Counting Their Medical Losses

Insurers Contemplate New Spending Requirements

Health insurers are considering the financial impact of mandatory medical loss ratios (MLRs) requiring them to spend minimum percentages of the premiums they collect on providing healthcare to customers. Starting in 2011, insurers will have to comply with federally mandated MLRs or provide rebates to consumers based on the amount that spending falls below these minimums. While stakeholders in the insurance industry work with regulators to determine precisely how the MLRs will be calculated and applied, some are taking preemptive action to bring their spending and accounting practices into compliance.

The new MLR requirements, which go into effect January 1, 2011, are part of the federal healthcare laws enacted this March. The Patient Protection and Affordable Care Act (HR 3590), now public law 111-148, was signed by President Barack Obama on March 23, 2010. A week later, the Health Care and Education Reconciliation Act of 2010 (HR 4872), now public law 111-152, was enacted, making several changes to HR 3590. Under the new laws, insurers are required to spend at least 85% of the premiums they collect in the large-group market on medical care. In the individual and small-group markets, the mandated medical loss is 80%.

A July 2009 report by the American Academy of Actuaries noted that before the enactment of new healthcare laws in 2010, MLRs for health plans sold in the individual market were common in most states but rare in the group market. New Jersey, for one, has required MLRs ≥80% for insurers selling individual policies since 1992.

In a memo prepared for the National Association of Insurance Commissioners (NAIC), actuary Rick Diamond said that determining whether health insurers’ current MLRs are within or near compliance with the new minimum standards is difficult because the new law defines MLRs differently than NAIC and various states. Despite these uncertainties, Mr. Diamond believes most insurers in small-group and large-group markets currently operate under MLRs higher than the newly enacted minimums.

“The situation is less clear in the individual market,” Mr. Diamond continued. “Some issuers would likely have MLRs below 80%...while others would be well above the minimum.”

Insurers have been working with regulators to determine how the new MLR rules will affect them. On April 27, 2010, an actuary representing 39 members of the Blue Cross Blue Shield (BCBS) foundation sent a letter to Steve Ostlund, chair of the NAIC Accident & Working Group, attempting to clarify which insurance products are subject to the new MLR requirements and which data elements will be used in calculations of the ratios.

In the letter, Shari Westerfield, FSA, MAAA, actuarial services, wrote that based on the language of the law, there appear to be multiple potential interpretations that regulators might reasonably consider in calculating MLRs. She made the case for one possible interpretation of the regulations governing which data elements will be included in MLR calculations, but conceded that the BCBS companies “certainly appreciate that the language of the law is not entirely clear and that other reasonable interpretations may exist, while the timeline to reach conclusions and develop the recommendations is very brief.”

Although NAIC accounting rules define medical loss as the value of medical claims an insurer has actually paid (incurred claims), plus the amount of money the insurer sets aside to pay future claims (contract reserves), the new law will potentially allow insurers to classify a broader set of expenditures as medical. Under the new law, insurers will be able to consider expenditures on “activities that improve healthcare quality” as medical expenses for the purpose of calculating MLRs. The new law also directs NAIC to establish uniform definitions and standardized methodologies for determining what services constitute clinical services, quality improvement, and other nonclaims costs for carrying out this provision.

On April 15, Sen. John D. Rockefeller IV, chairman of the Senate Committee on Commerce, Science, and Transportation, released a staff report on MLR information for policymakers and consumers. The report includes a review of recently filed 2009 MLR information filed by insurers as well as new MLR requirements.

The committee began work on the report in August 2009 to investigate how insurance companies spend health insurance premiums. “Making sure health insurance companies spend more of the money they collect from premiums on actual medical care was a key component of healthcare reform,” Sen. Rockefeller explained.

Based on their filings of 2009 Accident and Health Policy Experience Exhibits, the report included MLR information from the 6 largest for-profit companies (Aetna, CIGNA, Coventry, Humana, UnitedHealth, and WellPoint) provided in these filings.
For the 6 reporting insurers, MLRs in the large-group market were all ≥80% in 2008 and 2009. In the individual market, most MLRs were between 70% and 76% for 2009.

The Commerce Committee report also documents health insurer initiatives to reclassify some administrative expenses as medical expenses in response to the new MLR requirements. It states that in the company’s most recent investor call, executives from WellPoint announced that the company has started reclassifying certain expenses that had traditionally been classified as administrative expenses.
WellPoint’s reclassification involved expenditures on a nurse hotline; health and wellness, including disease management and medical management; and clinical health policy. By reclassifying these expenses as medical benefits, the executives projected that WellPoint’s 2010 MLR would increase by 170 basis points, or 1.7%.—Charles Boersig