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Regulation and Compliance > Federal Regulation > IRS

IRS: Blues shouldn't put quality in MLR tax calculations

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Nonprofit Blue Cross and Blue Shield plans and other nonprofit health plans may win some and lose some in proposed Internal Revenue Service (IRS) tax regulations.

The IRS has developed the draft regulations, “Computation of, and Rules Relating to, Medical Loss Ratio” (RIN 1545-BL05), to help nonprofit plans comply with a tax rule created by the Patient Protection and Affordable Care Act of 2010 (PPACA).

One proposed change could make it harder for nonprofit plans to qualify for a special tax break.

A second proposed change could make it easier for the plans to qualify for the tax break, and a third proposed change could simplify the process of doing the calculations needed to see if a plan qualifies for the tax break.

The draft regulations are set to appear in the Federal Register Monday. Comments will be due 90 days after the official publication date. 

PPACA and IRC Section 833(c)(5)
Before PPACA passed, nonprofit plans could use Internal Revenue Code Section (IRC) 833 to deduct 25 percent of their claims and expenses and 100 percent of their unearned premium reserves from their taxable income.

One PPACA minimum medical loss ratio (MLR) provision requires all health insurers, including nonprofit plans, to spend at least 85 percent of large group premiums and 80 percent of individual and small group premiums on health care or quality improvement efforts. Health insurers that fail to meet the minimum MLR standards must send enrollees’ rebates.

Members of Congress who believed that some nonprofit plans might be getting the Section 833 tax break without making any extra effort to help consumers added a second MLR provision that applies only to the nonprofit plans that use the tax break.

PPACA Section 9016 added Section 833(c)(5) to the Internal Revenue Code.

IRC Section 833(c)(5) requires the nonprofit plans that use the Section 833 tax break to spend at least 85 percent of total premium revenue on reimbursement for clinical services provided for enrollees.

The draft regulations
When health insurers comply with the minimum MLR rules that apply to all health insurers, they can add the money they spend on efforts to improve health care quality in the health care cost total.

Nonprofit plans asked the IRS to let them include quality improvement spending in Section 833 (c)(5) MLR calculations.

The IRS wants to keep nonprofit plans from putting quality spending in the Section 833(c)(5) MLR calculations.

The phrase “activities that improve health care quality” appears only the PPACA description of the general minimum MLR rules, not in the parts of PPACA that created IRC Section 833(c)(5), IRS officials said in a preamble to the proposed regulations.

But the nonprofit plans asked for a change that could increase their MLRs — keeping PPACA-related assessments and fees out of the total premium revenue figure in the Section 833(c)(5) MLR calculations — and the IRS has agreed to let insurers make that change.

Officials also have proposed letting nonprofit insurers use the same three-year time period to calculate their Section 833(c)(5) MLR and the minimum MLR rebate program MLR.

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