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PPACA: Tax Questions Surface in MLR Discussions

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Insurers and consumer groups are at odds over how insurers should treat tax payments when computing medical loss ratios (MLRs).

Tim Jost, a law professor who helps represent consumer interests in National Association of Insurance Commissioners (NAIC) proceedings, argued in July that insurers should subtract only taxes on health insurance premium revenue, not taxes on investment income or other types of revenue, when computing the revenue figure used in MLR calculations.

“Congress meant that taxes on health insurance premium revenue are to be subtracted,” Jost writes in a comment letter.

Letting insurers subtract other types of taxes from the MLR revenue figure “obviously makes no sense,” Jost says.

Bill Weller, who is representing America’s Health Insurance Plans, Washington, and Randi Reichel, a lawyer, say the NAIC MLR rules should let insurers deduct all state and federal taxes the revenue figure used in MLR calculations.

The minimum MLR section of the Affordable Care Act, the legislative package that includes the Patient Protection and Affordable Care Act (PPACA), “is clear that ‘federal and state taxes’ are to be deducted from the denominator of the MLR,” Weller and Reichel write in a comment letter.

“If Congress had intended that only certain taxes be deducted it could, and would, have specified which taxes those should be,” Weller and Reichel say. “It did not choose to do so. It is incorrect as a matter of law, and as a matter of policy, for the NAIC to attempt to delve into congressional intent when the language does not raise a question of what that intent is.”

The discussion is part of talks at the NAIC, Kansas City, Mo., regarding implementation of the Affordable Care Act minimum MLR provisions.

The provisions will limit total expenditures on medical costs and quality improvement efforts to 80% for individuals and small groups, and to 85% for large groups.

All other factors being equal, the smaller a health insurer’s revenue total is, the higher its MLR will be.

Section 1001 of the Affordable Care Act says insurers should divide the sum of medical costs and quality improvement expenses by “the total amount of premium revenue (excluding federal and state taxes and licensing or regulatory fees and after accounting for payments or receipts for risk adjustment, risk corridors, and reinsurance under sections 1341, 1342, and 1343 of the Patient Protection and Affordable Care Act) for such plan year,” according to a copy of the bill text.

The PPACA Actuarial Subgroup at the NAIC’s Accident and Health Working Group is trying to come up with the definitions needed to implement the minimum MLR provisions.

The NAIC’s Executive Committee and its Plenary – the body that represents all voting members of the NAIC – will be considering final implementation of a related proposal – a PPACA-related update of the blanks that insurers must use to file annual reports on their health insurance operations — Aug. 17, during the NAIC’s summer meeting in Seattle. The plenary could complete work on the blanks at the meeting.

Judy Dugan of Consumer Watchdog, Santa Monica, Calif., has written to the PPACA Actuarial Subgroup in support of Jost.

“To allow deduction of any tax not attributable to premium revenue would be a direct subsidy of overhead and profit,” Dugan writes.

Judith Langer has written on behalf of WellPoint Inc., Indianapolis (NYSE:WLP), that WellPoint believes the minimum MLR calculation rules clearly exclude all federal taxes.

“The clear and plain language of PPACA does not

in any way restrict or modify the term ‘federal taxes,’ and thus it would be inconsistent with the law for the NAIC to do so,” Langer says.

“The federal government requires insurers to pay federal taxes, and insurers have no control over whether to pay taxes or the amount of taxes to pay, and it is bad policy to penalize entity for paying taxes,” Langer says. “It would be unreasonable for the federal government, on the one hand, to require insurers to pay federal taxes and on the other hand, to pay out some of that same tax money already paid out to the government, to consumers as MLR rebates. In other words, insurers would be paying out more than 100% of a dollar.”


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