Straight talk on health care reform: Medical loss ratio has potential to bend the cost curve on premiums
Under the Affordable Care Act, the lion's share of each insurance premium dollar must be spent on health care.
That notion might seem obvious, but previously there was no national standard for what is termed the "medical loss ratio," or MLR. The ratio measures the split between health care spending and administrative and other costs. (Incidentally, MLR is an old insurance term that comes from the accounting departments, where spending on medical care was considered a loss deducted from income.)
Last month, the federal Centers for Medicare and Medicaid Services issued the final MLR regulation for the Affordable Care Act (ACA), and it has the potential to reduce premiums for consumers and businesses.
Under the ACA, health insurance carriers will be required to spend at least 80 cents on medical care for each premium dollar charged to consumers in the individual insurance market. That would leave 20 cents to cover profit, marketing and overhead. (For the large-group market, the MLR would be 85 cents of every premium dollar.) Companies that do not meet the MLR requirement will be required to pay a rebate to their customers beginning in August of this year.
As of 2009, Colorado's top 10 health insurance carriers had MLRs ranging from 80 to almost 92 percent, (1) so meeting the new MLR may not be especially difficult for them.
Nationally, about 45 percent of consumers who purchase insurance in the individual market are enrolled in plans that spend more than 25 cents of every premium dollar on administrative costs. In the most extreme cases, some insurance plans spend more than half of every premium dollar on administrative costs. (2)
The basic question that regulators wrestled with before setting the MLR was what qualifies as "health care service" and what constitutes an administrative expense, marketing or other cost. It is not always clear-cut, and the issue could still affect the MLR rule.
In November, the National Association of Insurance Commissioners endorsed a resolution urging Congress and the Department of Health and Human Services to exclude broker and agent commissions and fees from the medical loss ratio rule. The resolution states: "Congress should expeditiously consider legislation amending the MLR provisions of the PPACA in order to preserve consumer access to agents and brokers." (3) If broker commissions and fees are excluded from administrative costs, it would allow increased spending on administration and have the effect of reducing the amount spent on medical care.
The resolution was not unanimous, passing on a 26-20 vote of state insurance commissioners, but there is little doubt that it will be used to support national legislation seeking this change.
Consumer groups contend that if this kind of legislation were implemented, it would hinder the very purpose of MLRs, which is to increase the amount of money insurance companies spend on medical care. It would also have the potential to reduce the rebates paid out to consumers.
Projected rebates to customers whose insurance carriers do not meet the MLR targets are hardly insignificant. Nationally, it is estimated that up to 9 million Americans could receive rebates totaling between $600 million and $1.4 billion. Those forecasts may be high, since there are indications that some carriers have lowered the rate of premium growth, in part to avoid paying out potential rebates. (4)
Here are some of the features of the recently established MLR requirement:
Rebates to consumers are tax-free.
Transparency is increased. Consumers are notified of rebates, and insurance companies are required to publish their MLRs and a history of their performance.
"Mini-med" plans (coverage designed for workers in low-wage jobs) will have to phase in the annual benefit cap provisions of the Affordable Care Act. Mini-med plans had previously been given a waiver for implementing those provisions. All annual benefit caps will be eliminated in 2014.
Levels the playing field between for-profit and non-profit insurers for states that tax premiums.
The ACA's medical loss ratio provides a real opportunity for bending the cost curve for premiums for consumers and businesses and will play a vital role in making health insurance more affordable, as long as attempts to minimize its effectiveness are checked.
– Bob Semro
1) Annual Report of the Commissioner of Insurance to the Colorado General Assembly on 2009 Health Insurance Report, January 1, 2008 to December 31, 2008, in accordance with §10-16-111(4)(c) & (d), C.R.S., April 1, 2010.
2) Medical Loss Ratio: Getting Your Money's Worth on Health Insurance, Center for Consumer Information & Insurance Oversight, U.S. Department of Health & Human Services, HealthCare.gov website, Nov. 22, 2010.
3) NAIC Approves Resolution Calling for MLR Changes, Healthcare Exchange, healthcareexchange.com, November 2011.
4) Medical Loss Ratio: Getting Your Money's Worth on Health Insurance.