By Sara R. Collins and Tracy Garber
Last week the U.S. Department of Health and Human Services (HHS) issued final regulations governing the Affordable Care Act’s medical loss ratio (MLR) requirements on the percentage of enrollees' premiums that health plans spend on medical care versus administration and profits. (This blog post updates an earlier post on the agency’s interim final rule, issued in November 2010.)
The Affordable Care Act's MLR requirements for health insurance plans are an important way that the law improves the value consumers receive for their health insurance payments and will place downward pressure on premiums over time. Commonwealth Fund analysis has found that, for some small employers, as much as 30 percent of premium payments go to administration, and, for some individuals, it’s as high as 40 percent. The Commonwealth Fund Commission on a High Performance Health System found in its recent national scorecard on health system performance that reducing insurance administrative costs to the level seen in countries with mixed private–public insurance systems like ours could save $55 billion annually.1
MLR Reporting and Rebates
In an effort to reduce insurance administrative costs, the Affordable Care Act requires health plans to report their total spending on medical care, and activities to improve the quality of care, relative to their nonmedical costs, such as those for marketing, advertising, underwriting, broker commissions, profits, and staff compensation. Insurance companies must provide separate reports for each market—individual, small group, and large group—in each state in which they do business. HHS will publicly post the reports, with the first reports for 2011 due by June 2012.
Beginning in August 2012, health plans in the large-employer group market that spend less than 85 percent of their premiums on medical care and quality improvement activities, and plans in the small-employer group and individual markets that spend less than 80 percent on the same, will be required to offer rebates to enrollees based on their 2011 MLR reports. Carriers will pay rebates to enrollees in the form of a reduction in their premiums or in other ways, with none of the rebated taxed. For employer plans, carriers will provide rebates to employers, which are required to ensure that the rebates benefit enrollees in proportion to their premium contribution. The final rule also requires carriers to provide notice to consumers either about their rebates or the MLR, even if there is no rebate.
HHS estimates that 74.8 million people are in health plans that will be protected by the new requirements. In 2012, up to 9 million people might be eligible for rebates worth from $600 million to $1.4 billion. The General Accounting Office (GAO) recently found that 64 percent of the 1,796 insurance carriers that would be subject to the requirements would have met or exceeded the new MLR standards, but that the share varied considerably by market.2 Just 43 percent of carriers in the individual market would have met the requirements, compared to 70 percent of plans in the small-group market and 77 percent in the large-group market.
What’s in the MLR
Generally, the MLR has been calculated as the ratio of medical care claims expenses to premiums. The Affordable Care Act and the final regulations adjust the measure in the following way:
medical care claims + expenses for activities that improve health care quality
premiums – (federal and state taxes + licensing and regulatory fees)3
Quality improvement activities and federal and state taxes excluded. The new regulations allow quality improvement activities to count as medical costs, but health plans must be able to demonstrate over time that such activities are improving health outcomes. In the final rule, HHS decided to allow carriers to include in their quality improvement activities the cost of converting from the International Classification of Disease code sets from ICD-9 to ICD-10 (up to 0.3% of premiums in the relevant market), since some believe the new coding system will facilitate data-sharing among clinicians and thus help to improve quality.
In addition, when health plans calculate their MLRs, they are allowed to deduct federal and state taxes on health insurance and licensing and regulatory fees from their premium revenues, but not taxes on investment income and capital gains.
Broker fees and commissions are included. The final rule does not remove broker fees and commissions from the MLR, despite lobbying from trade groups and a recent resolution by the National Association of Insurance Commissioners that urged HHS to drop the fees from the calculation. Removing the fees from the MLR would have significantly diluted the measure’s usefulness in increasing the share of premiums that go to medical care. The GAO report found that in 2010, broker fees and commissions alone averaged 7 percent of premiums in the individual market, 5 percent in the small-group market, and 3 percent in the large-group market.
Exceptions and Adjustments to the MLR Requirement
The MLR regulations make some exceptions and adjustments for certain types of health plans. Very small health plans (less than 75,000 enrollees) are either excluded from the regulations or receive an adjustment to their MLR. New plans where 50 percent or more of premium revenues are for policies that have been in effect for less than one year may delay MLR reporting until the following year.
Mini-med and expatriate plans. In its interim final rule issued last year, HHS indicated that it would make adjustments to plans with annual benefit limits of $250,000 or less, so-called mini-med plans, and plans for people working in other countries (expatriate plans). However, these plans would need to report their data in 2011 to receive the adjustment.
Under the Affordable Care Act, most health plans are currently banned from imposing annual benefit limits of less than $1.25 million this year, with that amount rising to $2 million starting next September, before phasing out entirely in 2014. But HHS has allowed mini-med plans to apply for waivers from the bans until the major provisions of the law go into effect in 2014, as a way to prevent the plans from dropping coverage. As of the end of July 2011, HHS had granted a total of 1,472 one-year waivers and 106 three-year waivers, covering about 3.4 million people, or 2 percent of Americans with private health insurance.4 HHS requires plans with waivers to inform enrollees that their plans have lower annual limits than what is allowed under the Affordable Care Act and to illustrate how far their coverage will reach if they become seriously ill.
When HHS analyzed two quarters of reported data from the plans, it found that a majority of mini-med issuers in the individual market, and just under half of those in the large-group market, would not have met the MLR standards. The final rule thus settled on a graduated adjustment for mini-med plans that allows them to multiply their medical expenses (or the numerator of the MLR) by 1.75 in 2012, 1.5 in 2013, and 1.25 in 2014. The agency allowed a multiplier of two for expatriate plans that will continue indefinitely.
State MLR Waivers
In its interim final rule last fall, HHS allowed states that were concerned that the new MLR requirements would destabilize their individual markets to apply to HHS for an adjustment to the MLR for the market in their state. So far, 17 states have applied for waivers: six states (Georgia, Iowa, Kentucky, Maine, Nevada, and New Hampshire) received one and four states were denied (Exhibit 1). Each state with a waiver is allowed a gradual phase-in of the MLR requirement over the next three years.
Lower Premiums for Consumers
A recent Commonwealth Fund report found that average family premiums in employer-based health plans in the United States climbed 50 percent from 2003 to 2010, to $13,871—five times faster than the average rate of growth in median family incomes over that period.5 At current rates of growth, the report estimates that average premiums will climb to $23,793 by 2020. Insurance administrative costs are a major factor in premium growth, with per capita costs climbing at a faster rate than overall health care spending growth.6
The new MLR requirement, along with several other provisions in the Affordable Care Act, will help insurers reduce wasteful spending and thereby help lower the rate of growth in premiums over the next decade. Beginning this year, any insurance carrier that increases its premiums by 10 percent or more in the individual or small-employer group insurance markets will have to justify the increase to HHS and to the states in which they operate.7 Starting in 2014, states can recommend that health plans be excluded from participation in state-based insurance exchanges if they have demonstrated a pattern of excessive or unjustified premium increases. In addition, the creation of the health insurance exchanges and essential standard benefits packages will more efficiently pool risk, reduce benefit complexity, and lower advertising expenses. Requiring individuals to carry health coverage and restricting carriers from varying premiums on the basis of health, age, or gender will also significantly reduce insurers’ underwriting costs.
Too many Americans have struggled under the weight of administrative expenses and double-digit premium increases for too long. The reform law and these final MLR regulations encourage insurers to do their part to increase efficiency and lower costs in a way that should increase value and return real savings to families, businesses, and the economy.
1 Commonwealth Fund Commission on a High Performance Health System, Why Not the Best? Results from the National Scorecard on U.S. Health System Performance, 2011, The Commonwealth Fund, October 2011. http://www.commonwealthfund.org/Publications/Fund-Reports/2011/Oct/Why-Not-the-Best-2011.aspx?page=all
2 U.S. General Accounting Office, Letter to the Honorable Robert E. Andrews, “Private Health Insurance: Early Indicators Show That Most Insurers Would Have Met or Exceeded New Medical Loss Ratio Standards,” October 21, 2011. http://www.gao.gov/new.items/d1290r.pdf
4 U.S. Department of Health and Human Services, Annual Limits Policy: Protecting Consumers, Maintaining Options, and Building a Bridge to 2014, http://cciio.cms.gov/resources/files/approved_applications_for_waiver.html
5 C. Schoen, A.-K. Fryer, S. R. Collins, and D. C. Radley, State Trends in Premiums and Deductibles, 2003–2010: The Need for Action to Address Rising Costs, The Commonwealth Fund, November 2011. http://www.commonwealthfund.org/Publications/Issue-Briefs/2011/Nov/State-Trends-in-Premiums.aspx
6 The Commonwealth Fund Commission on a High Performance Health System, Why Not the Best? October 2011.
7 S. R. Collins, “Update: New Review Process for "Unreasonable" Premium Hikes,” The Commonwealth Fund Blog, May 2011.