Medicaid contractor status depends on insurance risk and beneficiary rights

Plain-English summary

The IRS analyzed when an entity providing Medicaid services is a health insurance issuer and covered health insurance provider for the compensation-deduction limit in section 162(m)(6). A non-risk-bearing entity paid on a fee-for-service basis is not an issuer because it lacks insurance risk shifting and distribution. A risk-bearing entity is an issuer if it is licensed to conduct insurance, subject to state insurance law, and has the necessary insurance risk. State Medicaid payments are premiums only if Medicaid beneficiaries have rights against the entity comparable to insureds' rights in the private market; if their rights run only against the state, the entity is more like a direct service provider.

Ruling snapshot

• Question: When is a Medicaid contractor a health insurance issuer receiving premiums for purposes of IRC § 162(m)(6)?
• Outcome: Advice given
• Key authorities: IRC §§ 162(m)(6), 9832(b); Treas. Reg. §§ 1.162-31, 54.9801-2

Full text (IRS public release)

ID:          CCA_2016022211570202
UILC:        9832.00-00

Number: 201616008
Release Date: 4/15/2016
From:
Sent: Monday, February 22, 2016 11:57:02 AM
To:
Cc: -------------------------------------------------------------------------------------
Bcc:
Subject: RE: IRC Section 9832(b)(2) and State Medicaid Health Plans

Hi ----------------------------,

These are responses to the questions raised in your email. Please let us know if we can be of more help.

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Issue

Whether an entity providing Medicaid services is a “health insurance issuer” receiving premiums from
providing “health insurance coverage,” as those terms are defined in section 9832(b), and thus within the
definition of “covered health insurance provider” for purposes of section 162(m)(6).

In particular:

(1) Is a non-risk bearing entity a “health insurance issuer” within the meaning of section 9832(b)(2)?

(2) Is a risk-bearing entity a “health insurance issuer” within the meaning of section 9832(b)(2)?

(3) If a risk-bearing entity becomes licensed as an insurance company under state law in order to submit
a bid for a Medicaid contract, is that entity a “health insurance issuer” within the meaning of
section 9832(b)(2)?

(4) Do payments from a state under a Medicaid contract to a risk-bearing entity that is a health insurance
issuer qualify as “premiums” so that the entity may be a “covered health insurance provider” under
section 162(m)(6) if, for taxpayer years beginning after December 31, 2012, not less than 25 percent of
the gross premiums received from providing health insurance coverage is from minimum essential
coverage (as defined in section 5000A(f)?

Background

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Covered health insurance provider. The statute and regulations under section 162(m)(6) limit the
available compensation deduction for a “covered health insurance provider” for a taxable year to
$500,000 per service provider (which includes an employee). The statute and regulations define the term
“covered health insurance provider” as a (A) “health insurance issuer” as defined in section 9832(b)(2)
which (B) receives premiums from providing “health insurance coverage” as defined in section
9832(b)(1).

Section 9832(b)(2) and §54.9801-2 provide that the term ‘‘health insurance issuer’’ means an insurance
company, insurance service, or insurance organization (including a health maintenance organization, as
defined in paragraph (b)(3)) which is licensed to engage in the business of insurance in a state and which
is subject to state law which regulates insurance (within the meaning of section 514(b)(2) of the Employee
Retirement Income Security Act of 1974, as in effect on the date of the enactment of this section).

Section 9832(b)(1)(A) and §54.9801-2 provide that the term ‘‘health insurance coverage’’ means benefits
consisting of medical care (provided directly, through insurance or reimbursement, or otherwise) under
any hospital or medical service policy or certificate, hospital or medical service plan contract, or health
maintenance organization contract offered by a health insurance issuer.

Section 1.162-31(b)(5) provides that, for purposes of section 162(m)(6), “premiums” from providing health
insurance coverage are premiums written determined in a manner consistent with the requirements for
reporting under the Supplemental Health Care Exhibit published by the NAIC or the MLR Annual
Reporting Form filed with the Center for Medicare & Medicaid Services’ Center for Consumer Information
and Insurance Oversight of the U.S. Department of Health and Human Services.

Section 1.162-31(b)(iv) excludes direct service payments from the definition of premiums. Section 1.162-
31(b)(iv) defines a direct service payment as a payment “made by a health insurance issuer or other
entity that received 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.”

Neither the Internal Revenue Code nor any accompanying regulations define the term “insurance” or
“insurance contract.” The United States Supreme Court, however, has explained that in order for an
arrangement to constitute insurance for federal income tax purposes, both risk-shifting and risk-
distribution must be present. See Helvering v. Le Gierse, 312 U.S. 531 (1941).

Neither section 162(m)(6) nor the accompanying regulations categorically except from the definition of
“covered health insurance provider” an entity that provides Medicaid services. The preamble of the final
regulations specifically notes that the Treasury Department and the IRS do not adopt the suggestion to
provide in the final regulations that clinical risk-bearing entities, Medicare and Medicaid providers, and
other recipients of payments from government entities in connection with providing benefits under
government sponsored health care programs are categorically excluded from being covered health
insurance providers or that the amounts received by these organizations are categorically excluded from
classification as premiums from providing health insurance coverage.

The preamble further acknowledges that to be a covered health insurance provider under
section 162(m)(6), a person must be a health insurance issuer (as defined in section 9832(b)(2)) that
receives premiums from providing health insurance coverage (as defined in section 9832(b)(1)) and that
meets certain other requirements. Therefore, if a person is not a health insurance issuer or does not
receive premiums from providing health insurance coverage, the person is not a covered health insurance
provider for purposes of section 162(m)(6).

Medicaid. The Medicaid Program provides medical benefits to low-income people who have no medical
insurance or have inadequate medical insurance. The Medicaid program is jointly funded by the federal
government and states. The federal government pays states for a specified percentage of program

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expenditures. The federal government establishes general guidelines for the administration of Medicaid
benefits. However, specific eligibility requirements to receive Medicaid benefits, as well as the type and
scope of services provided, are determined by each individual state.

States generally pay for Medicaid services through risk-bearing and non-risk-bearing
arrangements. Under non-risk-bearing arrangements, states pay providers directly for services. Such
arrangements can include an entity paid an administrative fee for case management services, although
actual medical care is reimbursed on a fee-for-service basis; that is, the states reimburse providers
directly for each individual to whom services are furnished.

Under risk-bearing arrangements, in exchange for capitation payments or other set payments, an entity
provides the prescribed medical services or arranges for providers to provide the prescribed medical
services to Medicaid enrollees on a similar basis as services are provided to other Medicaid
beneficiaries. Under risk-bearing arrangements, the entity assumes risk for the cost of furnishing the
services under the arrangement and incurs loss if the cost of furnishing the services exceeds the set
payments under the arrangement (or gain if the cost of services is less than the set payments).

In many cases, licensure as an insurance company under state law is a requirement that must be
satisfied before an entity may participate in a state Medicaid contract bidding process. The entity
participating in the bidding process may be either a risk-bearing or non-risk-bearing entity.

Analysis and Conclusions

(1) Is a non-risk bearing entity a ‘‘health insurance issuer’’ under section 9832(b)(2)?

A non-risk-bearing entity providing services under a state Medicaid program does not have the risk-
shifting or risk-distribution elements of insurance and consequently a non-risk-bearing entity is not a
health insurance issuer under section 9832(b)(2). Because the state reimburses the entity for medical
care provided on a fee-for-service basis based on the actual services provided to the covered individuals,
the entity generally is not at risk for the cost of the services exceeding the amount of reimbursements
paid by the state.

(2) Is a risk-bearing entity a “health insurance issuer” under section 9832(b)(2)?

A risk-bearing entity that is licensed to engage in the business of insurance in a state and is subject to
state law which regulates insurance and that has the risk-shifting or risk-distribution elements of
insurance is a “health insurance issuer” under section 9832(b)(2). Because a risk-bearing entity is at risk
of loss for the cost of the services exceeding the amount of payments received from the state, or has the
possibility of gain in cases in which the amount of payments paid by the state exceeds the cost of
services provided, the entity is at risk for the cost of the services exceeding the amount of
reimbursements paid by the state.

(3) If a risk-bearing entity becomes licensed as an insurance company under state law in order to submit
a bid for a Medicaid contract, is that entity considered to be a “health insurance issuer” under
section 9832(b)(2)?

A risk-bearing entity that becomes licensed as an insurance company under state law, whether to satisfy
a contractual requirement or otherwise, is licensed to engage in the business of insurance in the state
and satisfies the requirement under section 9832(b)(2) that a “health insurance issuer” be an insurance
company licensed to engage in the business of insurance in a state. Moreover, as an insurance company
licensed to engage in the business of insurance in a state, that entity is also subject to the state laws
which regulate insurance, which is the other requirement under section 9832(b)(2) for an entity to be a
“health insurance issuer.” As such, that entity is a “health insurance issuer.” This is in contrast to
situations in which the entity’s contract with the state imposes conditions similar or identical to the state
law requirements but the entity is not, in fact, directly subject to the state insurance laws.

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(4) Do payments from a state under a Medicaid contract to a risk-bearing entity that is a health insurance
issuer qualify as “premiums” so that the entity is a “covered health insurance provider” under section
162(m)(6)?

Even if an entity is a health insurance issuer under section 9832(b)(2), there remains the question of
whether payments received by the risk-bearing entity are premiums from providing health insurance
coverage. Direct service payments under §1.162-31(b)(iv) are excluded from the definition of
premiums. A direct service payment is a payment “made by a health insurance issuer or other entity that
received premiums from providing health insurance coverage (as defined in section 9832(b)(1)) to
another organization.”

Section 1.162-31(b)(5) provides that “premiums” from providing health insurance coverage are premiums
written determined in a manner consistent with the requirements for reporting under the Supplemental
Health Care Exhibit published by the NAIC or the MLR Annual Reporting form filed with the CMS CIIIO of
HHS. But as reflected in the treatment of direct service payments, to constitute the payment of a
premium for health insurance coverage the payment must result in a legal relationship between the
covered individual and the entity receiving the payment. Whether this relationship exists depends on
whether the Medicaid beneficiaries could assert rights against the entity analogous to those between
covered individuals and health insurance issuers in the private market and as required under state law. If
this type of relationship exists between the entity and the Medicaid beneficiaries (whether directly or
indirectly), the payments received by the entity are premiums from provided health insurance coverage
paid by the state on behalf of the Medicaid beneficiaries. If this type of relationship does not exist
because, for example, the individual’s rights under the arrangement are only enforceable against the
state, then the relationship between the state and the entity is more akin to a direct service provider. See
the preamble to the section 162(m)(6) proposed regulations (REG-106796-12) at 78 FR 19950-01,
19953. Whether there is an insurance relationship between the covered individual and the state is not
necessary to determine because a state would not meet the definition of a health insurance issuer under
section 9832(b)(2).