NAIC Provides Some Clarity on Health Care Reform Law’s Medical Loss Ratio Requirements

Under the Patient Protection and Affordable Care Act, the National Association of Insurance Commissioners plays a pivotal role in determining how the legislation’s medical loss ratio requirements will be interpreted. The NAIC recently published a draft regulation and is seeing public comment before submitting their proposal to the Department of Health and Human Services. Overall the Insurance Commissioners’ approach to the medical loss ration rules provides carriers with some welcome flexibility.

The NAIC’s process began weeks ago. In August the Insurance Commissioners approved a form which will capture the data used to calculate a health carriers’ medical loss ratio (often referred to as the “blank form.”) Now the Commissioners have put forward how they think that data should be used to calculate a health plan’s medical loss ration.

The NAIC is proposing to take virtually all federal and state taxes from the calculation (the exception are taxes paid on investments and capital gains). This runs contrary to the wishes of the Democratic chairs of the Congressional committees through which the PPACA passed who wanted the tax exemption to be limited. As noted in a previous post, these legislative leaders may want health care reform interpreted in a given fashion, but they lack the authority to define legislative intent – that power is in the hands of regulators. And the regulators are saying the letter of the law is clear in this regard. The NAIC’s interpretation will provide carriers with a bit more room to manage their administrative costs than would the stated intent of the committee chairs. As Politico has reported, both sides agree carriers should be able to deduct taxes “that relate specifically to revenue derived from the provision of health insurance coverage.” The NAIC approach, however, allows insurers to remove payroll and income taxes from the MLR calculation – for most carriers these are substantial sums.

Another bit of flexibility: spending that Improving Health Care Quality Expenses” (which simply means spending that, because it is aimed at improving the health of members is considered to be medically related, not administrative costs) must be:

  • designed to improve health care quality and increase the likelihood of desired health outcomes
  • in ways that can be objectively measured
  • produce verifiable results and achievements
  • are directed toward individual enrollees or for the benefit of specified segments of enrollees (as opposed to general cost containment efforts)

This means costs related to nurse-lines, disease management, member health education, preventive and wellness efforts will be allocated to the “medical” side of the MLR calculation. Reuter’s quotes Ipsita Smolinski, a health care analyst at Capitol Street as describing this definition of carriers’ quality improvement spending as “a fairly generous definition.”

On the “wait and see” side of things, several Insurance Commissioners have been pushing the Obama Administration to phase in the medical loss ratio rules to enable carriers, consumers and state regulators to adapt to the new law (as opposed to being thrown into the deep end of this particular reg’s pool). Carriers are locked in to long term expenses (most especially, in many cases, vested broker commissions) that they contractually cannot reduce. Phasing in the MLR requirement would allow for a more orderly transition. The PPACA allows the Secretary of Health and Human Services to waive the health care reform law’s MLR requirements on a state-by-state basis. However, this could be a very awkward and time-consuming approach. Kansas Insurance Commissioner Sandy Praeger is asking the HHS to provide the states with blanket flexibility.

There’s other provisions of the proposed regulation that will take additional study (and, hopefully, clarification in the final version). For example, some are interpreting. For example, the definition of “earned premium” is defined as “the sum of all moneys paid by a policyholder as a condition of receiving coverage from a health insurer.” The examples given concern reinsurance and unearned premium reserves. But what about arrangements like California Choice in which several carriers charge the administrator a stripped-down premium and that administrator then adds fees for distribution, billing, and additional services like Section 125 administration. If employers purchasing through this kind of arrangement are obliged to pay the additional fees do they apply against the carriers’ medical loss ratio?

The regulations require rebates to be calculated at the “licensed entity level with a state.” In California, carriers often offer plans under a license with the Department of Insurance or the Department of Managed Health Care. The wording of the regulation seems to require carriers to calculate their DOI individual plans (for example) separately from their DMHC-regulated products. And while I read this as allowing carriers to calculate their MLR against all their benefit plans in a particular market segment, I understand some are interpreting this as requiring carriers to meet the MLR threshold with each of their various benefit plans. The latter would require a level of pricing precision that is beyond most human actuaries. Further clarification on these elements would be welcome.

The good news is that there will be additional clarification. It also means that carriers may have some additional breathing room than they’ve been assuming. However, the window for modifying their business plans (and, consequently, their commission schedules) is closing rapidly. The medical loss ratio requirement takes effect on January 11, 2011. Carriers will need to announce their new commission schedules in November to notify their brokers concerning what they’ll be paid on this business. And the NAIC’s final regulations won’t be submitted to HHS until October 21, 2010. And while The Hill reports President Barack Obama’s Administration doesn’t want to publicly override the commissioner’s MLR proposal, it will still take time for HHS to review the rules. That doesn’t leave a lot of time to resolve all the uncertainty out there (another reason to phase in the MLR requirement).

But at least the NAIC is providing some clarity on the MLR calculations. And at this point, any clarification is helpful.