Medical Loss Ratios Will Be First Indication of Health Care Reform’s Real Impact

 The Patient Protection and Affordable Care Act requires carriers to spend specified percentages of the premium dollars they take in on paying claims and other activities that improve health care quality. This Medical Loss Ratio (“MLR”) requirement will have far-reaching effects on health care coverage, carrier costs and broker compensation. So the details concerning how it will be implemented is of critical importance.

For example, when dealing with any percentage there’s a numerator (the amount a health plan spends on claims and health quality improvements) and the denominator (the amount of premiums it takes in). Seems simple enough – until you get into the specifics.

The law says money spent on taxes (federal and state), licensing and regulatory fees are excluded from the calculation altogether. And it takes into account dollars spent on risk adjustments and reinsurance. The federal MLR targets are 85 percent for larger groups (100 employees or more) and 80 percent for individual and small group coverage. States can impose higher Medical Loss Ratio targets, but the Secretary of Health and Human Services can lower the targets if doing so is necessary to stabilize the individual market in a state.

If health plans spend less than the required percentage on claims and health care quality expenses, the underpayment must be returned in the form of rebates to its enrollees.

That’s pretty much what the law provides for. As I’ve mentioned before, however, the law is just a framework; the actions of judges, regulators and those living under the law are what brings it to life. It’s what happens after the law is passed that fills in the details.

Three federal Departments, working with the National Association of Insurance Commissioners, are tasked with filling in a lot of the details concerning. To help draft the devil’s new home — the details — the three Departments have requested input from the public concerning Medical Loss Ratios. (For those interested, you can submit comments online within 30 days from when the request was published in the Federal Register on April 14th).

What’s interesting is the questions they ask. (In the hard copy of the Departments’ Request for Comments relating to Medical Loss Ratios they start on page 13). Some of it is purely informational: what data is currently collected concerning MLR calculations at the state level? Some, however, go directly to the issue of whether this provision will result in a vibrant private market for health insurance or not. For instance, on page 17 of the hard copy the request seeks information on the impact of aggregating data “at the policy form level, by plan type, by line of business, by company, by State.”

Think about that for a moment and compare two scenarios In the first, each specific small group product a carrier offers has to individually meet the MLR requirement and do so each year. In the second scenario, all of a carriers’ small group products offered in a state have to meet or exceed the Medical Loss Ratio targets in the aggregate.

The first scenario leaves little room for error, meaning pricing and plan design will be extremely conservative. No innovation welcome. Actuaries and the health plan executives who love them will stick to the tried and true. The second scenario, however, will allow for some flexibility. New products can be offered with the knowledge that its impact will be minor in the MLR calculations relative to the carriers’ existing block of business. The result will be the continued introduction of new product designs and increased consumer choice.

The Departments are also looking at whether carriers should be allowed to aggregate their Medical Loss Ratio at the state or national level, how the data will be reported (the law requires each carriers’ MLR to be posted on the Internet), whether new carriers and regional health plans should be treated differently than national carriers. In addition to their stated questions, commentators can provide information and perspective on any issue related to the MLR issue.

The task of defining the rules, regulations, and definitions concerning Medical Loss Ratios will not be an easy one, especially given the need for speed. For most carriers, the MLR requirements will be based on the premiums they take in and spending they incur starting January 1, 2011 — less than eight months away. By law the regulations have to be in place by December 31, 2010. As a practical matter, however, to be implemented in 2011, health plans need to have their new business models in place by early Fall at the latest. Secretary of Health and Human Services Kathleen Sebelius is aware of these realities. She asked for input from the National Association of Insurance Commissioners by June 1st so the regulations can be published as soon as possible.

As I’ve written previously, the impact of health care reform will be revealed over time. The MLR regulations will be the first indication of where reform is headed. They will tell us a great deal about the viability of private coverage, the role brokers will play under a reformed health care system, and whether consumers will find much choice in the health insurance marketplace. These are not just details, but important details.