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Healthcare Enterprise Suggests Changes to Proposed Regs on Health Insurance Provider Fee

NOV. 26, 2013

Healthcare Enterprise Suggests Changes to Proposed Regs on Health Insurance Provider Fee

DATED NOV. 26, 2013
DOCUMENT ATTRIBUTES
  • Authors
    Scheffel, William
  • Institutional Authors
    Centene Corp.
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2013-27354
  • Tax Analysts Electronic Citation
    2013 TNT 229-33

 

18 November 2013

 

 

CC:PA:LPD:PR (REG-118315-12)

 

Internal Revenue Service

 

PO Box 7604, Ben Franklin Station

 

Washington, DC 20044

 

RE: Proposed Regulations § 57 "The Health Insurance Providers Fee" Under Section 9010 of the Patient Protection and Affordable Care Act, As Amended

 

Dear Sir or Madam:

Centene Corporation (Centene) submits this comment letter in response to the request for comments to Proposed Regulations § 57 (the "Proposed Regulations"). The Proposed Regulations would implement the health insurance provider fee enacted as part of the Patient Protection and Affordable Care Act, as amended (the "ACA") under section 9010 (the "section 9010 fee") that imposes a new fee on certain health insurance providers beginning January 1, 2014.

By letter dated June 3, 2013, Centene previously submitted a comment focusing on issues related to the application of the section 9010 fee on its Medicaid managed care plans. This comment letter focuses on two additional matters:

 

(1) The potential application of the section 9010 fee to service payments received by Centene's specialty health care management companies; and

(2) The potential inclusion in the 2014 section 9010 fee of net premiums written in 2013 by an entity that exited the health insurance business in 2013, but continues to be part of the a "covered entity" controlled group in 2014.

 

With respect to the first matter, we urge that the final regulations (or other interim guidance) clarify that "net premiums written" for purposes of calculating the section 9010 fee be defined in a manner that makes explicit that premiums written on a single U.S. health care risk are counted only once. In other words, the definition of "net premiums written" should make clear that premiums with respect to a single health risk are not subject to double taxation. We further urge that the final regulations (or other interim guidance) clarify that service payments made to entities like Centene's specialty health care management companies not be treated as "net premiums written" for purposes of calculating the section 9010 fee.

With respect to the second matter, we urge that the final regulations (or other interim guidance) provide for a 2014 transition rule that would exclude from the calculation of the 2014 fee any premiums written by an entity that terminates its entire health care business in 2013, even if that entity continues to be part of a "covered entity" controlled group in 2014.

Background

Centene, founded in 1984, provides health care services and programs to under-insured and uninsured individuals. Centene operates in two business segments: Medicaid "Managed Care" Services and Specialty Services. The Medicaid managed care business currently operates through separate health maintenance organizations (HMOs) located in 18 different states. The Specialty Services businesses include companies that manage behavioral health care and vision health care, among other health-related businesses.

The Centene HMOs maintain contracts with a number of states to serve as a Medicaid managed care organization ("MCO") and provide Medicaid enrollees with the mandated health benefits. The states reimburse the Centene HMOs for providing these benefits at the Medicaid managed care capitated rates provided for in the state contracts. These rates are set based on an actuarial study of costs and the risk of loss. The Centers for Medicare & Medicaid Services ("CMS") regulations require the MCO capitated rates to be actuarially sound and generally allow the rates to include reimbursement for certain fees and taxes. CMS has not yet fully addressed how the section 9010 fee will be incorporated into the state MCO contracts. Each state contract is negotiated separately and it is unclear for 2014 how the Medicaid managed care capitated rates will incorporate the section 9010 fee paid in 2014.

In certain circumstances, the Centene HMOs that hold the state Medicaid MCO contracts have subcontracted with a Centene specialty services company to manage the Medicaid or state mandated behavioral health care or vision care benefits. Under these subcontract arrangements, the Centene behavioral health care and vision health care specialty services companies manage the provision of the specific mandated health care benefits on behalf of the Centene HMO. The specialty companies are generally paid by the Centene HMO a per-member-per-month capitated fee for their services. Certain of the Centene specialty services companies are regulated by the state insurance departments and the revenue received by the specialty service companies from the HMOs may be referred to as "premium" payments. However, none of the specialty services companies file or report the fees paid by the HMOs on a Supplemental Health Care Exhibit or the Accident & Health Policy Experience Exhibit.

Final regulations should clarify the definition of "Net Premiums Written" for purposes of calculating the section 9010 fee

The Proposed Regulations do not clearly define the term "net premiums written." Centene is concerned that the ambiguity in the Proposed Regulations raises a question whether the fees (which may be referred to as "premiums") received by the specialty services companies should be treated as "net premiums written" for purposes of the section 9010 fee. If the revenue received by the Centene specialty services companies is treated as "net premiums written," Centene would be taxed twice under section 9010 for the same health risk: first, on the Centene HMO net premiums written, and next, on the fee paid by the Centene HMO to the Centene specialty service companies.

Centene urges Treasury and the IRS to clarify in the final regulations (or other interim guidance) that:

 

(i) Net premiums written apply only once to a single health risk; and

(ii) Net premiums written do not include direct service payments.

 

Section 9010 imposes an annual fee on each covered entity engaged in providing health insurance for a U.S. health risk. The fee is based on each covered entity's share of "net premiums written" during the data year. Proposed Regulation § 57.2(k) provides that:

 

The term net premiums written means premiums written, including reinsurance premiums written, reduced by reinsurance ceded, and reduced by ceding commissions and medical loss ratio (MLR) rebates with respect to the data year. Proposed Regulation § 57.2(k).

 

Proposed Regulations § 57.4(b) provides that the IRS will determine net premiums written for health insurance of a U.S. health risk based on reports submitted by the covered entities. Although not determinative of what constitutes net premiums written, the IRS may use annual insurance filings, such as the Supplement Health Care Exhibit (SHCE), which supplements the annual statement filed with the NAIC pursuant to state law, to determine the net premiums written.

 

A. Application of "net premiums written" to a single health risk

 

There is no indication in section 9010 that Congress intended premiums paid with respect to the same health risk to be taxed more than once.1 In fact, several provisions in the Proposed Regulations indicate that the intent is to avoid double taxation of premium payments for the same health risk.

First, although the Proposed Regulations define "net premiums written" to include reinsurance premiums written, this rule applies only to premiums written for assumption reinsurance, not to premiums for indemnity reinsurance. The Proposed Regulations specifically exclude indemnity reinsurance from the definition of a health insurance. The policy behind this distinction must be that premiums written on indemnity reinsurance should not be included in the calculation of the section 9010 fee because the primary insurer and the indemnity reinsurer are insuring the same health risk and the primary insurer is already liable for section 9010 fee based on the net premiums written on that risk. In the case of assumption reinsurance for which there is a novation, the reinsurer is the sole insurer of the health care risk under the policy.

In addition, the Proposed Regulations state that a multiple employer welfare arrangement (MEWA) is treated as a health insurer subject to the section 9010 fee only to the extent that the MEWA is not fully insured. The preamble to the Proposed Regulations makes clear that the reason for excluding a fully insured MEWA from the definition of a health insurer, even if it receives premiums and is subject to state insurance laws, is to ensure that the section 9010 fee is imposed only once on premiums received with respect to the same health care risk. In support of this position, the preamble provides:

 

In the case of a fully-insured MEWA, the MEWA is not a covered entity for purposes of section 9010 because, even though the MEWA receives premiums, it uses those premiums to pay an insurance company to provide the coverage being purchased. In this case, the insurance company is the covered entity because it, and not the MEWA, is providing health insurance. If the MEWA is not fully-insured, however, the MEWA is a covered entity for purposes of section 9010 to the extent that the premiums received by the MEWA are not used to pay an insurance company to provide the coverage being purchased (and are used instead by the MEWA to provide the health insurance itself). For example, if a MEWA received a $10,000 premium payment from a participating employer providing both major medical coverage and separate vision coverage for an individual participant, and the MEWA used $9,000 of that premium payment to pay the premium to cover such individual under a group insurance policy purchased from an insurance company and associated costs, and $1,000 to pay direct reimbursements under the vision plan and associated costs directly, then the MEWA would be treated as a covered entity only with respect to the $1,000 portion of the premium intended to pay the MEWA for providing the vision coverage itself. 78 Fed. Reg. 14034, 14036 (March 4, 2013).

 

Arrangements like Centene's, in which an HMO (or other insurer) subcontracts the management of a particular health care benefit to a third party, are common in the marketplace. Under these arrangements, the HMO (or other insurer) receives premiums to insure the entire health risk and would be subject to the section 9010 fee based on the net premiums written for the risk. The fee (even if it were characterized as a premium) received by the third party from the HMO to help manage that same health risk should not be characterized as a "net premium written" and should not be included in the calculation of the section 9010 fee. In Centene's situation, if the section 9010 fee applied to both the premiums received by the Centene HMO and the fee paid by the Centene HMO to the Centene specialty services companies, the double application would be particularly egregious because the same controlled group would pay twice for a single health risk. We do not believe that such a result is consistent with Congressional intent or required under the technical application of the rules; however, final regulations or other interim guidance should clarify how net premiums written defined for these purposes.

 

B. Application of "net premiums written" to direct service payments

 

We also request that final regulations or other interim guidance include a specific exception from the section 9010 fee for "direct service payments" made to a third party to manage certain health care benefits. Direct service payments should not be considered "net premiums written". This clarification may be unnecessary if the final regulations provide that only the premiums paid on a single health risk are treated as "net premiums written" subject to the section 9010 fee. However, because fees paid with respect to third party arrangements should never be subject to the section 9010 fee, we urge Treasury and the IRS to include this rule in the final regulations.

The section 9010 fee was not intended to apply to third-party fee arrangements. The Joint Committee on Taxation report regarding the fee states that "net written premiums do not include amounts arising under arrangements that are not treated as insurance." See, [cite]

The Proposed Regulations under section 162(m)(6), which was also enacted with the ACA, include an instructive rule that direct service payments made to a third party providers to manage a health care benefit are not treated as "premiums." Proposed Regulations § 1.162-31(b)(5) defines a "premium" to exclude "direct service payments," which the regulations define as follows:

 

a capitated, prepaid, periodic, or other payment made by a health insurance issuer or another entity that receives premiums from providing health insurance coverage (as defined in section 9832(b)(1)) to another organization as compensation for providing, managing, or arranging for the provision of healthcare services by physicians, hospitals, or other healthcare providers, regardless of whether the organization that receives the compensation is subject to healthcare provider, health insurance, health plan licensing, financial solvency, or other similar regulatory requirements under state insurance law. Proposed Regulations § 1.162-31(b)(5).

 

The Preamble to the Proposed Regulations explains the rationale for excluding "direct service payments" for these purposes. The Preamble states:

 

A health insurance issuer or other person that receives premiums from providing health insurance coverage may enter into an arrangement with a third party to provide, manage, or arrange for the provision of services by physicians, hospitals, or other healthcare providers. In connection with this arrangement, the health insurance issuer or other person that receives premiums from providing health insurance coverage may pay compensation to the third party in the form of capitated, prepaid, periodic, or other payments, and the third party may bear some or all of the risk that the compensation is insufficient to pay the full cost of providing, managing, or arranging for the provision of services by physicians, hospitals, or other healthcare providers as required under the arrangement. In addition, the third party may be subject to healthcare provider, health insurance, licensing, financial solvency, or other regulation under state insurance law. Commenters suggested that compensation payments to these third parties under these types of arrangements should not be treated as premiums from providing health insurance coverage for purposes of section 162(m)(6) because, while the third party bears some risk in connection with providing, managing, or arranging for the provision of healthcare services, a health insurance issuer or other entity that receives premiums from providing health insurance coverage is ultimately responsible for providing health insurance coverage to the insureds. . . . Accordingly, these proposed regulations provide that capitated, prepaid, periodic, or other payments (referred to as direct service payments) made by a health insurance issuer or other person that receives premiums from providing health insurance coverage to a third party as compensation for providing, managing, or arranging for the provision of healthcare services by physicians, hospitals, or other healthcare providers are not treated as premiums for purposes of section 162(m)(6), regardless of whether the third party is subject to healthcare provider, health insurance, licensing, financial solvency, or other similar regulatory requirements under state law. 78 Fed. Reg. 19950, 19953 (April 1, 2013).

 

The section 162(m)(6) Proposed Regulations' definition of "direct service payment" posits a three-party relationship. An individual, employer, or government is the first party who contracts for health insurance directly with an HMO or insurer, who is the second party. That second party in turn contracts with another insurer, manager or provider -- the third party -- to take on certain of the second party's obligations. While the third party may assume risk in the transaction, it is the second party that is obligated directly to provide the first party's health benefits. If the third party failed to provide the services it contracted with the second party to provide, the second party still would be the party ultimately responsible for providing those services to the first party. Thus, it is the second party, not the third party, in this example that is treated as receiving "premiums" for purposes of determining whether an entity is subject to section 162(m)(6).

Consistent with the rule regarding direct service payments in the section 162(m) Proposed Regulations, we urge Treasury and IRS to include a similar rule in the section 9010 final regulations. Under this rule, revenues would not include payments to third parties, like the Centene specialty services companies, that provide for health care services, but are not directly insuring individuals' health risks. This would be true even if those revenues are delineated as "premiums" and even if an entity is regulated as an insurance issuer under state law and takes on risk in the transaction. Stated differently, in order for a payment to a health insurance issuer to be treated as "net premiums written" there must be privity of contract between the insured individuals and the health insurance issuer, such that the health insurance issuer is the party ultimately responsible for the health insurance coverage. That privity and obligation does not exist if another party is legally responsible for providing the health insurance benefits to the individual in the first instance.

Final regulations should provide for a 2014 transition rule that would exclude from the calculation of the 2014 fee any premiums written by an entity that terminates its entire health care business in 2013, even if it continues to be part of a "covered entity" controlled group in 2014

ACA section 9010 provides that each covered entity with aggregate net premiums written over $25 million in the calendar year immediately preceding the fee year (referred to in the proposed regulations as the "data year") generally is liable for the section 9010 fee due by September 30th of each fee year. ACA section 9010(c)(3) provides that all members of a controlled group, as defined in Code sections 52(a), 52(b), 414(m) or 414(o), are treated as a single covered entity for purposes of the section 9010 fee. Expanding upon this controlled group rule, the Proposed Regulations provide that all net premiums written in the data year, in the aggregate, of the entire controlled group are taken into account in calculating the 9010 fee for the fee year. Prop. Reg. § 1.57-4(a)(4)(ii). The members of the controlled group are jointly and severally liable for payment of the fee. ACA section 9010(c)(4); and Prop. Reg. §§ 57.3(b)(3) and 57.8(e).

Centene urges the final regulations (or other interim guidance) provide a 2014 transition rule that would exclude from the calculation of the 2014 fee any premiums written by an entity that terminates its entire health care business in 2013, even if it continues to be part of a "covered entity" controlled group in 2014.

Without such a transition rule, Centene would be subject to the 2014 section 9010 fee based, in part, on net premiums written in 2013 by a member of the controlled group that exited from the health insurance business in 2013 without being reimbursed for this portion of the fee by the Medicaid capitated rates in the states where it continues to do business.

In Centene's situation, one of its controlled group member companies maintained a Medicaid managed care contract for 2013, but Centene exited this business during 2013. This member company received net premiums for 2013, but will write no health care insurance in 2014. Although the member company will have exited completely the health insurance business prior to the end of 2013, it will not liquidate until all runoff claims and other contractual obligations have been settled. Consequently, the member company will remain in existence for 2014.

Because the calculation of the section 9010 fee is based on the prior year's net premiums written, 2014 the first year the fee goes into effect presents a unique situation. Beginning in 2015 and going forward, Medicaid managed care companies like Centene likely will maintain contracts with the states that will take into account the section 9010 fee based on net premiums written by the member companies in the prior year. It is also expected that future CMS Medicaid regulations will address how the section 9010 fee should be allocated among the Medicaid managed care members of a controlled group.

2014, however, presents a one-year predicament for Medicaid managed care companies, like Centene, that have subsidiaries that will not write health insurance business in 2014. The 2014, Medicaid managed care contracts with the states where the Centene continues to do business may not reimburse the controlled group member in that state for the portion of the section 9010 fee that is based on net premium written by separate controlled group members operating in a different state. This is less an issue for controlled group members with ongoing state Medicaid managed care contracts because the particular state will likely reimburse the member company for the portion of the fee based on the net premium written by the member company in the state for the prior year. However, a Medicaid managed care controlled group, like Centene, may not have the opportunity to be reimbursed in 2014 for the portion of the 9010 fee that is based on net premiums written in 2013 by the member company that no longer maintains a contract in that State and exited the health insurance business.

Centene and other primarily Medicaid businesses operates on lower financial margins than other insurance companies. The payment of the section 9010 fee based on net premiums written by a controlled group member that has exited the business without reimbursement would be financially burdensome and may cause complications with Federal law requiring Medicaid managed care rates to be actuarially sound.

We request a 2014 transition rule a covered entity that exits the health insurance business, even if it remains part of the controlled group. We understand that the statutory structure of the section 9010 fee may preclude a permanent rule of this sort. However, a transition rule is sound policy and is consistent with other provisions of the proposed regulations. Under the proposed rules, a single covered entity that exits the health insurance business and liquidates before the end of 2013 would not be required to pay a fee in 2014. Furthermore, if a member of a controlled group liquidates prior to the end of the data year, the preamble to the Proposed Regulations indicates that would no longer be treated as a member of the controlled group for the fee year. It should not be the case that a covered entity becomes subject to that section 9010 fee in 2014 based on the net premiums written in 2013 by a controlled group member that exits the health insurance business, but remains in existence in the fee year to honor payment of runoff claims and to satisfy other contractual obligations.

Centene urges the final regulations to include this proposed transition relief. Failure to include this relief would be financially burdensome to Centene and other covered entities that were not able to negotiate Medicaid capitated rates for 2014 that take into consideration the portion of the section 9010 fee that is attributed to a controlled group member that exited the business in 2013.

We appreciate the consideration of our comments. We would welcome the opportunity to discuss any of these comments or questions you may have about these comments. Please contact me at 314-505-6540.

Sincerely yours,

 

 

William Scheffel

 

Executive Vice President &

 

Chief Financial Officer

 

Centene Corporation

 

St. Louis, MO

 

FOOTNOTE

 

 

1 If Congress intended the same health risk to be subject to a tax by more than one entity, it would have provided so explicitly. For example, Section 4375 imposes a per capita tax on specified insurance policies and 4376 imposes a per capita tax on self-insured plans, even though the same individuals may be provided coverage under both the insurance policy and the self-insured plan.

 

END OF FOOTNOTE
DOCUMENT ATTRIBUTES
  • Authors
    Scheffel, William
  • Institutional Authors
    Centene Corp.
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2013-27354
  • Tax Analysts Electronic Citation
    2013 TNT 229-33
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