The Affordable Care Act Sleeper Issue: Medical Loss Ratios

By Emily McKinley, Health Information Specialist

As we have explored, the Affordable Care Act (ACA) has many provisions. The nearly 1000 page legislation is multifaceted and addresses numerous issues, one of which is medical loss ratios (MLR). Perhaps you’ve not yet heard of this provision; it seems to be a sleeper issue in a complex law.

According to the Centers for Medicare and Medicaid Services, the act’s MLR clause will ensure “consumers will receive more value for their premium dollars because insurance companies are required to spend 80-to-85 percent of premium dollars on medical care and health care quality improvement, rather than on overhead costs.” Insurance companies dealing in individual and small group markets must spend at least 80% of consumer insurance premiums on qualified medical expenses. Large group insurers see an increase in the MLR to 85%. Insurers that do not meet this requirement must provide rebates to their consumers beginning this year, 2012, and the rebates must be issued by August 1. The Department of Health and Human Services (HHS) estimates that as many as 9 million Americans will receive rebates in 2012. Those rebates may come in the form of lower premiums.

Like many of the provisions of the ACA, HHS requested public comments regarding MLR in 2010. On December 2, 2011, the final rule of the provision was issued. Despite some minor tweaking, specifically in regards to calculating and reporting MLR data, the provision’s original form remained largely intact. The final rule continued to protect consumers in that HHS did not allow gross overhead costs to be disguised as medical and quality improvement expenses. That said, HHS will allow issuers to claim ICD-10 conversion costs of up to 0.3% of an issuer’s earned premium as quality improvement activities in 2012 and 2013. For more information about the final rule, please visit http://cciio.cms.gov/resources/factsheets/mlrfinalrule.html.

Because the MLR provision could potentially disrupt individual markets, HHS allowed states to apply for MLR adjustments. Adjustments would grant up to three years for the state insurance issuers to reach the full 80% requirement. Indiana’s Department of Insurance is one of the many that applied for adjustments, requesting an MLR standard of 65% for 2011, 68.5% for 2012, and 72.5% for 2013. The adjustment request was denied by HHS. HHS cited, “Evidence shows that all issuers in the Indiana individual market either 1) already meet the 80 percent MLR standard, 2) are sufficiently profitable to absorb the impact of rebate payments under an 80 percent MLR standard, or 3) are adapting their business models in order to continue to achieve sustainable financial performance in the individual market. In particular, the only issuer that, based on 2010 data, would be unprofitable after payment of rebates under an 80 percent MLR standard – Time – is adapting its business model to allow it to remain profitable after payment of rebates for 2011.”

A request for reconsideration from Indiana Department of Insurance has been received by HHS and is under review.

In addition to the aforementioned requests, Indiana Department of Insurance has petitioned for additional waivers and extensions that are not currently under consideration.

For more information about Indiana’s requests for MLR adjustments, consumers are encouraged to visit http://cciio.cms.gov/programs/marketreforms/mlr/mlr_indiana.html to review documentation, public comments, and a fact sheet regarding the program.

For general information about the Medical Loss Ratio provision of the ACA, please visit: http://cciio.cms.gov/programs/marketreforms/mlr/index.html.