Update: Medical Loss Ratio and Rebates in Private Health Insurance
Posted on November 23, 2010 | Comments (2)
This is an updated version of a brief originally published on August 25, 2010.
A medical loss ratio (MLR) is the proportion of the premium that an insurer spends on health care services relative to total amount of the health insurance premium paid by a subscriber. Prior to the enactment of the health reform law, the federal government required Medicare supplemental insurance (or Medigap policies) to meet minimum federal loss ratio requirements. At the same time, federal law did not regulate the MLR for other forms of private insurance.
Historically, state regulators have required insurers to report MLRs as a means of measuring both solvency and the reasonableness of premiums relative to benefits. Thirty-four states establish guidelines for MLRs, requiring the filing or reporting of loss ratio information with state regulators, or imposing limitations on administrative expenses for major medical insurance. States typically rely on model guidelines published by National Association of Insurance Commissioners (NAIC). Health insurance MLR requirements in the states vary widely, ranging from 50% to 80%. While most states require reporting of MLRs in the individual market. MLR requirements are less prevalent in the group insurance market. MLR requirements are generally enforced through the rate filing process: a standard penalty for failing to meet the requirement would be disapproval of rate filing.
During the health reform debate, proponents of a federal minimum MLR standard viewed such a requirement as a tool for limiting private insurance administrative and marketing costs as well as profit, and thereby increasing value by assuring expenditure of a certain percentage of insurance premiums in medical claims.
A number of issues arose during the debate over health reform. One issue was the lack of a standard definition and methodology for calculating medical claims versus administrative expenses. In addition, experts cautioned that while group health plans might be able to meet higher MLR requirements (that is, a higher proportion of expenditures on actual medical care), the application of MLR requirements to the individual market could cause some plans to exit the marketplace, resulting in disruption in health insurance coverage until other insurance market reforms aimed at assuring universal coverage, non-discrimination, and the use of a modified community rating system go into effect. Also important – at least implicitly – is the impact of stricter ratios on the cost of health insurance at a point prior to January 1, 2014, when subsidies go into effect.
Proponents sought to address concerns about market disruptions in a number of ways, including the use of different standards for the large group, small group, and individual markets, and by providing the Administration with flexibility during implementation to make adjustments that would avoid disruption in the individual insurance market.
Requires health insurance issuers offering health insurance coverage in either the group or individual (non-group) market to submit an annual report to the Secretary on their MLR and to provide rebates in circumstances in which the amount spent on medical care falls below permissible levels. The MLR and rebate requirements apply to both new and grandfathered insurance plans and go into effect for plan years beginning September 23, 2010.
In calculating their MLR, insurers’ reports must include total premium revenues in a manner that includes all revenues, including the receipt of risk adjustment and reinsurance payments as well as federal and state taxes. Against this revenue calculation, insurers must separately calculate the amount they spend on the following:
- Reimbursement for clinical services provided to enrollees;
- Activities that improve quality of care; and
- All other non-claims-related costs (such as marketing), accompanied by an explanation of those costs (not including federal and state taxes and licensing or regulatory fees).
For plan years beginning on or after January 1, 2011, requires health insurance issuers offering health insurance coverage in the small group or individual (non-group) markets to provide an annual rebate, on a pro rata basis to each covered enrollee, if the ratio of clinical expenditures and quality improvement activities over total premium revenues is less than:
- 85 percent for an issuer offering coverage in the large group market, or a higher percentage required under state regulation; or
- 80 percent for an insurance issuer in a small group (defined by the state as either 50 or fewer employees or 100 or fewer employees) or individual (non-group) market, or a higher percentage required under state regulation. The Secretary may adjust the MLR requirement in the individual and small group markets, if the Secretary determines that the application of the 80 percent medical loss ratio may destabilize the individual market in the state.
The total annual rebate amount to be provided to each enrollee is calculated as an amount that equals that portion of an insurer’s premium revenues that would have gone toward medical care had the insurer met the law’s targets. Thus, if the insurer showed an MLR of 75% in its large group market product (as opposed to 85% as required under the law) the 10-percentage point difference, applied to the insurer’s total premium revenues, would be returned to enrollees.
Provides that beginning on January 1, 2014, the MLR for each year will be determined based on the average of the previous 3 years.
Provides that in establishing alternative MLRs (to the extent permitted above either through state regulation for higher loss ratios or as provided by the Secretary for lower loss ratios for the individual market), a state should seek adequate participation by health insurance issuers in order to assure competition in the state’s insurance market and high premium value for consumers.
Directs the Secretary is directed to issue regulations to enforce the MLR and rebate requirements as provided under the health reform law.
Directs the National Association of Insurance Commissioners (NAIC) to establish uniform definitions to be used in calculating medical loss ratios, including activities that improve quality of care and standardized methodologies for calculating measures of such activities. Provides that MLR calculation methodologies should take into account the special circumstances of “smaller plans, different types of plans and newer plans.” Further provides that NAIC’s definitions are subject to certification by the Secretary of HHS. Authorizes the Secretary to adjust the MLR requirement if the Secretary determines the adjustment is appropriate because of volatility in the individual market.
Agency and Related Action
This section of the health reform law is implemented by the new Office of Consumer Information and Insurance Oversight within the Department of Health and Human Services, and will be included in overall insurance market reforms, which are regulated jointly by the Departments of Treasury, Labor, and Health and Human Services.
The NAIC is directed to establish uniform definitions and methodology related to the calculation of medical loss ratios by December 31, 2010. Plans are required to report medical loss ratios and provide rebates to enrollees for plan years beginning after September 23, 2010.
The law directs the Secretary to certify MLR standards and methodology established by NAIC, thereby elevating the NAIC standards to federal rule status once certification is made. In addition, the law directs the Secretary to issue regulations to enforce MLR requirements, rebates and the reporting of hospital charges, and authorizes the imposition of penalties for failing to meet requirements. The statute does not specify a date by which regulations must be issued. The law gives the Secretary a range of policy implementation tools including regulations with notice and comment as well as other tools such as letters, policy guidance and posted rulings, requests for information and notices.
- Defining quality: Stakeholders, including insurers and consumers, have acknowledged that counting certain insurer practices as administrative costs, and requiring rebates if those costs exceed the MLR, could have the effect of discouraging certain important activities such as anti-fraud and abuse measures, quality improvement, wellness and prevention programs, care management, and costs associated with provider credentialing, value-based purchasing initiatives, nurse call lines, and quality research and performance reporting. How quality improvement is defined thus could have an impact on how the MLR provisions affect another key aim of the health reform law, to improve health care quality as well as performance reporting in the Medicare, Medicaid, employer-sponsored plan, and health insurance exchange markets.
- NAIC deliberations: The first step in developing the federal implementing standards is the NAIC recommendations. Thus, key issues are how NAIC will define key terms.
- What will be considered a clinical service? Is case management a clinical service or merely administrative gate-keeping?
- Health plans today provide not just coverage but actually are engaged in the health care process through their provider networks. Will network formation, fraud prevention, and provider credentialing and oversight, and performance measurement be considered quality improvement?
- Health plans are engaged in quality improvement. Will chronic disease management or activities aimed at promoting adoption of health information technology be considered quality improvement?
- What criteria will NAIC use to adjust methodologies for “small plans, new plans, and different types of plans,” as required by statute?
- What, if any, differences in methodologies should be used for individual, as opposed to group plans, given that loss ratios increase over the duration of the policy.
- Market disruption: For the purposes of permitting a lower MLR standard in the individual market in certain states, what criteria will the Secretary use to determine whether there is disruption in the market.
- State flexibility: How much flexibility will states be permitted in application of MLR standards and rebate requirements? Will states be permitted to vary application of requirements from plan to plan, or will all plans be treated uniformly? If a state is granted the authority to phase-in application of the MLR to the individual market, will plans that already meet MLR requirements be permitted to meet lower MLR requirements?
- Credibility of information: Should small insurer groups as well as businesses and individuals enrolled in a plan for less than a year be included, since the small number of individuals and/or short duration of their coverage means that their claims experience is less reliable? (an issue referred to as a credibility problem)
- Exclusion of certain plans: Does the Secretary have the authority to exclude different types of plans from the application of MLR standards? For example, insurers have argued that policies offered to expatriates should not be subject to the MLR requirements.
- Geographic variation: To what extent does geographic variation result in variation in MLRs and how should they be accounted for?
- Rebates: Will all enrollees who were not enrolled in prior years receive rebates?
On April 12, 2010, the Secretary of HHS sent a letter to the NAIC requesting input on Section 2718 regarding the definitions of clinical services, activities to improve health care quality, and all other non-claims costs, as well as methodologies for calculating those activities. Secretary Sebelius requested that the NAIC respond by June 1, 2010.
On April 14, 2010 the Secretaries of Treasury, Labor and Health and Human Services issued a request for comments on the implementation of Section 2718.
On June 1, 2010, the NAIC responded to the Secretary that it would be unable to meet the June 1 deadline; it recognized, however, the importance of providing the information in advance of the December 31, 2010 deadline required by statute. On August 18th the NAIC released the “blanks” or reporting form that insurers will use to report medical loss ratios.
On October 21, NAIC unanimously approved for transmission to the HHS Secretary a “model” MLR regulation, termed the model Regulation for Uniform Definitions and Standardized Methodologies for Calculation of the Medical Loss Ratio for Plan Years 2011, 2012, and 2013. Based on the NAIC submitted regulations, on November 22, HHS issued an interim final rule on the medical loss ratio provision in the ACA. The regulation certifies and adopts the recommendations submitted to the Secretary of HHS on October 27, 2010, by the NAIC. It also incorporates recommendations from a letter sent to the Secretary by the NAIC on October 13, 2010.
- The HHS interim final rule requires insurers to report their losses on a state-by-state basis by June 1st of each year (agreeing with NAIC and rejecting insurer requests to be able to aggregate losses on a nationwide basis).
- Consistent with NAIC recommendations, the interim final rule allows insurers to add to their medical loss ratio a “credibility adjustment” when the insurer’s medical loss ratio for a market within a State is based on less than 75,000 people enrolled for an entire calendar year. This credibility adjustment factor limits insurers’ ability to avoid rebates on the ground that lower expenditures on medical care are simply the result of random fluctuations.
- Following NAIC recommendations, the regulation specifies a comprehensive set of “quality improving activities” that allows for future innovations and may be counted toward the 80 or 85 percent standard. Quality improving activities must be grounded in evidence-based practices, take into account the specific needs of patients and be designed to increase the likelihood of desired health outcomes in ways that can be objectively measured. In developing the definition of a quality improvement activity, the NAIC relied upon section 2717 of the PHS Act. HHS adopts these definitions in the interim final regulation. A quality improvement activity is one that:
- Improves health outcomes through quality reporting, case management, care coordination, and chronic disease management (including the use of Medical Homes);
- Implements activities that reduce hospital readmissions;
- Implements activities that improve patient safety and reduce medical errors; and
- Implements wellness and health promotion activities.
The final regulation, based on NAIC recommendations, allows a non-claims expense incurred by a health insurance issuer to be treated as a quality improvement activity only if the activity falls into one of the categories set forth in section 2717 (above) and meets all of the following requirements:
- It must be designed to improve health quality;
- It must be designed to increase the likelihood of desired health outcomes in ways that are capable of being objectively measured and of producing verifiable results and achievements;
- It must be directed toward individual enrollees or incurred for the benefit of specified segments of enrollees or provide health improvements to the population beyond those enrolled in coverage as long as no additional costs are incurred due to the non-enrollees; and
- It must be grounded in evidence-based medicine, widely accepted best clinical practice, or criteria issued by recognized professional medical associations, accreditation bodies, government agencies or other nationally recognized health care quality organizations.
- Consistent with NAIC recommendations, the regulation will allow insurers to deduct federal and State taxes that apply to health insurance coverage from premium revenues when calculating their medical loss ratios. As NAIC recommended, taxes assessed on investment income and capital gains will not be deducted from premium revenue. In the case of non-profit plans, assessments they are required to pay in lieu of taxes may be deducted.
- In its proposed regulations, NAIC bypassed the question of whether agent and broker commissions should be counted against overall administrative costs, electing instead to appoint a committee to work with HHS on how to address commissions. In its interim final rule, HHS noted the potential impact of the MLR standard on agents and brokers merits recognition and stated that the impact will be a factor in considering whether particular individual markets would be destabilized. In the interim final rule HHS seeks comments on the approach taken in the regulation and on the issues related to agents and brokers during years leading up to 2014.
- The NAIC model regulation did not address the special circumstances of different types of plans, such as expatriate plans and plans with low annual coverage limits, commonly called “mini-med” plans. Under the HHS interim final rule, an insurer will report aggregate premium and expenditure data for each market, except for so-called “expatriate” and “mini-med” plans. For these plans, insurers will be allowed to report their experience separately.
- Consistent with NAIC recommendations, certain insurers that have newly joined the insurance market may be able to delay reporting their medical loss ratio until the year following the year of market entry. Under the interim final rule, when 50 percent or more of an insurer’s premium income accounts for policies that have not been effective for an entire calendar, insurers will be permitted to delay reporting until the following year.
- The NAIC model regulation addressed the calculation of an issuer’s MLR, and HHS certified and adopted the NAIC’s uniform definitions and methodologies in their interim final rule. In the 2013 MLR reporting year, an issuer’s MLR is calculated using the data for a three-year period; this three-year period consists of the MLR reporting year whose MLR is being calculated as well as the data for the two prior MLR reporting years. For the 2011 and 2012 MLR reporting years, there will not be sufficient data reported to use a three-year average. The NAIC addressed this in its model regulation, and in the interim final rule (45 C.F.R. §158.220(b)), HHS adopted the NAIC’s approach. For the 2011 MLR reporting year, an issuer’s MLR will be calculated using only the data reported for the 2011 MLR reporting year. For the 2012 MLR reporting year, the data that should be used in calculating an issuer’s MLR depends in part upon whether the issuer’s experience is credible.
- Finally, Consistent with NAIC recommendations, the interim final rule establishes a state based transition process allowing States to request such an adjustment for up to three years. In order to qualify for this adjustment, a State must demonstrate that requiring insurers in its individual market to meet the 80 percent MLR has a likelihood of destabilizing the individual market and could result in fewer choices for consumers. The interim final regulation does not require the Secretary to find that adherence to the 80 percent MLR standard is certain to result in market destabilization in order to grant an adjustment from it. Nor does the interim final rule allow the Secretary to grant an adjustment in the case where market destabilization is a remote possibility. Rather, the interim final regulation both allows and requires an adjustment to a State’s MLR to be granted when there is a reasonable likelihood that of market destabilization, and thus harm to consumers.
Authorized Funding Levels
The requirements under §2718 are regulatory in nature and do not direct the award of federal funds.
 “Critical Issues in Health Reform: Minimum Loss Ratios,” American Academy of Actuaries, February 2010. Available online at: http://www.actuary.org/pdf/health/loss_feb10.pdf (accessed July 26, 2010).
 State Mandatory Medical Loss Ratio Requirements for Comprehensive, Major Medical Coverage: Summary of State Laws and Regulations, America’s Health Insurance Plans. April, 2010. Available online at: www.naic.org/…/committees_lhatf_ahwg_100426_AHIP_MLR_Chart.pdf.
 PHSA §2718, added by PPACA §1001.
 Section 1001 adding PHSA §2718(b)(1)(B).
 Section 1001 adding PHSA §2718(b)(1)(B).
 Section 1304(a) defines the small group market as a group plan maintained by a small employer. Small employers are those that have at least 1 but not more than 100 employees. Prior to January 1, 2016, however, a state may choose to define a small employer as an employer with no more than 50 employees. Under this section large and small employers are determined by the average number of employees they are expected to have during the year.
 §2718, as added by PPACA §1001.
 Section 1001 adding PHSA §2718(c).
 Timothy Stoltzfus Jost, Perspective: Writing New Rules for Insurers –Progress on the Medical Loss Ratio, New Eng. Jour. Medicine (October 28, 20100).
 A copy of the letter is available online at: http://www.healthreform.gov/newsroom/naicletter.html (accessed July 26, 2010).
 75 FR 71, 19297, available online at: http://www.dol.gov/federalregister/PdfDisplay.aspx?DocId=23731 (accessed July 26, 2010).
 A copy of the letter is available online at: http://www.naic.org/documents/committees_e_hrsi_hhs_response_mlr_100601.pdf (accessed August 5, 2010).
 Jost, Writing New Rules for Insurers, op. cit.
 § 158.110.
 §§ 158.230-158.232.
 §§ 158.150-158.151.
 §§ 158.161-158.162.
 Health insurance provided to U.S. citizens who are living or working abroad. As a note, policies issued by non-U.S. issuers for services rendered outside of the U.S. are not subject to the Affordable Care Act.
 Insurance products with very low annual dollar limits and low premiums (a large majority
of such plans have limits at or below $250,000.)
 § 158.121.
 §§ 158.230-158.311.