News Flash: March 11, 2014 - Final Regulations on Modifications to Transitional Reinsurance
Program for 2015
The Patient Protection and Affordable Care Act (PPACA) provides for three risk-spreading mechanisms to
mitigate the potential impact of adverse selection and to stabilize premiums for coverage in the individual
health insurance market: a risk corridor, a risk adjustment program and the transitional reinsurance
program. The Department of Health and Human Services (HHS) recently issued final regulations that
modify PPACA’s premium stabilization programs, including the transitional reinsurance program, for 2015.
Starting in 2014, due to insurance reform under PPACA, health coverage will be available to anyone,
regardless of health status, either in the individual market or through the small group market. This
unfettered availability may result in adverse selection (i.e., the tendency for high-risk individuals to buy
health insurance and low-risk individuals to defer purchase of health insurance), which in turn would result
in fewer healthy enrollees. Such adverse selection may ultimately cause premiums to increase in any
market, but especially in the individual and small group markets.
In order to stabilize these increasing premiums, especially in the first three years (2014-2016) of operation
of state insurance exchanges, PPACA provides for the implementation of a transitional reinsurance
program. Reinsurance is basically buying protection against the possibility that some rare set of
circumstances (such as high claim cost) might produce losses that an insurer is unable to fund on its own.
Thus, the reinsurance program under PPACA is designed to reduce the uncertainty of insurance risks in the
individual market by making payments for high-cost claims. According to HHS guidance, the “reinsurance
program is designed to protect against insurers’ potential perceived need to raise premiums due to the
implementation of the 2014 market reform rules, specifically guaranteed availability.”
The reinsurance program will be funded with payments to an “applicable reinsurance entity” from health
insurance issuers and certain plan administrators on behalf of group health plans. The program is scheduled
to run for a three-year period beginning January 1, 2014. Additional information about the reinsurance
program can be found in Willis’ Alert, January 2013, "HHS Issues Additional Guidance on Transitional
Final Regulations Highlights
The recently published final regulations make several changes to the reinsurance program. Highlights of
these changes include:
• For 2015 and 2016 (the change does not apply to the 2014 benefit year), self-insured group health
plans that do not use a third party administrator (TPA) for claims payment, claims adjudication or
enrollment (referred to as “self-insured, self-administered plans”) would not be treated as
contributing entities and would be exempt from making reinsurance contributions. A self-insured
plan can qualify for this exemption even if it outsources some plan administrative functions,
provided it outsources the function to an unrelated third party and meets one or more of the
Outsourcing is limited to pharmacy benefits or excepted benefits (like dental or vision);
Only a de minimis amount of core administrative services for benefits other than pharmacy or
excepted benefits is outsourced. A de minimis amount is up to 5% of either the amount or
value of the enrollment or claims processing transactions for the outsourced benefits; or
The plan “leases” a network and also obtains provider network development, claims repricing
and similar services.
Based on this guidance, a self-funded plan that is otherwise self-administered but outsources its
substance use disorder benefits will not receive this exemption if the substance use disorder benefits
exceed the de minimis limit.
Since most self-insured plans use a TPA to administer their health plans, it is expected that this
change will have very little effect on those plans generally.
• The final rules add a definition of major medical coverage that excludes (from the definition and
thus the contribution requirement) coverage that does not provide minimum value (having a 60%
actuarial value). Major medical coverage also includes an individual or small group market plan
(subject to actuarial value requirements) and a catastrophic plan.
• The annual contribution amount for 2015 is $44 per covered life (it is $63 for 2014).
Contributions will be paid in two installments. The first installment reflects the actual reinsurance
contribution (plus HHS’ administrative costs) and the second installment reflects payments allocated to the
U.S. Treasury. The first payment will be invoiced by December 15 of the benefit year (e.g., calendar year
for which coverage is provided) and the second installment will be invoiced in the fourth quarter of the
following calendar year. Both installments will be based on the same enrollment count and payments for
each installment are due within 30 days after the invoice date. The installments payable for 2014 will be
$52.50 and $10.50 per covered life, and the installments payable for 2015 will be $33 and $11 per covered
Lastly, HHS also indicated that it anticipated conducting targeted audits of contributing entities, beginning
with the contributions made for the 2014 plan year.
The information in this publication is not intended as legal or tax advice and has been prepared solely
for informational purposes. You may wish to consult your attorney or tax adviser regarding issues raised
in this publication.