New Medical Loss Ratio Regulations Affect Insurers

Beginning this year, federal law requires health insurers to spend a percentage of the premiums they collect on patient care, a mandate that was included in the Patient Protection and Affordable Care Act (HR 3590). If they do not comply with the policy, known as the medical loss ratio (MLR), insurers will have to issue rebates to policyholders. Insurers covering groups of ≥50 people must spend ≥85% of the premiums on medical care and healthcare quality improvement. Insurers selling policies to individuals or groups of <50 people must spend ≥80% of the premiums on those services. The rest of the money can go toward administrative expenses such as salaries, advertising, and marketing costs. However, states are able to ask for an adjustment to the MLR, and some plans are exempt from adopting the new standards. The Department of Health and Human Services (DHHS) issued the final guidelines on November 22 after consulting with and receiving recommendations from the National Association of Insurance Commissioners (NAIC), composed of insurance regulators from the 50 states, the District of Columbia, and the 5 US territories. The DHHS closely followed the NAIC’s proposed guidelines, which were released in October. An NAIC committee developed forms that insurers will submit to state regulators detailing their financial information, which will be used to calculate the MLR. Another NAIC subgroup established the methodologies used to calculate MLR. The final rules went into effect in January. “It basically carries out congressional intent,” Timothy S. Jost, professor at the Washington and Lee University School of Law in Lexington, Virginia, who helped draft the NAIC’s recommendations, said in an interview with First Report Managed Care. “I was very impressed with the NAIC process. It was exhausting. They involved all the stakeholders and listened to what people had to say. They adopted a lot of ideas. On the whole, I think they came up with a good rule.” Each year, insurers must report to DHHS their total earned premiums, total reimbursement for clinical services, total spending on activities to improve quality, and total spending on other nonclaims costs. The reports will be posted on the DHHS Web site and grouped by state to include premium and expenditure data. Beginning in 2012, if insurers do not meet the 80% or 85% MLR standard, they must refund the difference to policyholders. The rebates have to be paid by August 1 via a premium reduction, rebate check, or lump sum reimbursement. The DHHS said an estimated 9 million people in the United States could be eligible for rebates, with individuals purchasing their own insurance coverage benefiting the most from the new rules. According to the DHHS, >20% of consumers in the individual market are enrolled in plans that have MLRs <70%, while an additional 25% are in plans with MLRs between 70% and 75%. Under the new rules, insurers are able to include federal and state taxes as part of the patient care calculation, which could result in significant cost savings. A Bloomberg article cited a Goldman Sachs’s analyst prediction that the 6 largest health insurers would spend $655 million in rebates in 2011. If the insurers did not include the taxes, they would spend $1.36 billion in rebates. “This suggests the administration is perfectly willing to be reasonable from an insurance point of view and try to preserve the private insurance market,” Dave Shove, an analyst for the financial services firm BMO Capital Markets, told Bloomberg after the regulations were released. “The nervousness among investors was over whether the administration would take the point of view that says insurers aren’t entitled to a fair profit.” The investment community was also encouraged that insurers may not have to abide by the rules in every state. According to the DHHS guidelines, states can request that the MLR standard be adjusted if they believe the individual market would be negatively affected and would lead to fewer options for consumers. Some states are concerned that if the 80% MLR rule goes into effect, insurers will leave the state and not offer individual policies. As of early February, Maine and New Hampshire were the only states to request an adjustment. The documents are made available on the DHHS Web site (www.hhs.gov/ociio/regulations/medical_loss_ratio.html), and the public may comment on the proposed MLR changes within 10 calendar days from when the documents are posted online. Mila Kofman, Maine’s superintendent of insurance, sent an e-mail to DHHS Secretary Kathleen Sebelius in December requesting an MLR adjustment in the individual market until 2014. Maine wanted the MLR standard in the state to remain at 65% excluding federal adjustments for quality improvement expenses and taxes. Ms. Kofman said that 2 commercial insurance companies, 3 health maintenance organizations (HMOs), and a public-private partnership offered coverage in the individual market. The commercial insurers (Anthem Blue Cross and Blue Shield of Maine and MEGA Life & Health Insurance Company) held an 82% market share in the individual market, while the HMOs accounted for only 2% of the market. According to the Bangor Daily News, Ms. Kofman wrote a letter to Ms. Sebelius in July indicating that MEGA would likely stop offering policies in Maine if the MLR was increased to 80%. In January, New Hampshire insurance commissioner Roger A. Sevigny sent a letter to Ms. Sebelius requesting an adjustment in the MLR to 70% until 2014. Mr. Sevigny noted the MLR for the state’s individual market was approximately 60% in 2009. New Hampshire adopted an MLR of 65% in 2010 for the individual market. Mr. Sevigny wrote that “absent a waiver, the application of the federal MLR to New Hampshire will disrupt the individual health insurance market…the size of New Hampshire’s market makes the market relatively unattractive to insurance carriers…and the loss of carriers providing individual insurance in New Hampshire will have a destabilizing effect on the market.” Reports have indicated other states, such as Iowa, South Carolina, and Georgia, will likely formally request an adjustment in the MLR standard, as well. “There will certainly be more states that apply,” Mr. Jost said. “If you have a place where 1 or 2 insurers say, ‘Give us everything we want or we’ll leave your market,’ the state has to try to encourage the insurer not to do that. The tools [the states use to work with insurers] depend on the states. But I don’t think it’s appropriate for states to say to insurers, ‘We’ll do whatever you want.’” The new MLR rules do not apply to limited-benefit plans (commonly referred to as mini-med plans) that offer insurance with low annual caps, mostly to low-wage and part-time workers. A PBS online report cited a survey from the Mercer consulting firm that found the median annual limit on how much insurers would pay on those policies was $7000. According to a February 2 article in the Wall Street Journal, DHHS issued 733 waivers to limited-benefit plans from employers and union healthcare funds exempting them from new rules that set a minimum limit on policy coverage. In 2011, health plans must have a minimum annual limit of $750,000 for each worker, which increases to $1.25 million in 2012 and $2 million in 2013. The Wall Street Journal article said that waiver recipients included PepsiCo Inc, Foot Locker Inc, DineEquity Inc (which owns Applebee’s and IHOP restaurants), the International Brotherhood of Teamsters, and the United Food and Commercial Workers International Union. The plans receiving the exemptions insure 2.1 million people. The exemptions are only for 2011, although the companies may apply again next year. The waiver recipients will have to report to the DHHS how they are spending their premiums on a quarterly basis. Plans that cover expatriates are also excluded from the requirements. Other exemptions include small plans and new plans. Insurers that base their MLR calculation within a market of <1000 people enrolled in a year are not required to offer rebates, while plans basing their calculation on a market of between 1000 and 75,000 people will receive an adjustment to their MLR. In addition, if ≥50% of an insurer’s premium income comes from policies that have not been effective for a calendar year, the insurer can delay reporting the MLR until the next year.