IRS provides MLR guidance to the Blues

In Notice 2010-79, the Internal Revenue Service provides interim guidance for 2010 for certain Blue Cross and Blue Shield organizations in how to comply with the medical loss ratio (MLR) provisions of the Patient Protection and Affordable Care Act and retain special tax treatment.

Special tax treatment. IRC Sec. 833 allows a special tax deduction to Blue Cross and Blue Shield organizations and other organizations that provide health insurance. The ACA amended Sec. 833 to limit the application of this tax deduction to those groups with a medical loss ratio that is not less than 85%.

Interim guidance. Because Sec. 833(c)(5) applies to taxable years beginning after December 31, 2009 (including the period in 2010 before enactment of the ACA), taxpayers will need to consider the effect, if any, of the recently-published guidance under ACA Sec. 2718 on issues that arise under Sec. 833(c)(5).

For purposes of determining whether a taxpayer's percentage of total premium revenue expended on reimbursement for clinical services is not less than 85% (and thus satisfies the requirement of Sec. 833(c)(5)), taxpayers must use the definition of "reimbursement for clinical services provided to enrollees" that is set forth in the recently-issued U.S. Department of Health and Human Services interim final regulations.

In addition, the IRS accepts the inclusion of "amounts expended for activities that improve health care quality" as defined in the Department of Health and Human Services interim final regulations.

What happens if an organization's MLR is less than 85%? Be aware of these consequences:

1. The organization is not taxable as a stock insurance company by reason of Sec. 833(a)(1);
2. The organization is not allowed the special deduction set forth in Sec. 833; and
3. The organization takes into account 80%, rather than 100%, of its unearned premiums for purposes of computing premiums earned on insurance contracts during the taxable year under Sec. 832(b)(4).

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