTC amounts. CMS will not be able to update the premiums displayed on healthcare.gov, meaning that consumers choosing a plan may not be aware of the actual premium they would face.
Other subjects. The guidance includes some odds and ends:
- Indicates that CMS will impose the 2020 user fee based on the discounted (lower) premium and will not change the user fee rate.
- Promises future guidance allowing premium reporting for MLR and risk adjustment purposes to net out any rebates.
- Notes that healthcare.gov will continue to use the undiscounted (higher) premiums to determine affordability for purposes of catastrophic plan eligibility.
What it Means for Stakeholders
Consumers. The guidance appropriately holds consumers receiving rebates harmless from financial and administrative burdens by ensuring that both APTC and PTC will be set based on the discounted (lower) premium and that any excess APTC amounts will be clawed back from issuers seamlessly – without consumers taking action or even being aware. They will reconcile on the tax return using the normal procedures.
Issuers. For issuers considering rebates, the guidance provides a roadmap for how rebates must be structured and how to seek approval. The rules are not as flexible as some may desire, but they are straightforward and do not require onerous administrative changes.
Issuers that have already been providing rebates may face the need to bring rebates into compliance retroactively. Those that did not seek pre-approval from the Marketplace and rate review authority should do so. All issuers providing rebates should submit information about their rebates using the expected template (or the SBM analog). The requirement for rebates to be provided in a uniform percentage may pose a problem for issuers who have provided smaller rebates to some enrollees – especially those receiving APTC. Such issuers may need to “top up” rebates for enrollees who received smaller ones – perhaps incurring unexpected costs. Issuers that have provided complete premium holidays for a month may be out of compliance with the abortion requirement. Such issuers may need go back and bill enrollees already provided a full premium holiday. It is not clear how strictly or how quickly CMS might enforce these mandates.
State-Based Marketplace (SBMs). State-based marketplaces with QHP issuers considering (or already providing) rebates face a few key tasks:
- Review and approve or deny proposed rebates, including addressing rebates that may have taken effect without the required pre-approval or that violate the newly announced conditions.
- Establish procedures for issuers to report rebate amounts.
- Incorporate rebated premiums into their enrollment databases, thereby triggering an automatic adjustment in APTC payments via the ongoing reconciliation between issuers and CMS, and ensure that the rebated premiums and correct APTC amounts are reflected in their Form 1095-A reporting.
- Determine whether to follow CMS’s lead in levying user fees based on the discounted premium. SBMs must balance lost revenue against potential operational challenges and the importance of encouraging issuers to provide rebates.
Insurance Regulators. State insurance departments must review and approve or deny proposed rebates, including addressing rebates that took affect without the required pre-approval or that violate the newly announced conditions.
Questions that Remain Unanswered
The guidance leaves at least two key questions unanswered:
- As discussed above, it does not address how issuers that have provided rebates that violate the new rules should go about coming into compliance. Issuers facing this situation may want to reach out to CMS at the contact provided: email@example.com.
- The guidance does not address how MLR rebates affect tax liability. The IRS’s current position – that MLR rebates don’t generally trigger additional tax liability for PTC recipients – may be reconsidered since individual market MLRs rebates have increased over time, and especially with the prospect of larger rebates given litigation over unpaid risk corridor and cost-sharing reduction payments. The IRS FAQ mentioned above indicates that the Treasury Department and IRS are considering guidance “that will address whether a taxpayer must increase his or her tax liability for the year of the receipt of the MLR rebate to the extent the taxpayer was allowed a premium tax credit for the portion of the taxpayer’s prior-year premium that was refunded.”
 The rate review authority is generally the state insurance regulator. However, four states rely on CMS for this function: Missouri, Oklahoma, Texas, and Wyoming. In these states, CMS will “coordinate with state regulators.”