The What, Why and How of Medical Loss Ratio
On November 22, 2010, The Department of Health and Human Services (HHS) released the interim final regulation (IFR) regarding medical loss ratio (MLR) implementation for health insurance issuers. HHS has adopted the MLR recommendations by the National Association of Insurance Commissioners (NAIC). This IFR will form part of Section 2718 of the Public Health Service (PHS) Act through MLR provision which is related to bringing down the cost of health care coverage and ensuring that consumers receive value for their premium payments. The MLR regulations of the Affordable Care Act (ACA) will be effective from January 1, 2011.
The MLR measures the amount of premium insurers spent for medical care. MLR was of greater interest for investors, as insurers with lower MLR had lower expenditures and higher profits. IFR requires insurers to meet minimum MLR of 80 percent in the small group (1 – 100 employees) / individual market and 85 percent in the large group market (greater than 101 employees). Failure to meet the minimum MLR requirements will result in insurers paying rebates to their customers. The interim rule does not apply to self-insured plans. The IFR establishes rules for greater transparency and accountability by providing consumers details regarding how their premium dollars are spent on medical care, quality improvement activities and administrative expenses.
This article will provide an overview of the major MLR provisions and its impact.
The IFR requires insurers to submit a report to HHS for each plan year with the information regarding total earned premiums, total reimbursement for clinical services, total spending on activities that improve healthcare quality and non-claim costs excluding federal state taxes and fees. The report needs to be submitted by June 1st of each year and the first report needs to be submitted in 2012. The insurer must submit a report for each state in which it is licensed to issue health insurance coverage. The HHS report must include the description of the methods used to allocate expenses such as incurred claims, quality improvement activities, federal and state taxes and other non-claim costs.
Activities that improve health care quality
The quality improvement activities conducted by an issuer must meet the following goals:
- Improve health outcomes including increasing the likelihood of desired outcomes compared to a baseline and reduce health disparities among specified populations
- Prevent hospital readmissions
- Improve patient safety and reduce medical errors, lower infection and mortality rates
- Increase wellness and promote health activities
- Support meaningful use of Health IT consistent with ARRA
Examples of quality improvement activities include:
- Effective case management, care co-ordination and disease management initiatives through medical homes
- Patient-centered education and counseling
- Comprehensive discharge planning
- Prospective prescription drug utilization review
Activities designed primarily to control or contain costs are not quality improvement activities and hence they are excluded from medical costs. The following activities will be considered as administrative costs for MLR calculation
- HIPAA and ICD-10 implementation and administration costs
- Retrospective and concurrent utilization review
- Amount spent on fraud prevention activities which is more than the recovered incurred claim
- Costs related to executing provider contracts and establishing provider networks
- Provider credentialing
- Marketing expenses
- Agent Commissions
Medical Loss Ratio Calculation
A health plan issuer must aggregate data by state and line of business. Starting from 2011, MLR is calculated over a three year period if the plan’s experience is partially credible. MLR is partially credible if it based on the experience of more than 1000 members and lesser than 75000 members. State insurance commissioners could request a waiver of the 80 percent MLR requirement if there is a likelihood of the destabilization of the individual market which could result in fewer choices for consumers
MLR = Incurred Claims + Quality Improvement Measures
Premium Revenue – (Federal & State Taxes + Licensing and Regulatory Fees)
For each MLR reporting year, if the minimum MLR percentage is not met as per the IFR, the issuer must provide a rebate to each enrollee who paid premium for healthcare coverage.
Rebate for each MLR reporting year = (Total Premium Paid by Enrollee – Federal & State Taxes – Licensing & Regulatory Fees) X (Minimum MLR* – Health Plan Issuer’s MLR)
- Minimum MLR is 85 percent in the large group market and 80 percent in the small group/individual market
The rebate needs to be paid by August 1 following the end of the MLR reporting year. A late payment interest will be applicable if the issuer fails to pay the rebate on time. The rebates could be paid through premium credit, lump-sum check or reimbursement to the account used to pay the premium. The issuer need not individually calculate rebates if it is less than $5 per enrollee. The issuer must submit a report to the Secretary of HHS with information regarding the number of enrollees who received the rebate and the amount of rebates provided. Issuers with fewer than 1000 members (non-credible) are not required to pay rebates. Issuers can also delay payment of rebates until the new entrants attain a full year’s experience.
Mini-Med & Expatriate Plans
Expatriate Plans generally cover employees working outside their country of citizenship. These plans result in higher percentage of administrative costs in relation to premiums because of the administrative costs related to identifying and credentialing providers worldwide, processing claims in various languages and billing procedures and the inability to provide quality improvement activities outside United States. Policies issued by non-US insurers for services rendered outside of the U.S. are not subject to IFR. Expatriate policies that are issued by U.S. domestic insurance companies on forms approved by a state insurance department are covered by the interim final rule. The experience of an insurer’s expatriate policies is to be reported separately from other coverage and the calculation of claims and quality improving activities is to be multiplied by a factor of two. Insurance companies that offer expatriate plans will be required to report to HHS on a quarterly basis in 2011.
A “mini-med” plan refers to a policy offered by an insurer that has a total of $250,000 or less in annual limits. The administrative expenses for mini med plans are higher because of high turnover rates which also result in lower claim costs. Because of the lower annual limits these plans are less likely to spend much on quality improving activities. The mini-med issuers, for policies that have a total of $250,000 or less in annual limits, will be permitted to apply an adjustment to their reported experience to address the unusual expense and premium structure of these plans. The calculation of claims and quality improving activities is to be multiplied by a factor of two. Insurance companies that offer mini-med plans will be required to report to HHS on a quarterly basis in 2011.
About 75 Million Americans are covered by this rule. As per HHS estimates, 30 percent of the enrollees in the individual market will receive an average rebate of $164 for 2011. About $3 billion will be paid as rebates by insurers in all markets over the 2011 – 2013 period.
MLR mandates will require health plans to ponder over profitability through administrative cost cutting. MLR regulations will result in lower margin and reduced market share. Major projects like 5010 and ICD-10 might face funding issues as it will not be part of MLR calculation. Some insurers might focus on premium increases, but competition and rating regulations will limit them. Insurers will have to look at restructure their commission schedules to attain the minimum MLR. Few insurers have informed brokers regarding reduced commissions. Payers should start evaluating their accounting for quality improvement and medical care related activities.
The IFR includes provisions to improve the insurer efficiency through greater transparency and accountability, quality improvement activities and reduced administrative expenses. ACA emphasizes the role of Health IT to improve the quality of care. EHR and ICD-10 implementation will enable better research and disease management. Health IT can help health plans standardize, simplify and automate processes for administrative transactions and thereby help insurers attain the minimum MLR.
About the Author
Deepak Padmanabhan works as a Lead Business Analyst in the Health IT field. His areas of interests include Health Reforms, ICD-10, HIPAA 5010 and Health Innovations. He is a certified Project Management Professional (PMP) and Fellow, Academy of Healthcare Management (FAHM).