Medical Loss Ratio: Don't Expect a Check in the Mail Just Yet

Ed Doherty

On November 22, 2010, the Departments of Treasury, Labor, and Health and Human Services (the Departments) released Interim Final Regulations for what may be the most anticipated health care reform rule to date, the Patient Protection and Affordable Care Act’s (PPACA) Medical Loss Ratio (MLR) provision. By requiring health insurers to spend a high proportion of their premium revenues on paying claims, the MLR provision may drive down the cost of health insurance and provide greater transparency to policyholders. But because of the method the rule uses to calculate the ratio, employers should not expect to receive premium rebates, experience a drastic reduction in their premiums, or see much greater transparency in the calculation of their premiums.

The MLR provision restricts the MLR of individual and small groups (less than 50 lives) to 80% and the MLR of large groups to 85%. If MLRs fall below those thresholds, the insurance company must issue a rebate or premium reduction to policy holders. Importantly, it is not illegal to have an MLR below the threshold, and having an MLR below the threshold will neither guarantee an employer a rebate nor exempt an employer from a renewal increase. To understand why, we must examine how the MLR provision is designed to work.

PPACA directed the National Association of Insurance Commissioners (NAIC) to draft recommendations for the regulation implementing the MLR provision. The NAIC provided its recommendations to the Departments on October 27, 2010, and the Departments adopted the recommendations with little alteration in the November 22, 2010 regulation.

The adopted regulation defines the MLR as aggregate premiums divided by aggregate claims. However, more than just premiums and claims comprise aggregate premiums and claims. Aggregate premiums will not include taxes and regulatory fees. Aggregate claims will include credit for the carrier’s expenses to "improve health care quality" and other factors like reserves. Expenses for improving health care quality include a broad list of activities like member services, data analysis, health and wellness activities, disease management and case management. The overall formula adjusts to allow for credibility (the number of people insured in a given block and for how long) and plan design (the level of deductibles and copays) within a given block of business.

An insurer may have multiple MLRs according to the regulation. The regulation states that an MLR will be calculated at the insurer’s "licensed state entity level" and then further divided into blocks of business. The blocks will consist of individual, small, and large groups; in those markets where the state already mandates it, the block of business will include both individual and small group policies. In order for an employer in a given block to receive a rebate, the carrier’s entire block of business in the contract state must fall below the target loss ratio.

MLR will be calculated based on the calendar year, irrespective of a plan’s renewal date and any payment due must be made by August of the following year. Employers must share the rebate with their enrollees, and each enrollee must receive a rebate that is proportional to the premium amount paid by that enrollee. Plans may provide premium reductions or credits in lieu of cash payments.

Lawmakers intended the MLR provision in PPACA to provide two key benefits, increased transparency and cost reduction. However, it is not clear how successful the MLR provision will be towards these goals.

Groups should be careful in anticipating just how much transparency the MLR provision will provide. Historically, insurers told large groups their plan’s loss ratio while not disclosing the ratio to small groups and individuals. Nothing in the MLR regulation currently requires insurers to report an individual’s or small group’s unique loss ratio, nor is there any provision for providing any further detail to large groups about their loss ratio. The MLR provision is thus designed to provide transparency only at the highest aggregated levels within a carrier’s book of business.

The MLR regulation also may not succeed at its goal of cost reduction via requiring most premium dollars go towards claims. The measure broadly defines insurers’ costs "to improve health care quality," which are included as costs towards paying premiums. Such health care quality improvement costs can be substantial and, when accounted for, would drive loss ratios significantly higher and above the minimum threshold. However, this provision applies to fully-insured plans only, exempting ASO self-funded plans.

Employers should bear in mind the limitations of the MLR regulation and temper their expectations of a rebate check from their group health insurers. While the measure may have some industry-wide positive effects on year-to-year premium increases, the full impact of the regulation is far from clear now.