On May 4, 2010, the Department of Health and Human Services issued interim final regulations ("Interim Final Regulations ") implementing the Early Retiree Reinsurance Program (the "Program") effective June 1, 2010. The Patient Protection and Affordable Care Act ("PPACA") established the Program to provide plan sponsors with a partial reimbursement for certain health benefit claims incurred by early retirees, their spouses, surviving spouses and dependents under participating employment-based plans. As Congress has appropriated only $5 billion to fund the Program and participation will be approved on a "first-come, first-served" basis, employers should begin gathering appropriate information now so they will be ready to submit their applications as soon as the Program formally opens in June.

The PPACA requires the Department of Health and Human Services to implement the Program no later than June 21, 2010 and to end the Program no later than January 1, 2014. The Interim Final Regulations implement the Program effective June 1, 2010.

  • Calculation of Reimbursement. Under the Program, the Secretary of Health and Human Services (the "Secretary"), upon receipt of a valid claim for health benefits, will make a reimbursement payment to plan sponsors in an amount equal to 80% of the portion of health benefit costs (net of negotiated price concessions) attributable to claims that exceed $15,000 but are below $90,000 (indexed for plan years starting on or after October 1, 2011). The Secretary has interpreted this rule to mean cumulative health benefits incurred in a given plan year and paid for a given early retiree, that fall between the $15,000 lower limit and the $90,000 ceiling will be eligible for reimbursement. In determining the amount of claims, costs paid by the early retiree (or spouse, surviving spouse or dependent) in the form of deductibles, copayments, or coinsurance, will be included in the amounts paid by the plan. Claims for an early retiree under various benefit options (e.g. one option for the retiree, another for a dependent) will not be separately counted. Only one lower limit and one ceiling applies to each early retiree under each employment-based plan for a given plan year.
  • Effective Date and Transition Period. The Program becomes effective June 1, 2010. Sponsors may apply for plan years that begin before June 1, 2010 and end after that date. For claims incurred before June 1, 2010, the amount of such claims up to $15,000 count toward the lower limit and the ceiling, but the amounts that exceed $15,000 are not eligible for reimbursement and do not count toward the ceiling. The reimbursement to be paid is based solely on claims incurred on and after June 1, 2010 and that fall between the lower limit and the ceiling for the plan year.

For example, for a plan with a plan year that began July 1, 2009, with an end date of June 30, 2010, with an early retiree for which it has spent $120,000 in health benefit claims before June 1, 2010, and spends another $30,000 in health benefit claims for that early retiree between June 1, 2010 and June 30, 2010, the sponsor would receive credit for $15,000 in claims incurred before June 1, 2010 and receive reimbursement of 80% of $30,000 (for claims incurred after June 1, 2010), namely $24,000.

The Interim Final Regulations clarify that reimbursement will be made under the Program only for claims that are incurred and paid during the plan year.

  • Certain Definitions.

"Employment-Based Plan"—The Program is available to employment-based plans, which the Interim Final Regulations define broadly to include, a group health plan, whether a single employer plan, multiemployer plan, multiple employer welfare arrangement, or the plan of a state or local government or political subdivision of such government or an employee organization, a voluntary employees' beneficiary association, in any case whether self-funded, insured or otherwise, that provides health benefits to retirees, but excludes federal government plans.

"Health Benefits"—The PPACA defines health benefits to include medical, surgical, hospital, prescription drug and such other benefits determined by the Secretary. The regulatory definition of "health benefit" clarifies that such benefits include benefits for the diagnosis, cure, mitigation, or prevention of physical or mental disease or condition with respect to any structure or function of the body. The list of benefits the Secretary has authority to determine are proper under the Program is not exhaustive, though it is generally intended to include major medical benefits. Certain benefits, such as stand-alone dental and vision benefits, are not included.

"Early Retirees"—Under the PPACA, early retirees are individuals who are at least age 55 but not eligible for coverage under Medicare, and who are not active employees of an employer maintaining or contributing to an employment-based plan. The regulation clarifies that spouses, surviving spouses and dependents are also included in the definition of early retiree, so that even if they are under age 55 and/or eligible for Medicare, they may nonetheless be included in the Program.
  • Program Application. Requirements to participate in the Program include submission of an application and the requirements listed below must be satisfied. One application must be filed for each employment-based plan, and it must include.
  • The applicant's Tax Identification Number.
  • Name, address and contact information for the applicant.
  • A summary of how the applicant will use the reimbursement to meet the requirements of the Program, including how the reimbursement will be used to reduce plan participant or sponsor costs. Reimbursements may be used to pay for increases in sponsor's premiums or other health benefit costs or to reduce participants' costs. The summary must also explain how the reimbursement will be applied to maintain the sponsor's level of effort in contributing to support the employment-based plan. Funds dispersed under the Program may not be used as general revenue.
  • Applicants must project their reimbursement amounts for the first two plan-year cycles. This will assist the Secretary in making funding projections, and will help in determining when the Secretary should stop accepting applications due to funding limitations.
  • The employment-based plan must have in place programs and procedures that have generated or have the potential to generate cost-savings. Generally, the sponsor of the employment-based plan must be able to show that its programs and procedures have generated or had the potential to generate cost savings for plan participants with chronic and high-cost conditions, namely those that are likely to generate $15,000 or more in health benefit claims for one participant in a plan year. The sponsor need not have programs and procedures in place to address all such costly conditions, but it must take a reasonable approach to identifying which conditions it must address.

For example, to generate cost savings for a participant with a chronic condition, a sponsor may determine that diabetes, if not properly managed, is likely to lead to claims exceeding $15,000 for the participant per plan year. The sponsor might implement a diabetes management program that includes aggressive monitoring and behavioral counseling to prevent complications and unnecessary hospitalization.

Also, for example, to generate cost savings for a high-cost condition, a sponsor may determine that cancer is a high-cost condition for which it should generate cost savings. The sponsor may ensure that its plan covers all or a significant portion of the participant's coinsurance or copayments, or it could reduce or eliminate the deductible for treatment and visits related to the condition.
  • Sponsors must have policies and procedures in place to detect fraud, waste and abuse, and data to substantiate the effectiveness of the policies and procedures.
  • To accommodate HIPAA privacy rules, sponsors must have a written agreement with the health insurance issuer or employment-based plan requiring disclosure of protected health information on behalf of the sponsor to the Secretary.
  • Sponsors must sign a plan sponsor agreement which will include certain assurances to the effect that reimbursement is based on data submitted by the sponsor, and that if such data is found to be inaccurate, incomplete or incorrect, the Secretary may reopen and revise a reimbursement determination, including recouping reimbursement from the sponsor. Among other possible requirements, the sponsor must also specifically agree to comply with the terms and conditions for participation in the Program, and acknowledge that information in the application is being provided for the purpose of obtaining federal funds.
  • Application and Reimbursement Process. Before a sponsor may submit claims for reimbursement, its application must be approved by the Secretary. Applications will be processed in the order received. An application should be complete on its first submission, as denial of the application will necessitate resubmission of a new application. This may result in a possible loss of the sponsor's opportunity to participate in the Program, as applications are reviewed on a first-in first-out basis and the Secretary will stop accepting applications once the funding has been projected to be exhausted for the Program. The application does not need to be submitted each year—indication of the plan year cycles covered by the application will be sufficient for calculation of reimbursements.
  • Remedies. In addition to other laws which may apply, if it is found that a sponsor committed fraud, waste or abuse, or allowed them to occur under its employment-based plan, the Secretary may recoup from the sponsor some or all of the reimbursements paid under the Program, and/or may revoke a sponsor's certification to participate in the Program.

What to do now?

Since funding for the Program is limited to $5 billion, and the Program will end once that amount is expended or projected to be expended, even if prior to January 1, 2014, it is important for plan sponsors to move quickly to prepare for completing the application. A sponsor of a group health plan for early retirees should immediately:

  • Commence gathering data for health benefit claims incurred in the current plan year, including prior to June 1, 2010.
  • Review its group health plan to make any amendments necessary to satisfy the requirements of the Program.
  • Prepare applicable claims projections for the first two plan-year cycles.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.