Making Health Insurers Insure

Medical Loss Ratio Standard to Give Consumers More Care for Their Money

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Tex Med. 2010;106(12):37-41.

By Ken Ortolon
Senior Editor

Most Texas physicians haven't found much to like about the health system reform law Congress passed earlier this year. But one provision of the law may hold hope that their patients get more value for their health insurance premium.

A section of the Patient Protection and Affordable Care Act (PPACA) requires health plans to maintain a minimum "medical loss ratio," or MLR, of between 80 percent and 85 percent. If they don't, they could be ordered to refund some premium dollars to their beneficiaries.

Plano family physician Christopher Crow, MD, chair of Texas Medical Association's Council on Socioeconomics, says expecting the vast majority of premium dollars to actually pay for medical care is a "pretty reasonable assumption for our insurance."

But neither the federal government nor most states have ever mandated that insurers actually use a minimum percentage of premium dollars to cover beneficiaries' health care needs.

TMA officials say the new MLR provision could force health plans to spend more time providing insurance and less time meddling in patient care. But that is still unclear.

As with much of the rest of the PPACA, the devil is not in the language of the bill but in the details of how the U.S. Department of Health and Human Services (HHS) will implement it.

"The framework is in the law, but the details are going to be in the regulations," said Lee Spangler, JD, TMA vice president for medical economics. "So how HHS Secretary Kathleen Sebelius defines 'medical loss' is going to be the big issue."

While that definition and other regulations to implement the MLR requirement were still being written in late September, early recommendations to HHS from the National Association of Insurance Commissioners (NAIC) appear to be a mixed bag for both patients and health plans. 

Defining Medical Loss

Medical loss ratio is generally defined as the amount of revenue from health insurance premiums that is spent to pay for the medical services covered by the plan, i.e., claims for physician services, hospital services, prescription drugs, and other direct medical expenses.

Under the law, individual and small group plans are required to have a medical loss ratio of at least 80 percent, while large group plans must maintain a ratio of 85 percent. Large groups are defined as those with more than 50 employees.

Health plans must begin submitting medical loss data to HHS or state insurance departments beginning in 2011, using 2010 medical loss information, and must meet the new standards in 2012 or face potential rebates to beneficiaries.

NAIC officials say state insurance departments likely will be the entities that will enforce the new requirement, but exactly how they will do it is still being discussed.

"When we're sending in our premium dollars as an employee, as an employer, or whoever is sending those premiums in, we're expecting, assuming, hoping that the vast majority of those dollars are actually going to be used to pay for medical costs," Dr. Crow said.

He says the range of 15 percent to 20 percent for administrative expenses and profit allowed under the law should be adequate for health insurance carriers.

But Dr. Crow and Mr. Spangler say the law leaves a door open for health plans to include some purely administrative expenses in the MLR, thus threatening to reduce the real percentage of premium dollars going to direct medical care.

"The health system reform law actually includes not just medical losses, but also quality improvement expenses as part of the medical loss," Mr. Spangler said. Quality improvement costs have never been included in previously accepted definitions of medical loss, he adds.

As a result, the carriers asked NAIC – which PPACA requires to make recommendations to HHS regarding the definition of medical loss ratio – to include costs for such things as utilization review (UR), fraud and abuse detection programs, network development, disease management programs, and ICD-10 coding preparation as part of the MLR.

The carriers also asked that the MLR be calculated nationally rather than on a state-by-state basis, which is how the insurance industry currently is regulated. America's Health Insurance Plans and the Texas Association of Health Plans did not return calls for comment.

Dr. Crow sees activities such as fraud and abuse detection and UR as purely cost-saving measures that have nothing to do with direct medical care.

"I don't see that at all as having a value to the health of a patient," he said. "I understand how it affects costs, but the traditional thought behind the medical loss ratio is that they are medical care costs."

In a letter to Secretary Sebelius in May, Dr. Crow warned that allowing health plans to include these types of costs in the MLR would "merely sanction the status quo without providing an additional benefit to consumers in terms of transparency or plan value."

Preparing Blanks

Two NAIC committees began working on recommendations on the MLR in April. The first focuses on developing the form, or "blank," that companies will fill out to show how they allocate their premium dollars. The second is working on recommendations for how refunds will be made if plans fail to meet the MLR requirements.

In August, NAIC overwhelmingly approved the new blank and forwarded it to HHS for approval. The form appears to give some victories to both health plans and patients. For example, it includes prospective UR as a quality improvement expense, but not retrospective or concurrent UR.

"The health plans argued they should be able to do retrospective and concurrent, as well as prospective, utilization review and call that a quality expense," said Kansas Insurance Commissioner Sandy Praeger, chair of the NAIC Health Insurance and Managed Care Committee. "The committee said no."

While prospective UR could be deemed as a quality improvement activity because it sets out goals for what type of care is appropriate for certain diagnoses, Commissioner Praeger says NAIC viewed retrospective and concurrent UR as "more cost containment strategy on the part of the plans, and that was not allowed."

Also, some disease management programs are allowed to be included in the MLR. For example, if a plan uses a nurse call line and can demonstrate that it is used to actually help individuals manage a chronic disease, that could be included in the MLR.

"But they're going to have to be able to demonstrate that it's not just being used to make appointments, and it truly is being used to help somebody manage care," Commissioner Praeger said.

While those were partial victories for the plans, patients won on the issue of fraud and abuse detection. Those expenses will remain classified as administrative costs, she says.

The form has been recommended to HHS, but Commissioner Praeger says there are still some outstanding issues outside NAIC's purview that Secretary Sebelius will have to address. Among those is whether the MLR should include state and federal taxes and regulatory fees insurance carriers pay, as well as agent commissions.

"There are times the agent – especially in the individual and small group market – does an awful lot to assist individuals and small businesses make good decisions about the benefit structure of their plans," Commissioner Praeger said. "Then also they help their customers negotiate the claims-filing process when they have disputed claims. So they do provide some value. We weren't going to consider them a medical expense, but HHS will have to figure out how they want to factor in the agent commissions."

Impacting Coverage Choice

While most large insurance carriers are expected to have no problem meeting the 80 percent and 85 percent MLR standards, experts say there could be some negative impact on the availability or choice of coverage in some markets. At least one plan in Massachusetts already has dropped out of the marketplace, and others may follow.

"We've heard the large groups don't think they'll have much difficulty, but I think the small group and individual market may have," Commissioner Praeger said. "We've heard anecdotally there are some companies that are pulling out of the individual market because they are fearful that they wouldn't be able to meet the standard."

Maine has requested a waiver from the standard because it has very few health insurance carriers. Commissioner Praeger says HHS may need to consider phasing in the requirement for individual markets, slowly increasing the required MLR percentage from 70 percent to 75 percent and then 80 percent.

Will health plan beneficiaries really see more value for their premium dollar? TMA officials hope so, as does Commissioner Praeger.

"I think that's what Congress intends," she said. "That's why I think we have to be very clear on our definition so we don't get games being played."

TMA officials are being cautiously optimistic.

"I think what you're seeing is that the medical loss ratio requires insurance companies to focus on providing insurance, and it leaves behind the idea that they should be managing medical care," Mr. Spangler said. "That's the policy statement. Whether it works out that way is yet to be seen."

  Ken Ortolon can be reached by telephone at (800) 880-1300, ext. 1392, or (512) 370-1392; by fax at (512) 370-1629; or by e-mail at Ken Ortolon.

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