The Statutory Accounting Principles Working Group (SAPWG or the working group) readdressed the accounting issues for the application of Section 9010 of the Patient Protection and Affordable Care Act (PPACA) as amended by the Health Care and Education Reconciliation Act at the Spring 2013 NAIC meeting in Houston, TX. The PPACA calls for an annual assessment (excise tax or fee) to be charged to insurers beginning in 2014. The working group originally exposed the issue (SAPWG exposure draft, 2011-38 – Fees Payable to the Federal Government by Health Insurers) on March 6, 2013 with a comment deadline of March 26, 2013.
The current proposal calls for full accrual and expensing of the 2014 liability and full accrual of the 2015 liability for the year ended December 31, 2014. Expense recognition for subsequent payments of the fee would be phased in for three years. The impact on the statements of operations for the first three years of the PPACA excise tax per the current proposal has been summarized below:
|All of the 2014 accrual/fee would flow through as expenses in 2014||2/3 of the 2015 fee would flow through as expenses in 2015||1/3 of the 2016 fee would flow through as expenses in 2016|
|1/3 of the 2015 accrual would flow through as expenses in 2014||2/3 of the 2016 accrual/fee would flow through as expenses in 2015||All of the 2017 accrual/fee would flow through as expenses in 2016|
|2/3 of the 2015 accrual would flow through as surplus||1/3 of the 2016 accrual would flow through surplus|
Throughout the discussion, it became apparent that solvency is the most important factor in the working group’s decision. Since the risk-based capital (RBC) calculation is based on year-end surplus, they believe that the future obligations must be factored in to appropriately evaluate an insurer. The working group indicated that insurers have already built the anticipated fees into their premiums and income in advance of paying the fees, so it would be more appropriate to offset the earnings with matching expenses related to the fees rather than paying them out in dividends and executive compensation.
The working group discussed the content of the comment letters received from various departments of insurance, health insurers, and other interested parties (interested parties). In general the interested parties were all in disagreement with the proposal citing that the fees for any given year are a cost of doing business in that year, and should be recognized as an expense over the course of that year, which would be consistent with accounting principles generally accepted in the United States of America (US GAAP).
The recurring arguments made by the interested parties included:
- The obligating events occur only when the insurers provide health insurance in any given year, not before. Accrual for the fees in advance would be inconsistent guidance in existing Statements of Statutory Accounting Principles (SSAPs) including SSAP No. 5, which indicates that "the transaction or other event obligating the entity has already happened" for it to be considered a liability, and SSAP No. 35 (prior to the proposed revisions), which states that "the event obligating the entity to pay an imposed or probable assessment has occurred on or before the date of the financial statements" is a condition of an insurance-related assessment.
- The accounting treatment would result in additional rate increases for small business and consumers during a period of significant rate shock from the implementation of the PPACA.
- The statutory guidance would be inconsistent with US GAAP, which would require additional system changes and the use of resources at a time when significant resources are already being drained by the implementation of the PPACA.
- Including the 2015 fee within the 2014 reporting year may require insurers to adjust pending rate filings, which would be very difficult since many states have established hard deadlines for rate filings in April.
- Lastly, the interested parties believe that the working group has failed to assess the impact of the proposal on medical loss ratio (MLR) accrual/rebate sufficiently, and that they will need to ensure that any proposal is consistent with the United States Department of Health and Human Services’ application of the fee for the MLR accrual/rebate calculations.
The interested parties’ recommendations for the treatment of the fees included a combination of disclosure without accrual or booking a portion of the fees as unearned premiums for the portion of the fees included in 2014 rates. It was also strongly suggested that the working group thoroughly evaluate the impact of the accounting treatment on the MLR accrual/rebate and that they gain a better understanding of the impact on rates as a result of early accrual. Lastly, the interested parties suggested that the working group have discussions with the lawmakers who drafted the PPACA before reaching a final conclusion on the accounting treatment.