Wednesday, September 29, 2010

The Medical Loss Ratio Tornado

Cross-posted from The Science Business on

Imagine if you ran a business, and one day the government told you that you would be fined if you: (1) minimized unnecessary expenses; (2) hired workers to specialize in customer service; (3) invested resources in order to ensure you wouldn’t get victimized by fraud. What would you do? Think quickly: because three months from now, this very system will be the law of the land for our nation’s health insurers.

Last Friday, the National Association of Insurance Commissioners—the association of the 50 state insurance commissioners—issued its draft guidelines for how insurers will need to calculate “medical loss ratios,” or MLRs. Regular readers will recall that the medical loss ratio is loosely defined as the dollar amount that an insurer spends on the health care of its beneficiaries, divided by the total dollar amount the insurer collects in premiums. Section 2718 of our new health care law mandates that insurance plans sold to individuals and small employers must spend at least 80 percent of their premiums on health care, and plans sold to large employers must spend at least 85 percent.

But, like everything else with Obamacare, the devil is in the details: how do you define health care? How do you define “insurance plan”? Now that the NAIC has spoken, we have a good idea of how the final regulations will look. And the news is not good: the MLR regulations are likely to lead to a significant disruption of the health insurance market, with many insurers exiting the market, driving premiums up and choices down.

And this isn’t just my opinion. Maine Superintendent of Insurance Mila Kofman wrote a letter to HHS Secretary Kathleen Sebelius, asking Sebelius to waive the MLR rules for Maine until 2014. “One insurer has indicated its intent to pull out of individual markets (and has explicitly named one state where that decision has already been made),” wrote Kofman. “Prior to 2014, implementation of an 80% medical loss ratio requirement may destabilize the individual health insurance market in Maine.” Maine currently has a state MLR requirement of 65 percent; eliminating 15 percent of an insurer’s budget in three months is no small task.

Susan Voss, Iowa’s Commissioner of Insurance and the NAIC’s President-Elect, has also asked Sebelius for a waiver. “Our first goal as insurance regulators is to protect consumers,” wrote Voss. “Part of that protection is providing ‘choice’ in the market place. Without some form of ‘phase-in’ for these individual carriers, consumers in Iowa will be left with fewer choices.”

Unfortunately, the statutory language in PPACA gives regulators little flexibility in waiving the MLR requirements. Section 2718(b)(1) requires that the requirements must be in force “not later than January 1, 2011.”

The story gets worse. For in the areas where the NAIC did have latitude to make the MLR regulations less onerous, they made the onerous choice. To wit:
  • MLRs will be measured against individual state entities. Many insurance companies operate plans in multiple states across the country. If you add up all the plans and average their MLRs, you get close to the 80 percent and 85 percent thresholds. But, on a plan-by-plan level, some of those plans have MLRs as high as 170 percent (which the government deems to be good), whereas others have MLRs as low as 30 percent (bad). This has to do with case-by-case characteristics like how new or old the plan is (newer plans typically have younger, healthier policyholders who have less expenses and thus lower MLRs).
  • The higher 85 percent MLR threshold will begin at 50 employees. Insurance sold to “large” employers will be subjected to the higher 85 percent threshold, as opposed to “just” 80 percent for small groups and individuals. PPACA specified that the threshold for being counted as a large employer could be as high as 100 employees; the NAIC decided to bring that threshold lower for the next five years, to 50 employees, significantly expanding the group of employers who will be ensnared by the 85 percent requirement.
  • Important health care management activities will be curtailed. The NAIC explicitly excluded certain important activities from the MLR calculation, including: reviewing insurance claims to prevent unnecessary tests and procedures; fraud prevention activities; and doing due diligence and keeping tabs on hospitals and doctors to ensure they are performing high-quality, high-value medicine. The consequence of these restrictions will be to drive up the cost of insurance: if insurers can’t invest in reducing fraud and waste, they will have to spend more of their money on fraudulent and wasteful health care, driving up the cost of insurance. In addition, as Arnold Kling points out, since insurers will be financially penalized for investing in customer service, there will be less of it. If you thought your insurer was unsympathetic and unresponsive before Obamacare, just wait.
  • The status of health savings accounts remains unclear. By my reading, the NAIC draft guidelines are silent on the question of whether HSAs will count towards the MLR requirements. If HSAs do not count towards MLR, consumer-driven health plans will immediately become illegal. The Department of Health and Human Services, for its part, asserts that “nothing in the legislation would infringe upon the ability of an individual to contribute to a Health Savings Account.” If this is true, shouldn’t regulators explicitly say so?
The NAIC draft guidelines are open to public comment until October 4. The organization plans to submit its final recommendations to Secretary Sebelius later in the month. PPACA gives Sebelius the freedom to enact whatever regulations she likes on the MLR matter, though she is likely to accept the NAIC’s recommendations so as to avoid stoking further controversy. She is likely to wait until after the November elections to issue the final regulations, leaving insurers less than two months to radically reorder their businesses, or face crippling fines.

Residents of states whose insurance markets aren’t up to Washington’s snuff are in for a serious disruption of their health care. This situation has all the makings of a giant mess. And if a mess does indeed come to pass, let no one pull the wool over your eyes as to how and why it happened.


  1. "doing due diligence and keeping tabs on hospitals and doctors to ensure they are performing high-quality, high-value medicine."

    In about 25 years of practice I have never seen an insurance company do anything like this. I do see Medicare initiated programs, like the central line protocol to prevent infections. Is this something done in only a few states?


  2. So we have to think about those things now!! Good article!!!
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  3. A big thank you for your post.Really looking forward to read more. Really Great.