Health reform’s medical loss ratio (MLR) rule requires health insurance companies to spend 80% or 85% (for large group insurers) on medical care rather than overhead, marketing expenses, and profit. The law requires that insurers that do not meet this requirement must send their customers a rebate check representing the amount in which they underspend on medical care and quality improvement. States can require higher minimum MLR percentages, but HHS can also adjust state MLR requirements downward where necessary to prevent destabilization of the individual market. State MLR targets tend to be lower than the health reform law targets.
Rebates must be paid by August 1 of the year following the year for which the medical loss ratio (MLR) data are reported. Insurers must also report how the rebate was calculated. Insurers who fail to comply with the law are subject to civil fines to be assessed by HHS up to $100 per day per individual affected by the violation.
On November 22, 2010, the Department of Health and Human Services (HHS) issued its interim final regulations implementing the MLR requirements of section 2718 of the Public Health Services Act (PHSA) entitled “Bringing Down the Cost of Health Care Coverage.” The term “medical loss ratio” does not appear in section 2718.
In December 2011, HHS issued final MLR regulations and the DOL has issued related guidance on health care reform’s MLR rules, making changes for employer-sponsored group health plans, including who receives the rebates and how such amounts may be applied. Insurers must provide the rebates for individuals covered by group health plans subject to ERISA or the PHSA to the policyholder, which is generally the employer for a group plan. The effective date of this Final Rule is January 3, 2012, and the first rebates will be due August 1, 2012.
ERISA Issues. DOL Technical Release 2011-04 applies to ERISA plans and explains the fiduciary and plan asset rules for insurer rebates. Plan sponsors should review plan documents to determine if and how they address how the plan assets portion of a rebate is determined and used to verify whether such provisions are consistent with the final regulation.
The DOL states that MLR rebates may qualify as ERISA plan assets in whole or part, depending on various factors, including the terms of plan documents, whether the insurance policy is issued to the plan itself or a related trust, and whether insurance premiums are paid from trust assets. Other considerations include the relative proportion of premiums paid by plan participants, including employee salary reductions under a cafeteria plan, and the amount of plan administrative expenses paid by the plan sponsor. Any portion of a rebate that constitutes plan assets must be used for the exclusive benefit of plan participants and beneficiaries. ERISA fiduciary rules apply to determine how to use that portion of the rebate. The DOL notes that, in choosing an allocation method, “the plan fiduciary may properly weigh the costs to the plan and the ultimate plan benefit as well as the competing interests of participants or classes of participants provided such method is reasonable, fair and objective.”
Examples of allocation methods mentioned in the guidance include refunds to participants or reductions in future participant contributions or benefit enhancements. In addition, DOL Technical Release 2011-04 provides that DOL Technical Release 92-01, which generally excuses insured group health plans from the obligation to hold participant contributions in trust and from the obligation to file Form 5500 as a funded plan, will apply to MLR rebates, if they are used within three months of receipt to pay premiums or refunds.
Computing The MLR. The numerator of the MLR formula includes reimbursement for clinical services and expenditures for quality improvement activities. Clinical services reimbursement includes direct payments for services and supplies as well as changes in contract reserves (where an issuer holds reserves for later years when claims are expected to rise as experience deteriorates) and reserves for contingent benefits and lawsuits. Payments under capitation contracts with providers may be counted fully as claims, but insurers must count as administrative rather than claims costs payments made to third part vendors (such as behavioral health or pharmacy benefit managers) that are attributable to administrative services.
The definition of quality improvement activities found in section 2717 of the health reform law was applied for the MLR rules. Quality improvement activities include activities that
• improve health care outcomes,
• reduce medical errors
• improve patient safety,
• encourage wellness and prevention, and
• reduce rehospitalizations are counted.
MLR quality improvement costs also include:
• related IT expenses,
• the cost of healthcare hotlines,
• the cost of collecting and reporting quality data for accreditation purposes, and
• expenditures for facilitating the “meaningful use” of certified electronic health record technologies.
• Prospective utilization review may be countable as quality improvement to the extent it is intended to ensure appropriate treatment, but concurrent and retrospective utilization review activities are administrative costs.
The regulations provide that the MLR is calculated as follows:
medical care claims + quality improvement expenses
premiums – (federal and state taxes + licensing and regulatory fees)
Fraud Prevention. PPACA does not allow insurers to count fraud prevention costs in the numerator as quality improvement expenses. However, the rule allows insurers to offset their fraud detection and recovery expenses against successful fraud recoveries.
Quality Improvement Expenses Must Be Verifiable & Objective. The HHS rule states that only activities “capable of being objectively measured and of producing verifiable results and achievements” can be counted as quality improvement. The preface to the HHS rule states: “While an issuer does not have to present initial evidence proving the effectiveness of a quality improvement activity, the issuer will have to show measurable results stemming from the executed quality improvement activity.”
GAAP Accounting Rules. Insurers are required to allocate expenses among categories based on “a generally accepted accounting method that is expected to yield the most accurate results.” They must describe to HHS how this is done and maintain records of the underlying data.
Separate Licenses Require Separate MLRs. MLRs are calculated separately for each licensed entity within a state by market segment (individual, small, or large group). Experience can be aggregated to the state in which the contract is located for employers with employees in multiple states. Affiliated insurers can also aggregate their experience where they combine to offer an employer in- and out-of-network coverage. No national reporting is allowed. Association health plans selling individual coverage must report their experience in the state in which individual certificates of coverage are issued.
Rules for State & Local Government (Non-Federal) Group Health Plans. Group health plans maintained by non-federal governmental employers, including state and local governments, are not subject to ERISA. HHS issued separate interim final regulations for these plans. The plan policyholder is required to use the portion of rebates attributable to the amount of premium paid by plan subscribers for the benefit of subscribers. At the option of the policyholder, this portion of the rebate must be used either to reduce employee premium contributions or to provide cash refunds to employees covered by the group health policy on which the rebate is based. In either case, however, the rebate is to be used to reduce premiums for (or pay refunds to) employees enrolled during the year in which the rebate is actually paid (rather than the MLR reporting year, the prior year, on which the rebate was calculated).
New, Small, Expatriate, & Mini-Med Plan Exceptions. Insurers with a small number of insureds in a state may experience health care costs well below 80% one year and well above the next because of the presence or absence of a few large claims. The rules provide for “credibility adjustments,” reducing the 80 or 85 percent target for smaller issuers. The adjustment will be based on the number of members issuers have in particular states, and further adjustment will be allowed based on the average size of deductible for the issuer’s plans, recognizing that higher deductible plans are more volatile.
Issuers with fewer than 1,000 members in a state are “non-credible” and do not need to pay rebates. Issuers with up to 75,000 members are “partially credible” and receive some adjustment. Experience is cumulated for up to three years for small insurers, however, and if an insurer comes in under the target for each of the first three years, it will need to pay a rebate based on its actual experience. HHS estimates that 68 percent of insurers will be “non-credible” in at least one state, 30 percent partially credible, and only 2 percent fully credible, non-credible entities will cover 1 percent of enrollees, and the fully credible will cover 50 percent of enrollees. Additionally, new entrants need not pay rebates until they have had a full year’s experience.
The final regulation recognizes two exceptions for “expatriate” and “mini-med” plans. Plans insuring individuals working outside the U.S. or aliens working in the U.S. have unusual expenses. Mini-med plans, which have annual limits below $250,000 (and which have received an HHS waiver from the health reform rule restricting annual limits), receive special treatment. For 2011, both expatriate and mini-med plans need only reach a 40 percent MLR in the individual and small group and 42.5 percent MLR in the large group market. They must report their experience quarterly, however, and HHS will reach a decision based on these reports how they will be treated going forward. Beginning in 2014, there will be no mini-med plans.
HHS Authority To Adjust MLR Targets To Prevent Market Disruption. PHSA § 2718 authorizes HHS to “adjust” (but not waive) the MLR target in individual states where enforcement of the 80 percent target would “destabilize” the individual market. HHS must provide detailed, public information as to its conclusions and the public may comment. HHS may elect to hold a hearing and must respond promptly to state requests.
Brokers & Agents’ Commissions. Brokers and agents commissions reportedly may account for 5 percent or more of premiums today. The statute requires that sales commissions be counted as administrative costs, although HHS could consider such compensation in assessing market destabilization.