Medical Loss Ratio Computation Rules Released (T.D. 9651)

The IRS has released final regulations that provide guidance to Blue Cross and Blue Shield organizations, and certain other qualifying health care organizations, on computing and applying the medical loss ratio (MLR) under Code Sec. 833(c)(5). These regulations are effective on January 7, 2014, and apply to tax years beginning after December 31, 2013. These rules adopt the provisions as originally proposed (NPRM REG-126633-12, TAXDAY, 2013/05/13, I.1) with some modifications.

For purposes of Code Sec. 833, an organization’s MLR is its percentage of total premium revenue expended on reimbursement for clinical services provided to enrollees under its policies during the year. The MLR numerator is the organization’s total premium revenue expended on reimbursement for clinical services provided to enrollees and the MLR denominator is the organization’s total premium revenue for the tax year, after excluding federal and state taxes and licensing or regulatory fees and after accounting for payments or receipts for risk adjustment, risk corridors, and reinsurance. The MLR numerator does not include costs for activities that improve health care quality.

For purposes of Code Sec. 833(c)(5), the amounts used are based on those reported under section 2718 of the Public Health Service Act (PHSA) for the current and two preceding tax years, subject to the same adjustments that apply for purposes of section 2718 of the PHSA. However, the final regulations contain transition rules to phase in the three-year period for tax years beginning in 2014 and 2015. Thus, for the first tax year beginning after December 31, 2013, an organization’s MLR is computed based on its total premium revenue expended on reimbursement for clinical services provided to enrollees and its total premium revenue for that year.

The final regulations also provide that a change in an organization’s eligibility for treatment under Code Sec. 833 solely because it fails to have an MLR of at least 85 percent will not be treated as a material change in the organization’s operations or in its structure for purposes of Code Sec. 833(c)(2)(C). Finally, Notice 2011-4, 2011-1 CB 282, and Rev. Proc. 2011-14, 2011-1 CB 330, which provide procedures for an organization to obtain automatic consent to change its method of accounting for unearned premiums to apply Code Sec. 833(c)(5) continue to apply and are not superseded by the final regulations.

T.D. 9651, 2014FED ¶47,006

Other References:

Code Sec. 833

CCH Reference – 2014FED ¶26,170B

Tax Research Consultant

CCH Reference – TRC EXEMPT: 15,160.10



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