Regulators under pressure to agree on final MLR rules

October 1, 2010

Insurers have been complaining loudly about the proposed methods for calculating a health plan's medical loss ratio (MLR), which has been recently developed by the National Association of Insurance Commissioners.

With the deadline for implementation just around the corner, state insurance regulators and the Department of Health and Human Services (HHS) are under pressure to agree on a revised MLR formula as soon as possible. The health reform law calls for NAIC to establish, and for HHS to certify, uniform definitions and standardized methodologies for calculating the MLR by December 31, 2010.

CONSUMERS APPLAUD MLR

Insurers want more flexibility in calculating healthcare expenditures and have blasted the formula as likely to raise costs and kill many beneficial programs that promote quality of care. Consumer groups and physicians applaud the NAIC rules as a way to force insurers to spend more revenue on patient services and to keep premiums and profits in check.

Congress handed NAIC the difficult task of revising the MLR, drawing on the organization's expertise and policy-development experience needed to do the job. Washington policy makers also hoped to avoid a major political battle on this issue, but probably have been disappointed.

Sen. Jay Rockefeller (D-W.Va.) has been particularly outspoken on the need for a strong MLR standard that will limit insurers' profits and administrative costs and force companies to change business practices. Doctors and medical societies support the NAIC approach, acknowledging that larger expenditures on patient care would boost provider reimbursement.

Insurance plans serving the large group market will spend at least 85% of premiums on clinical services and quality care initiatives, beginning in January 2011; insurance policies for individuals and small firms must have an 80% MLR.

Insurers that exceed the new spending targets will have to reimburse customers for the difference between their actual expenditures on healthcare and the mandated threshold. Those rebates will go out beginning in 2012 and could amount to billions.

The MLR traditionally has been used by state insurance regulators to compare premium rates to amounts spent on plan administration, marketing and other operational activities and to ensure solvency.

While mandating a fairly high ratio, PPACA also allows insurers to add "quality improvement" activities to the clinical services category. The aim is to build insurer support for initiatives to reduce hospital readmissions, improve patient safety, curb medical errors, lower infection rates and promote wellness. Because expenditures on these activities help insurers meet the new MLR standard, industry has pressed for the quality improvement category to be as broad as possible.

Consumer advocates prefer to limit the programs included under quality improvement so that plans will have to spend more of their premiums dollars on patient care.

The December 31 deadline for HHS to certify the MLR standards, leaves insurers no time to incorporate new standards into policies for next year. Earlier in the year, HHS Secretary Kathleen Sebelius urged NAIC to develop its proposal by June, but officials found that timetable impossible.

In mid-August, NAIC approved the form, or "blank," for insurance companies to report MLR-related financial information to state regulators. Several amendments further defined which wellness and health promotion activities could be included under clinical services and quality improvement, and what items could not. That fueled weeks of haggling over the fine print, as insurers pressed for flexibility in defining health care activities.

Last month, an NAIC subgroup was still drafting key definitions and methodologies for calculating the MLR and anticipated weeks of additional public vetting and committee votes.

Although NAIC officials believe that their proposal is appropriate, they also recognize that it's most likely just "a good start," said Brian Webb, NAIC manager for health policy and legislation, at an August seminar sponsored by the Alliance for Health Reform. With the clock ticking on implementation, many observers expect Sebelius to adopt the NAIC plan and revise it later.

In coming months, policy makers will be watching closely to assess the impact of the new standards and whether they are too narrow to include bona fide quality initiatives, or, as Webb commented, are so loose that insurance companies "can drive a truck through the rules."