The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

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

Posted by Alan on April 16, 2010

 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.


15 Responses to “Medical Loss Ratios Will Be First Indication of Health Care Reform’s Real Impact”

  1. vince phillips said

    MLR should also include insurer activities regarding fraud versus putting the fraud efforts including consumer education into the administrative side. Classifying it as part of the 15/20 percent will severely harm these important efforts to reduce bogus claims. The Exchanges and CO-OPs should also have the same requirements so as to reduce their already formidable competitive advantage over the private sector. Another effort is wellness which, while not directly part of a specific claim, reduces future claims. These expenses should also be in the claim side of the equation else their benefits will be lost or reduced.

  2. Alison said

    I have started to post a couple of times and deleted it. I don’t mind people havimg their own opinions it’s just the way everything is described as a conspiracy to hurt people and make more money off of them and deny them coverage. I represent alot of people who have had devastating medical expenses due to tragedies and have ended up having the majority of their procedures approved and all of their cost paid minus their deductible and coinsurance. Granted they paid high premiums but it was there for them. I just feel so defensive and angry sometimes at the corporate greed posts over and over. I really really do.

    • Alison, Some, a few, one in specific, don’t seem to be able to post anything positive about how so many millions have been acutely and dramatically helped by our system, including having received that help from that section of our system in which corporations are a norm, because of our free-market capitalist philosophies.

      They are known as “Mal-contents”, and will never be satisfied with any system until that system has been completely nationalized, socialized, and is ostensibly “run by the people”, when in reality they are invariably run by the socialist controlled dictatorial bureaucracy. The “tunnel vision” consistently evidenced by these malcontents include statements berating “corporate greed”, while promulgating systems that reward all equally for the work accomplished by the few; they demand more and more paid days off, higher incomes without the need to demonstrate a commensurate higher productivity level (I.e. a national public education system in which the teachers demand more and more while their product, educated students, fall further and further down the rankings in world education levels, a situation endemic in America); their greed in wanting something for nothing is all too clear, and is very unfortunate. Rick, a member poster, makes this argument far more briefly than do I, and it can be read in the sixth (#6) block of posts on this thread, begun and ended by James Thornton, thus far…Rick post is just above Mr. Thornton’s last post.

      I agree with you, Alison. It can be very disheartening to attempt to post in a “let’s move forward, let’s find common ground so that we can work together to make this work” manner, when feeling that by the mere volume of these constantly damning, depressing, harangues against those who have succeeded by those who have not, any positive thoughts will be drowned out, will not be heard.

      Alison, keep posting your salient questions and positive thoughts. It is important that they, and you, are heard. I’m sure that many, as with me, appreciate being able to read what you have to say.

  3. James S. Thornton said


    So you are saying that Wellpoint, among others, has NOT reclassified administrative costs as medical expenditures?

    You are furthermore saying that the Senate did NOT include in its report the quote Froomkin attributes to it:

    At least one company, WellPoint, has already “reclassified” more than half a billion dollars of administrative expenses as medical expenses, and a leading industry analyst recently released a report explaining how the new law gives for-profit insurers a powerful new incentive to “MLR shift” their previously identified administrative expenses.

    Furthermore, you are maintaining that for-profit health insurers are making medical care better and easier to obtain for the vast majority of Americans than a single payer system would, this despite the 1) drastically stream-lined administrative costs of the the latter, 2) some control on 8-9 figure executive salaries and other indefensible costs of the former, and 3) pressure to show short-term profits to appease shareholders?

    You honestly maintain a balkanized private insurance system can do all this much better than the government? That the former can maintain their profits while still giving American consumers a better deal?

    If your beloved approach is so objectively superior, why was AHIP so adamantly opposed to even a public option?

    • Rick said

      “1) drastically stream-lined administrative costs of the latter, 2) some control etc etc and 3) pressure to show etc etc” + “why was AHIP so adamantly opposed to even a public option?”

      Jim, these items were debated numerous times. If you need a review I suggest you research the Archives.

    • Scott said

      Because a public option would act like medicare and wouldn’t be even close to fair competition. Stop already. The government doesn’t do anything better, or more efficient than the private sector. Please stop already.

    • Mark said

      OK just so you know there is no difference between for profit and not for profit carriers. I know many folks in Washington and elsewhere like to think it’s all about the evils of Wellpoint, Aetna, United Heatlh etc but in reality there is no difference.

      Here in California we have Anthem Blue Cross which is part of Wellpoint and we also have Blue Shield of California which describes itself as “proudly not for profit”. The two carries compete in the individual and small group markets as if it were Army vs Navy. One is less money for the same or similar plans for a while then they switch. Both have rescinded coverage. Simply there is no difference. Actually even a complicated look at the two operating systems will show no difference as to plans, pricing and service.

      To be fair in California we also have Kaiser Permanente a not for profit but it operates completely differently than carriers mentioned above. They are a vertical managed care provider. It should be noted that they continue to receive very favorable press along with the Mayo, Cleveland Clinic, and Geisinger as a near future framework for healthcare delivery.

      • Actually, a number of years ago I insured the then President of Pierce County Medical, a Blue Shield company. Being relatively new to the Health insurance field I asked him some question regarding the difference between “Non, or Not for, Profits” versus “For Profits”. His response was that all companies, including “Non Profits” are really “For Profit” because if a Non-profit doesn’t make any money, it will go broke and be out of business, tax advantages notwithstanding.

        The only entity I can think of that doesn’t need to earn in the black by the end of their fiscal year is government, whether state, local, or federal, and survive…or, in the case of our federal government, thrive.

        I am surprised to see that this “block” of the discussion, #3, is once again focused on discussing the “Public Option”. I don’t see it mentioned in the Topic’s commentary, so well written by Alan. It seems to me that we should be “staying on topic”.

  4. Kevin Luss said

    oh, and ”yesterday’s report” is an opinion piece by dan froomkin, a disgraced’ non-objective hack who has every right to try and entertain the susceptible…but whose drivel doesn’t belong within 100 miles of this thoughtful and non-political site…

  5. Kevin Luss said

    Jim, can you please describe why you think the single payer system is so beneficial. Have you ever been to any town, village, city on the planet? The folks in the part of town that rely on the government are NEVER better off that those of us who work to take care of ourselves. While your use of the huffington post as a source and the obligatory reference to corporate greed damages your credibility beyond repair, have at it anywyay…

  6. Alan, what do you think of yesterday’s report about health insurance companies already beginning to game the system by shifting “administrative costs” into “medical expenditures” via accounting maneuvers?

    This is the sort of thing that gives those of us who believe in a single payer system reason to think corporate greed will ultimately doom the new attempt to keep AHIP in the mix.

    My prediction: the current compromise–a way of delaying the inevitable–will prove as much of a bandaid as “don’t ask, don’t tell” has been in the military. A temporary solution that pleases no one and will eventually give way to the right decision…

    Here’s the link:

    • Alan said

      Jim: A fair question. Carriers are shifting some expenses from categories that previously had not been used in calculating medical loss ratios to a category that is. But this isn’t to “game” health insurance reform as claimed in the article you site. These shifts are required by health care reform. Before health care reform it didn’t matter whether carriers treated expenses toward “health quality improvements” (disease management, preventive care and chronic care programs) were bucketed with claims or administrative expenses. But the new law explicitly states such expenditures are the be grouped with claims in calculating a health plan’s medical loss ratio. So WellPoint and other carriers need to shift those expenditures to a different part of their balance sheet. For publicly traded companies, this means they have to go back and provide information on what their income and expense statements would have looked like if they had historically done this. Otherwise investors and regulators would have great difficulty in compariing current to past financial performance.

      So there’s nothing nefarious about this recalculation. It’s required by the new health care reform law. Commentators like Mr. Froomkin, who wrote the article you cite, are the liberal version of Sarah Palin who finds death panels where there are none to satisfy her preconcieved notions whether than to explain the facts. In this case, Mr. Froomkin sees evidence of health plans gaming the system when the fact is they are simply complying with it.

    • Rick said

      Jim, there you go again with the worn out whine of corporate greed. You never point out government greed, union greed, government employee greed, the greed of those that pay little if any income tax, the greed of employees that profit from their salary, or the greed of those like you that see nothing immoral about sticking their hands into others pockets.

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