Editor’s Comment: Medical Loss Ratio and Rebates in Private Health Insurance

Posted on August 25, 2010 | Comment (1)
Filed under Editor's Comment, Health Insurance

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Key Developments

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A key issue for insurers, businesses and consumers in health reform is working its way through the regulatory process. Beginning January 1, 2011, insurers will be required to spend a minimum percentage of insurance premiums on medical expenses, as opposed to administrative and marketing costs or profits. Insurers that fail to meet these minimum percentages, called medical loss ratios, will be required to rebate the difference in premiums. Group policies will be required to spend 85 percent on medical expenses and individual policies must spend 80 percent on medical expenses.

Last week, the National Association of Insurance Commissioners (NAIC) released the form that insurance companies will be required to use to report their medical loss ratios. The NAIC is expected to release additional documents in the coming weeks that provide information on how the forms should be completed, including key definitions on what activities performed by insures can actually be included as medical expenses. The association representing the health insurance industry, the Association of America’s Health Plans (AHIP) issued a letter last week expressing concerns that the NAIC has excluded certain costs. AHIP praised the openness of the NAIC process, but expressed concerns that NAIC will not allow anti-fraud and abuse activities, the costs of transitioning to a new coding system (ICD-10), utilization review activities, and the cost of a new wellness program in the individual market to be included as medical expenses.

Based on the content of the form released last week, it appears that NAIC will allow insurers to include quality improvement activities as medical expenses. It is expected that those activities will be defined in the upcoming release of additional documents.

Comment (1)

Bob Mason says:

August 31, 2010 at 3:42 pm

In the struggle to make health reform work, insurance companies present themselves as advocates for patients, as corporate entities working tirelessly to improve patient health. Unfortunately, their are many people in more credible institutions — for example many member of the National Association of Insurance Commissioners (NAIC) – who accept the insurers framing of themselves this way.

The provisions of the ACA regarding employer wellness program are open to abuse and misuse by employers and insurers who wish to show how concerned they are with employee/client health, but in fact would rather spend money on public relations than solid medicine.

CMS rule requires MA and Medicare Part D to comply with MLR

May 20, 2013

The Centers for Medicare and Medicaid Services (CMS) released a final rule that requires Medicare Advantage (MA) and Medicare Part D issuers to comply with the medical loss ratio (MLR), which states that these issuers must spend 85% of their premium revenues on patient services. The MLR permits only 15% of this revenue to be spent on organization administrative and overhead costs. MA and Part D issuers are required to submit data to CMS that allows consumers to use the sponsor's MLR as a measure of efficiency. If the plan sponsors do not meet the MLR requirements, they will be subject to financial penalties, enrollment sanctions, and potential contract termination if issuers repeatedly miss the minimum MLR requirement.

IRS updates guidance with MLR proposed rule

May 14, 2013

According to a proposed rule released by the Internal Revenue Service (IRS), "activities that improve health quality" can not be used to determine Blue Cross and Blue Shield's Medical Loss Ratio (MLR) in regards to obtaining their tax-exempt status. According to the Affordable Care Act (ACA), insurance companies lose their tax privilege under tax code Section 833 and the MLR if they do not spend 85% of their premium revenue on enrollee medical services. Until this proposed rule was released, interim guidance permitted insurance companies to count health care quality activities toward their 85%.

IRS releases notice extending medical loss ratio compliance date

May 31, 2012

The Internal Revenue Service (IRS) recently published a notice giving health organizations another year to comply with the medical loss ratio (MLR) provision enacted by the Affordable Care Act (ACA). Under the MLR provision, Blue Cross Blue Shield organizations and others that meet certain tax code requirements could lose special tax treatment under Section 833 if the organization's MLR during the taxable year is not less than 85 percent. For purposes of Section 833, an organization's MLR is equal to the "percentage of total premium revenue expended on reimbursement for clinical services provided to enrollees under its policies during such taxable year." IRS plans to issue rules specific to MLR, but the industry needs more time to digest related final rules from the Department of Health and Human Services (HHS). Those rules were issued in December 2011. Comments on the notice are requested by September 10 of this year.

CMS releases final rule on MLR requirements

May 12, 2012

The Centers for Medicare & Medicaid Services (CMS), a department within the U.S. Department of Health and Human Services (HHS), released final rules on Friday May 11th requiring insurers to notify subscribers when the medical loss ratio (MLR) provision of the Affordable Care Act (ACA) is met or exceeded for spending on medical claims or quality improvements. The December 2011 interim final rule and final rule on MLR only required that notices be sent to policyholders when insurers did not meet the MLR requirements. The ACA requires both individual and small group plans to meet the MLR requirements by spending at least 80 percent of premiums on medical claims or quality improvements. Large plans are required to spend at least 85 percent. Beginning in August of 2012, insurers must refund the difference to consumers. The goal of the notice is to educate consumers regarding the MLR measures and to help consumers know that the majority of premium payments go towards health care, as opposed to advertising, executive bonuses, or administrative overhead costs. HHS said the rule is not expected to have an economic impact of more than $100 million a year.

Commonwealth Fund releases paper on MLR

December 5, 2012

The Affordable Care Act’s (ACA's) medical loss ratio (MLR) rule requires health insurers to pay out at least 80 percent of premiums for medical claims and quality improvement, as opposed to administrative costs and profits. A new issue brief from the Commonwealth Fund examines whether insurers have reduced administrative costs and profit margins in response to the new MLR rule. In 2011, the first year under the rule, insurers reduced administrative costs nationally, with the greatest decrease, over $785 million, occurring in the large-group market. Small-group and individual markets decreased administrative costs by about $200 million each.

CBO report finds GOP health law bill would add to the deficit

November 8, 2012

A Congressional Budget Office (CBO) report found that the Republican-sponsored bill H.R. 1206 would add about $1 billion to the budget deficit over the next deficit. The bill would alter the Affordable Care Act's (ACA's) medical loss ratio (MLR) provision. The provision mandates that insurers spend no less than 80 percent of premium dollars on medical care as opposed to overhead costs and profits. This past year, insurance companies were forced to send back over $1 billion in consumer rebates due to the provision. H.R. 1206 would exclude brokers' fees from counting as administrative costs in the MLR requirement. The bill would also make it easier to obtain waivers for the provision.

Georgetown and RWJF report examines private health insurance across state lines

October 4, 2012

A new brief authored by the Georgetown University Health Policy Institute and funded by the Robert Wood Johnson Foundation (RWJF) considers the private health insurance market across state lines. While some people support the idea of allowing private health insurance to be sold “across states lines” because it can increase the availability and affordability of health insurance coverage by allowing consumers to purchase products approved in other states, others argue that proposals to sell insurance across state lines would lead to deregulation and a “race to the bottom” where health insurers relocate to the states with the least burdensome regulations. To better understand the effects of allowing insurance to be sold across state lines, the researchers analyzed legislation enacted in six states. According to the authors, none of the laws in the six states resulted in a single insurer entering a new market, or the sale of a single new insurance product. The authors argue that it is because supporters considerably underestimated the administrative hurdles necessary for full implementation. Although the findings are limited in context, the authors say the findings hold insight into what might happen if similar legislation were enacted at the federal level.

CRS details medical loss ratio requirements

September 27, 2012

The Congressional Research Service (CRS) published a report which outlines three issues on which legislation and hearings regarding the Affordable Care Act's (ACA's) medical loss ratio (MLR) requirement have focused. The issues include broker commissions, high-deductible health plans (HDHPs), and special rules for nonprofit insurers. Under the MLR provision, individual and small group plans must spend at least 80 percent of premiums on medical benefits or activities to improve consumer health care quality. Large group plans must spend at least 85 percent. If plans do not meet this MLR requirement, they must refund the different to beneficiaries. In August 2012, insurance companies refunded $1.1 billion to approximately 12.8 million consumers for 2011, due to the ACA provision.