The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

NAIC Starts to Clarify Medical Loss Ratio Calculations

Posted by Alan on August 18, 2010


One of the most far-reaching elements of the Patient Protection and Affordable Care Act concern the requirement that carriers spend a specified percentage of premium on medical expenses and health quality improvement (large group carriers must spend 85 percent of premium while individual and small group carriers have an 80 percent medical loss ratio target). If carriers spend less than required on medical care it must refund a portion of the premiums collected to its policyholders. Which means what gets defined as medical and quality improvement, as opposed to being considered administrative expense, has a cascading impact on everything from premiums to commissions to innovation to technology adoption and so on.

The PPACA directs the National Association of Insurance Commissions to establish uniform definitions and methodologies for determining how medical loss ratios will be calculated. (Whether the Secretary of Health and Human Services has the authority to reject or modify the NAIC determinations is the subject of some debate, but it appears the only role of the HHS Secretary is to certify the NAIC’s decisions.) And during their meeting this week, the Commissioners took an important step toward providing much needed clarity on the issue.

The Commissioners approved a form (called a “blank”) that specifies the types of expenses, activities, fees, etc. that will be used in the calculation. The blank form has generated both praise and criticism, but the fact that it was approved by the NAIC on a unanimous vote from Commissioners across the partisan spectrum demonstrates the political strength of the decision. Additionally, the NAIC deliberations were long, open and inclusive, lending them enhanced credibility. This doesn’t mean they are non-controversial, however. America’s Health Insurance Plan, the carriers’ trade association, has criticized the financial template for failing to treat fraud prevention and detection as a claims-related expense, among other concerns. Their concern is that by treating such expenses as administrative costs, hamstrings carriers’ ability to control costs.

While the blank form is an important step, it’s important not to put too much weight on its impact. It is a first, critical step to bringing the health care reform legislation’s medical loss ratio provisions to life. Next comes determining further clarification the NAIC is expected to provide in the next two weeks (give or take). Among the issues expected to be clarified at that time: whether broker commissions will be considered in calculating the MLR and which taxes will be excluded from the calculations.

The tax issue is interesting, but for many readers of this blog the treatment of commissions takes a bit of precedence. Which is why my next post will focus on that issue.

Uncertainty surrounding how medical loss ratios will be calculated under the PPACA has been painful for a lot of folks. The rules take effect in 2011, which means decisions concerning premiums, commissions, and benefits are being made now. Without clarity carriers are making decisions with only partial information. Which, given the gravity of those decisions, means they are assuming the worst. The results: premiums may be set higher, and commissions set lower, than will be needed once the definitions surrounding MLR calculations are finalized. 

By bringing clarity to this situation, the NAIC’s action this week are an important accomplishment. Their thorough review of the issue and successful consensus building is also to be commended. But 2011 is right around the corner. Now, the need to finish the process – and quickly – is paramount.

One Response to “NAIC Starts to Clarify Medical Loss Ratio Calculations”

  1. EM said

    If I buy health insurance, I want an agent or broker helping me. It doesn’t cost me any more. I don’t want a salaried govt. employee with no training.

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