Read the proposed regulations: REG-126633-12 [PDF 87 KB]
A public hearing on these proposed regulations is scheduled for Tuesday, September 17, 2013. Comments and requests to speak at the hearing are due 90 days after publication of the proposed regulations in the Federal Register, scheduled for Monday, May 13, 2013.
Section 833 provides that a Blue Cross and Blue Shield organization (or other health care organization meeting certain requirements) is entitled to favorable treatment for federal income tax purposes, which includes:
- Treatment as a stock insurance company
- A special deduction
- Computation of unearned premium reserves based on 100% rather than 80% of unearned premiums
The Patient Protection and Affordable Care Act (referred to as the Affordable Care Act) added section 833(c)(5) to the Code. This measure provides that the favorable treatment provided under section 833 will not apply to an organization unless the percentage of total premium revenue expended on reimbursement for clinical services—i.e., the medical loss ratio (MLR)—is not less than 85%.
The Affordable Care Act also added section 2718 of the Public Health Service Act, which requires a health insurance issuer to report to the Department of Health and Human Services (HHS) the percentage of total premium revenue expended on reimbursement for clinical services and activities that improve health care quality, and requires the health insurance issuer to pay its enrollees a rebate if that ratio is less than a prescribed percentage. HHS has issued regulations on these calculations.
In November 2010, the IRS and Treasury issued Notice 2010-79 to provide interim guidance on the application of section 833(c)(5).
Additional interim guidance was subsequently provided in Notice 2011-4, Rev. Proc. 2011-14, Notice 2011-51, and Notice 2012-37.
In general, under today’s proposed regulations, the MLR computation under section 833(c)(5) is to be the same as the medical loss ratio computation under the HHS regulations. However, expenditures for “activities that improve health care quality” are not included in the numerator for purposes of the section 833(c)(5) computation.
Today’s proposed regulations also provide rules regarding the consequences of failing to satisfy section 833(c)(5).
These rules are proposed to be effective for tax years beginning after December 31, 2013.
For more information, contact KPMG’s national tax leader for healthcare, and a tax professional with KPMG’s Washington National Tax practice:
Monica M. Coakley
+1 (615) 248-5639