Since the health reform law passed in March, one of the most critical issues for the industry has been how “medical loss ratios” will be calculated. The law’s provision on medical loss ratios, or MLRs, says that, beginning in 2011, health insurance companies must spend at least 80 to 85 percent of premium dollars on medical care and health care quality improvement. If they don’t – if insurers spend more than 15 percent of large-group premiums on administrative costs and profits, or more than 20 percent of individual or small group premiums on administrative costs and profits – they will be penalized: Beginning in 2012, they will have to provide rebates to their customers.
But what should be counted as quality improvements and medical care? The law gave the National Association of Insurance Commissioners the job of writing the definitions and creating the formula for calculating medical loss ratios, but the final decision was left to the Department of Health and Human Services. The insurance commissioners presented their recommendations to HHS in October. Now HHS has issued a regulation based on those recommendations.
Most of the provisions of the regulation are in line with NAIC’s recommendations. The major provisions include:
Insurers are allowed to deduct federal and state taxes from premium revenue when calculating MLR. (Taxes on investment income and capital gains will not be exempted.)
Agent and broker commissions will be treated as administrative expenses, despite those groups’ arguments that they should be left outside of the MLR calculation. However, HHS is participating with the NAIC in a working group to study the agent-broker issue further. It will be chaired by Kevin McCarty, Florida’s insurance commissioner and vice president of the NAIC. Both the NAIC and HHS are concerned that without insurance agents and brokers, the state insurance commissions will be flooded with questions about how to purchase coverage and file complex forms.
Anti-fraud programs are counted as administrative expenses, not as quality improvement programs, as the insurance industry had argued they should be. However, the regulation does allow insurers to offset any funds that they spend on fraud recovery against money actually recovered.
Although some insurers would have liked their medical loss ratio to be judged collectively, the regulation requires them to account for MLRs separately in every state.
The regulation does allow some exceptions to the MLR requirement:
Low-cost, limited-benefit “mini-med” policies will have at least another year to gather data before falling under the requirement. (This is a change from what NAIC had recommended.)
States may apply to have the MLR standard adjusted if the requirement would result in destabilizing their individual market. (Maine, Iowa, South Carolina and Georgia have already said they will seek adjustments.)
“These new rules are an important step to hold insurance companies accountable and increase value for consumers,” HHS Secretary Kathleen Sebelilus said. She added that they will help “guarantee that consumers get the most out of their premium dollars.”
