One Minute Left in the Game. Score: Patient Education 100, Patient Accountability 0


Originally published 10/05/10 at the Health and Human Capital Foundation Blog.

There is a sad irony in new healthcare reform provisions released last week. It rewards (or at least relieves financial pressure on) health plans for virtually every bit of educating, assessing, coaching and reminding it does with patients. Then, it penalizes them for trying to give consumers purchasing power.

The issue: the definition of MLR.
Medical Loss Ratio (MLR) is a term used to describe the portion of the total healthcare premium spent on “medical services” as opposed to other expenses usually referred to as administrative services. MLR is actually expressed as a fraction or percentage indicating what portion of premiums is spent on supposedly REAL value delivered to covered members, compared to operational costs, profits, or inefficiencies.

In national healthcare reform (now referred to most commonly as ACA, the Affordable Care Act), legislators decided to mandate a minimum MLR: 80% (or 85% depending on the size of the group being insured). A plan achieving a lower MLR will incur a penalty, to be paid to members in the form of rebates.

The intent of this minimum MLR was to encourage better, more efficient care delivery and operations and discourage profit-taking.

One small detail: the ACA did not define which items belonged inside versus outside of the MLR calculations. The definitions were left as a “To Be Determined” category.

One does not need to know the intricacies of healthcare to guess what has been happening in Washington—a mad dash to have products and services considered “medical,” or as a contributor to medical “quality.” Every stakeholder group possible has been lobbying to be considered INSIDE MLR, rather than risking possible extinction by falling outside essential services. Services that improve efficiency of care but do not treat illness have traditionally been considered administrative. These are now in a rush (appropriately or not) to be redefined.

You may have heard a collective sigh of relief on September 23rd when the National Association of Insurance Commissioners (NAIC) gave their preliminary recommendations about what will be included in MLR (1). After the arm wrestling, the apparent decisions are:

  • Any personalized wellness program, education, outreach, self-management, compliance monitoring, decision-support and other illness-specific programs are considered inside MLR. However, they need to deal with an issue specific to the person. Apparently, general newsletters are not specific enough (2).
  • In another hotly-contested area, fraud detection falls under MLR—but only up to the amount recovered (1, p. 31).
  • Similarly, the cost of using information technology is included in MLR, but not the initial start-up or update to such systems. (1, p. 31)
  • The topic most likely to be challenged by the Obama administration appears to be the NAIC’s exclusion of most state and federal taxes from the denominator (3, 4). Some claim that the “spirit” of the bill was to exclude only a small amount of additional taxes caused by reform. By removing all taxes from the denominator, it makes it easier for health plans to reach the 80% or 85% figure because the denominator is smaller.

So, what about steps that encourage patients to be smarter consumers?
As readers know, we believe that a high-deductible health plan (HDHP) combined with a health savings account (HSA) has mutual benefit for the plan sponsor as well as the consumer. Combined with resources that help inform consumers about price (see products like Adjudica (5)), such plans activate consumers to take accountability and seek care appropriately. Even better, lower premiums associated with HDHPs allow more money to go into consumers’ pockets.

Sadly, the new MLR definition makes it much more likely that a well-run consumer-directed health plan (CDHP) will NOT meet the required level and will be assessed a penalty. Here is why:

Typical health plan scenario: Assume that a traditional health plan has a $250 deductible. If the premium is $5,000, the plan needs to account for at least $4,000 in qualified medical expenses to meet the minimum MLR requirement of 80% ($4,000/$5,000).

CHDP scenario: Let’s say the same population is switched to a $2500 deductible, and put $2,500 in an HSA account. The first $2,500 of medical spending will be assumed by the individual—not the health plan. So even if utilization did not go down (which it would) and each person spent $4,000 on medical services, the plan would only be providing $1,500 of services ($4,000 minus the $2,500 deductible). Even if the premium for that plan was cut in half (and it would most likely be more expensive than that) the MLR will still be only 60% ($1,500/$2,500). So, despite no true increase in out-of-pocket costs and the same amount of spending, as the rules stand now, the HSA will not count toward medical spending.

As it stands now CDHP-oriented plans will be required to deliver significant rebates
In an opinion on a separate, but related, matter, the Congressional Budget Office suggests that the actuarial value of a CDHP should include the amount a plan sponsor places in a health savings account (6). Other experts agree that MLR calculations cannot be applied to high-deductible plans in the same way as traditional plans (7).

However, thus far the only provision for CDHP in the NAIC document seems to be an adjustment factor—which for a $2,500-deductible plan would involve multiplying the MLR by 1.16. This still wouldn’t get the MLR in our example (60% becomes 69%) close to the required level. NAIC also allows plans to average their deductible amounts across all plans, meaning that as long as there is a low deductible plan (with sufficiently high utilization) to balance the high deductible plan, the insurer can, possibly, achieve the required MLR.

While it is likely that the final rules will figure out a way to accommodate the 10 million+ people who already have HDHPs and HSAs (8), the underlying question we must ask is: why weren’t HSAs considered in the first draft? Why discourage a proven method for engaging consumers and managing utilization?

Now that all things “wellness” are classified inside the MLR definition, we can anticipate inclusion of a wide range of both proven as well as ineffective educational programs to fortify “medical spending” and keep both ratios and premiums high. Plans will be able to justify virtually any awareness campaign or public health effort. But health accounts—that reward individuals for being wise consumers and staying healthy—will put insurers at greater risk of being penalized.

If the current score is: Patient Education 100, Patient Accountability 0…maybe our last play needs to bring consumers into the game?

Why this matters: There is no greater tool for improving health literacy and reducing cost than the increased transparency and consumer-activation that results from CDHPs. Even if proposed provisions are modified, the potential penalty associated with CDHPs illustrates just how disconnected policy makers are from evidence. Affordability in healthcare cannot happen without engaged consumers.

Note: This blog is focused on the effect new MLR rules on CDHPs, however, the rules will also discourage so-called “mini-med” plans that provide limited coverage for college students and minimum-wage workers. Last week McDonald’s announced it might have to drop healthcare for 30,000 employees (9). Unfortunately, this is the type of collateral damage that happens when government legislates a one-size-fits-all solution when consumers need and want a variety of options.

1. National Association of Insurance Commissioners. Regulation for Uniform Definitions and Standardized Rebate Calculation Methodology for Plan Years 2011, 2012 and 2013 Per Section 2718 (B) of The Public Health Service Act. Sep 29, 2010 ; (accessed Oct 4, 2010).

2. Goozner, M. Medical loss ratio defined. Sep 27, 2010;  (accessed Oct 4, 2010).

3. Health Insurer Rule Draft Yields Few Surprises. Sep 24, 2010; (accessed Oct 4, 2010).

4. Pecquet, J. Insurers’ concerns with medical loss ratio outlined. Sep 24, 2010; (accessed Oct 4, 2010).

5. Adjudica. Our goal: Create healthy and savvy consumers. (accessed Oct 4, 2010).

6. Congressional Budget Office. Key Issues in Analyzing Major Health Insurance Proposals. Chapter 3: Factors Affecting Insurance Premiums. Dec, 2008; (accessed Oct 4, 2010).

7. Ramthun, R. Health Reform Provisions that Could Impact Consumer-Driven Health Plans. Apr 12, 2010; (accessed Oct 4, 2010).

8. AHIP Center for Policy and Research. January 2010 Census Shows 10 Million People Covered by HSA/High-Deductible Health Plans. May, 2010; (accessed Oct 4, 2010).

9. Adamy, J. McDonald’s May Drop Health Plan. Sep 30, 2010; (accessed Oct 4, 2010).

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