Further clarifications on the Comparative Effectiveness Fee
Update: Dec. 27, 2012 - IRS issues final rule on the comparative effectiveness fee reform alert
May 31, 2012
The Internal Revenue Service has issued a proposed rule providing guidance on the Comparative Effectiveness Fee required under the Affordable Care Act. The fee is intended to fund health outcome and clinical effectiveness research conducted by the Patient Centered Outcomes Research Institute, a nonprofit organization created by the ACA. The Comparative Effectiveness Fee has also been referred to as the "PCORI Fee." Health insurance issuers or plan sponsors will be required to pay this fee to the IRS by July 31 of the calendar year immediately following the last day of the plan or policy year. The first payments are due by July 31, 2013.
The Comparative Effectiveness Fee applies to plan or policy years ending in federal fiscal years 2013 through 2019 (Oct. 1, 2012 through Sept. 30, 2019). For plan or policy years ending on or after Oct. 1, 2012 and before Oct. 1, 2013, the fee is $1 multiplied by the average number of covered lives. For plan or policy years ending on or after Oct. 1, 2013 and before Oct. 1, 2014, the fee will increase to $2 per covered life. The fee remains at $2 (indexed to increases in national health spending) through its conclusion with plan or policy years ending between Oct. 1, 2018 and Sept. 30, 2019.
General information on the fee
How will the funds be used?
This annual fee will support the Patient Centered Outcomes Research Institute ("PCORI"). The institute will use these funds to support research initiatives comparing the effectiveness, benefits, and potential risks of different treatment options that may impact health outcomes.
Who pays this fee to the IRS?
For fully insured business, health insurance issuers pay the fee. Plan sponsors (usually the employer) pay the fee for self-insured business.
When will the first fee payment be due?
This depends on when the last day of the plan or policy year will be. The fee must be paid and filed with the IRS by July 31 of the calendar year immediately following the last day of the plan or policy year.
Therefore, for any plan or policy years ending between Oct. 1, 2012 and Dec. 31, 2012, the first fee payment will be due by July 31, 2013.
If a member is covered under multiple plans, does the plan sponsor count them once for each policy they have?
Under the proposed rule, multiple self-funded plans may be treated as a single plan for purposes of the fee calculation to avoid counting members more than once.
When do issuers and plan sponsors stop paying this fee?
The fee terminates with plan or policy years ending in federal fiscal year 2019.
General calculation methods for the fee
How is the fee calculated?
It is calculated by multiplying the average number of "covered lives" in a plan or policy year by the "applicable dollar amount."
There are different calculations of "covered lives" for fully insured versus self-insured business. The "applicable dollar amount" also changes depending on when a plan or policy year ends.
What is the "applicable dollar amount?"
The dollar amount depends on when the plan or policy year ends.
- For plan or policy years ending on or after Oct. 1, 2012, and before Oct. 1, 2013 (fiscal year 2013), the applicable dollar amount is $1.
- For plan or policy years ending on or after Oct. 1, 2013, and before Oct. 1, 2014 (fiscal year 2014), the applicable dollar amount is $2.
- For plan or policy years ending on or after Oct. 1, 2014 and before Oct. 1, 2019 (plan or policy years ending during fiscal year 2015-2019), the $2 applicable dollar amount is indexed annually to growth in national health spending as determined by Centers for Medicare and Medicaid Services' per capita National Health Expenditure data.
Calculation methods and rules for fully insured business
What is the calculation of "covered lives" for fully insured business?
One calculation method must be chosen among four different options of calculating covered lives:
- Actual count method: For each policy, calculate the sum of lives covered for each day of the policy year and divide by the number of days in the policy year.
- Snapshot method: For each policy, the sum total number of lives covered on one date in each quarter of the policy year (or an equal number of dates for each quarter) divided by the total number of dates on which a count was made.
- Member months method: The average number of lives covered under all policies in effect for a calendar year is determined by taking the "member months" that are reported on the National Association of Insurance Commissioner's Supplemental Health Care Exhibit and dividing this number by 12.
- State form method: Same calculation as the member months method, but used in states where NAIC forms are not filed but where the state uses a form that reports covered lives in the same manner.
If the issuer selects the member months or state form methods, the issuer must continue to use that method for every policy year for which the fee applies.
If the issuer chooses the actual count or snapshot methods, the issuer may switch among those two options (e.g., from actual to snapshot or vice versa), but must use the same method for all policy years with the same tax remittance date. For example, the issuer must pick the same method for all plan or policy years ending in calendar year 2013, for the comparative effectiveness fee due to the IRS by July 31, 2014.
If issuers decide to use the actual count or snapshot methods, are there any special rules for calculating the first year's fees for fully insured business?
Yes. For plan or policy years beginning before May 12, 2012 and ending on or after Oct. 1, 2012, covered lives is calculated using a partial policy year and extrapolating covered lives for the full plan or policy year.
If issuers decide to use the member months or state form method, are there any special rules for calculating the fees for fully insured business?
Yes. For issuers using the member months or state form method, there are special rules for calculating this fee during the first and last year.
If the fee is paid by July 31, 2013 (for the 2012 calendar year experience), the average number of lives equals the average number of lives reported on the NAIC Supplemental Health Care Exhibit or state form (as described under the question about the calculation methods for fully insured business) multiplied by 1/4.
For fees paid by July 31, 2020 (for the 2019 calendar year experience), the average number of lives equals the average number of lives reported on the NAIC SHCE or state form multiplied by 3/4.
Calculation methods and rules for self insured business
What is the calculation of "covered lives" for self insured business?
Self-insured plan sponsors must use the same method of calculating the average number of covered lives throughout the duration of the plan year, but may change methods from one plan year to the next.
Plan sponsors must choose one calculation method from the following three options:
- Actual count method: Calculate the sum of the lives covered for each day of the plan year and divide that sum by the number of days in the plan year.
- Snapshot method: Add the totals of lives covered on one date in each quarter (or an equal number of dates for each quarter) and divide the total by the number of dates on which a count was made.
- Snapshot count method: The number of lives covered on a date may be determined as equal to either the sum of the actual number of lives covered on the dates, or
- Snapshot factor method: The sum of (1) the number of participants with self-only coverage on that date, plus (2) the number of participants with coverage other than self-only coverage on the date multiplied by 2.35
- Form 5500 method: covered lives determined using plan participants reported on Form 5500.
- If the plan only provides self-only coverage, covered lives equals the number of plan participants at the beginning and end of the plan year, divided by two.
- If coverage other than self-only is provided, the plan sponsor determines covered lives by adding the number of plan participants at the beginning and end of the plan year.
Are there any special rules for calculating the first year's fee for self-insured plan sponsors?
Yes. For plan years beginning before July 11, 2012, and ending on or after Oct. 1, 2012, a plan sponsor may determine the average number of covered lives using any reasonable method.
Payment of the fee
How will health insurance issuers and plan sponsors pay this fee?
Issuers and plan sponsors will be required to fill out and submit a specific tax return form to pay and report this comparative effectiveness fee. The IRS is proposing to use Form 720 (paper or electronic version) for this reporting. While Form 720 is labeled "Quarterly Federal Excise Tax Return", the comparative effectiveness fee reporting and payment remittance will occur on an annual basis.
Why does Form 720 refer to quarterly tax returns when this is an annual fee?
Before this ACA requirement to pay and report this comparative effectiveness fee to the IRS, other excise taxes were paid and reported on a quarterly basis using Form 720. The IRS is currently updating the instructions for Form 720 to provide issuers and plan sponsors with more details on the payment and reporting process for the annual comparative effectiveness fee.
What if my plan or policy year ends sometime in 2013? When do I pay this fee?
For any plan or policy years ending in 2013, the fee will have to be paid by July 31, 2014.
If I am an employer with a self-funded health plan and I have my own fiscal year, when do I need to pay this fee?
The employer's fiscal year is irrelevant in determining when the fee payment is due. Payments are only determined by the end date of the plan or policy year relative to the federal fiscal year.
Will there be any updates to this proposed rule on this fee? How will the regulatory updates affect fee payment or effective dates?
Though this is a proposed rule, the IRS has stated it should be treated as federal guidance until any further updates are made. If future guidance is more stringent, the future guidance will be applied without a retroactive effect.
Impacts on retiree-only and grandfathered plans
What about "retiree-only" plans?
Although retiree-only plans are exempt from most of the ACA mandates, the comparative effectiveness fee does apply to covered lives in retiree-only plans. Among the plans specifically subject to the comparative effectiveness fee are plans established or maintained for the benefit of former employees (such as retirees).
Does the comparative effectiveness fee apply to grandfathered plans?
Yes. A plan which is otherwise subject to the fee is not exempt from the fee because of its grandfather status.
Is there any covered life to which the fee would not apply?
Yes. There are several exclusions where the fees imposed do not apply to any covered life enrolled in certain fully insured or self insured coverage, including, but not limited to:
- Excepted benefits, such as standalone dental, standalone vision, and Medigap
- Stop loss or indemnity reinsurance policies
- Medicare (including Medicare Advantage and Part D)
- State Children's Health Insurance Program
For more general information on the comparative effectiveness fee, visit HealthCare.gov or IRS.gov. To access the proposed rule by the IRS, visit the Federal Register. For more information on the Patient-Centered Outcomes Research Institute and the research initiatives it may fund, go to the PCORI website.
The information on this website is based on BCBSM's review of the national health care reform legislation and is not intended to impart legal advice. Interpretations of the reform legislation vary, and efforts will be made to present and update accurate information. This overview is intended as an educational tool only and does not replace a more rigorous review of the law's applicability to individual circumstances and attendant legal counsel and should not be relied upon as legal or compliance advice. Analysis is ongoing and additional guidance is also anticipated from the Department of Health and Human Services. Additionally, some reform regulations may differ for particular members enrolled in certain programs such as the Federal Employee Program, and those members are encouraged to consult with their benefit administrators for specific details.