Implementing Health Care Reform: Fine Tuning the Medical Loss Ratio Rules

Timothy Jost

Posted 12/02/11 on The Health Affairs Blog

On December 2, 2011, the Department of Health and Human Services released both a final rule  and an interim final rule updating the medical loss ratio rule that it issued almost exactly a year ago.  The Department of Labor simultaneously issued a technical release giving direction to employer-sponsored health plans governed by the Employee Retirement Income Security Act (ERISA) as to how to handle rebates provided by insurers who fail to meet the targets established under the MLR rule.

The MLR rule has been one of the most controversial provisions of the Affordable Care Act (ACA).  The MLR provision of the Affordable Care Act (section 2718 of the Public Health Services Act) requires health insurers in the individual and small group market to spend 80 percent of their premiums, after subtracting taxes and regulatory fees (85 percent for large groups), on payment for medical services or on activities that improve health care quality.  Insurers must report their medical loss ratios annually and insurers that fall short of the target must rebate to their enrollees an amount equal to the product of the difference between their actual medical ratio and the statutory target multiplied by their premium revenues.  According to a recent Kaiser tracking poll, 60 percent of the public views the MLR concept favorably, although only 38 percent was aware that the provision is in the ACA.

The goal of the MLR requirement is to ensure that health insurance premium dollars are actually spent on health care rather than consumed by administrative costs and profit.  The hope is that insurers will attempt to avoid paying rebates by moderating premium increases or even reducing premiums.  A Government Accountability Office Report issued last summer found some evidence that this is actually happening.

The Affordable Care Act asked the National Association of Insurance Commissioners to establish the definitions and methodologies necessary to implement the provision.  This included the definition of “activities that improve health care quality.”  The NAIC was also asked to establish methodologies to “take into account the special circumstances of smaller plans, different types of plans, and newer plans.”  The definitions and methodologies established by the NAIC were adopted by and large intact by HHS in its December 2010 regulation.

This year is the first year in which the MLR rule applies.  The NAIC requested insurers to report MLR data for 2010. Based on those reports, the NAIC found that insurers would have had to pay rebates of nearly $2 billion had the MLR rule been in effect for 2010, with nearly half of that amount going to employer-sponsored group plans.  The GAO, however, analyzing the same reports, found that the rebates were limited to a minority of insurers—most insurers would have met or exceeded the MLR requirements.

What’s Notably Not In The New Regulations: Reclassifying Agent And Broker Compensation

One of the ways in which some insurers have been cutting their administrative costs has been by cutting compensation to agents and brokers.  The NAIC Report found that “a significant number of companies have reduced commissions in 2011,” although it also found that a significant number had not.  For the past year, agents and brokers have heavily lobbied the NAIC to recommend that their compensation be protected from reductions under the MLR formula, and on November 22, 2011, the NAIC recommended that Congress and HHS do just that.

State insurance commissioners were also lobbied, however, by consumer advocates who supported continuing to classify agent and broker compensation as an administrative cost, as they have been traditionally.  One consumer group reported that state commissioners received 45,000 emails and faxes from consumers opposing the broker resolution leading up to the NAIC vote.  According to the NAIC’s own study, reclassifying broker and agent compensation would have resulted in a loss of about $1.2 billion to consumers in rebates in 2010, had the rule been in effect.  It would have also taken the pressure off insurers to lower premiums.   Although commissioners are generally supportive of agents and brokers, the usually consensus-driven NAIC was sharply divided on the issue, with 26 commissioners voting for the resolution, 20 against, and 5 abstaining.

Perhaps the biggest news about the new HHS regulations concerns what they did not do.  HHS did not reclassify agent and broker compensation, instead leaving them as an administrative cost.  HHS has long maintained that there is no other way to classify these expenses under the current law, and the new regulations do not even discuss the issue.

A Mid-Course Correction

What the new regulations rather do is address a number of less controversial and generally more technical issues that are nonetheless important to particularly insurers or consumers.  The rules are essentially a mid-course correction, addressing practical problems that have arisen in the implementation of the rule or fine-tuning earlier resolutions of particular issues.

Distribution of rebates. The most important modification wrought by the rule is a change in how rebates are handled for employee plans.  Under the original rule, insurers were responsible for paying rebates representing an employee’s share of a group insurance premium either directly to the employee or to the employer with assurance that the employer would give it to the employee.  Insurers complained that this was administratively burdensome, while the IRS pointed out that it would result in tax liability for employees, who would be receiving taxable income rather than nontaxable benefits.

The resolution of this issue was complicated by the fact that the Department of Labor regulates ERISA employee plans, while HHS regulates non-federal governmental plans and group plans that are neither ERISA nor governmental (such as church plans).  HHS therefore published separate rules governing governmental plans and other plans, while DOL published a technical release addressing ERISA plans. The DOL release is written in ERISA-speak, incomprehensible to mere mortals, but the bottom line for all group plans is that group plan insurers will now be able to pay rebates directly to the plans, with the plans being responsible for making sure that employees benefit from the rebates to the extent they contributed to the cost of the coverage, probably most often through reduction of premiums rather than direct payments.  The rule also reduces for groups the “de minimis” amount below which insurers do not have to pay rebates from $5 per member to $20 per group.

Notices to enrollees. The original rule required insurers to provide a notice to each of their enrollees who received a rebate including information about the MLR concept and its purpose, the MLR standard, the issuer’s aggregate MLR premium revenues, the rebate percentage owed, and the rebate being provided.  The new rule retains these requirements for individual plan rebate recipients.  The same information must be provided to group policy-holders and to each group subscriber, but in addition the notice to current plan subscribers must explain how the rebate will be handled. If the plan is subject to ERISA, the notice to subscribers must explain that the policyholder may have obligations under ERISA’s fiduciary responsibility provisions with respect to the handling and allocation of the rebate, as well as contact information for questions regarding the rebate.

Mini-Med and Expatriate Plans. The rule revisits the treatment of two “different” types of plans.  First, the rule changes the treatment of mini-med plans, defined for this rule as plans with annual limits of $250,000 or less.  These plans arguably have higher administrative costs relative to premiums than more comprehensive plans and for 2011 were allowed to multiply their claims and quality improvement expenses by 2 to determine whether they met the target (effectively reducing their MLR target to 40 or 42.5 percent).  For 2012, the multiplier will be reduced to 1.75; for 2013 to 1.5, and for 2014 (by which time all mini-meds should disappear under the ACA) to 1.25.  These plans will, that is, be gradually required to cut their administrative expenses and to get into compliance with the statutory standard.

Issuers of “Expatriate plans,” on the other hand (plans that cover employees “substantially all of whom are: working outside their country of citizenship; working outside of their country of citizenship and outside the employer’s country of domicile; or non-U.S. citizens working in their home country”), will continue to be allowed to double the numerator, recognizing their apparently irreducible administrative costs.

Quality improvement expenses. The rule also revisits the classification of quality improvement expenses.  One issue left open by last year’s rule was how expenses for conversion to the ICD-10 claims coding system would be handled.  While data reported using ICD-10 coding can be used to improve quality improvement and care coordination, ICD-10 is fundamentally a claims processing system.  Consumer and provider advocates who commented on the rule, therefore, contended that ICD-10 conversion costs should continue to be treated as administrative expenses.  The final rule allows insurers to claim ICD-10 conversion costs as quality improvement expenses up to 0.3 percent of their total premiums for 2012 and 2013, the primary years during which the conversion will take place. This effectively allows most insurers to claim most of their conversion costs as quality rather than administrative, and thus to spend less on health care.  ICD-10 maintenance costs, on the other hand, will be considered to be administrative.  HHS did, however, refuse to reclassify fraud reduction costs as quality expenses, something insurers had wanted.

The rule further simplifies the handling of community benefit expenses for tax-exempt insurers, allowing them to deduct community benefit expenses incurred in lieu of taxes up to the level of the highest premium tax level charged by the state.

Requests for comments. Finally, HHS requests further comments on a handful of issues, including how rebates to group plans should be handled and whether issuers should be required to provide notice regarding their MLR to all enrollees, not just to those who are due a rebate. The latter requirement could serve the salutary purpose of encouraging even insurers with MLRs that meet the threshold to keep improving their performance.

These are now the final rules that will govern MLR reporting and rebates for 2011.  Reporting of MLR calculations is due on June 1, and payment of rebates on August 1.  We will see whether the MLR rule continues to restrain premium growth for 2012 as it has apparently for 2011.