Insurers’ Operations to Become More Transparent

Under ACA (the health care reform law), insurance companies are required to payout a specified percentage of their premiums for claims and quality improvement activities (this is defined as the insurers’ Minimum Loss Ratio).  This means that insurers will have to report to the Department of Health and Human Services some detailed information on an annual basis.   HHS will then post the information for the public to review.  This will result in the curtain of mystery being opened a bit on the carriers operations.  If the insurers do not meet the minimum loss ratio levels designated by the law, they will have to pay rebates out to their covered members (this would result in a premium credit for employers who provide fully-insured health insurance to their employees). 

According to Carl McDonald, a Wall Street analyst at Oppenheimer who follows publicly-traded insurers, if  the new law had been on the books in 2009, the six largest for-profit health insurance companies would have been required to refund $1.9 billion in that year alone for spending too much on profits, CEO pay and administration. In other words, if Sebelius enforces this provision in the ACA, it has the potential to save billions over ten years; see the table below. (Thanks to Health Care for America Now and Health Beat  for calling attention to McDonald’s calculations.) 

Minimum Loss Ratio refunds

I would like to explain to you how this is all going to work, but rather than type a lengthy explanation, I will direct you to a lengthy report put together by CCH that does a great job of explaining it:

CCH® BENEFITS — 11/29/10

Medical Loss Ratio Rules Will Affect 64 Million Covered By Group Plans

from Spencer’s Benefits Reports: An interim final regulation implementing medical loss ratio (MLR) provisions in the Patient Protection and Affordable Care Act (ACA) will affect almost 75 million individuals enrolled in comprehensive major medical coverage, including 24 million individuals covered by small employers and 40 million covered through large employer group health plans.

The regulation, scheduled to be published by the Department of Health and Human Services (HHS) in the December 1 Federal Register implements MLR requirements in Public Health Service Act Sec. 2718, as added by the ACA.

The interim final regulation is effective Jan. 1, 2011, for health insurance issuers offering group or individual health insurance coverage. The interim final regulation adopts and certifies in full all of the recommendations in the model regulation of the National Association of Insurance Commissioners (NAIC) regarding MLRs.

Comments, due by Jan. 30, 2010 (60 days after publication of the rule in the Federal Register), may be submitted electronically to Follow the instructions under the “More Search Options” tab. In commenting, refer to file code OCIIO-9998-IFC.

General Goals Of Provision

The MLR regulation includes two primary provisions. The first is the establishment of greater transparency and accountability around the expenditures made by health insurance issuers. The ACA requires that issuers publicly report on major categories of spending of policyholder premium dollars, such as clinical services provided to enrollees and activities that will improve health care quality.

The second provision is the establishment of MLR standards for issuers, which are intended to help ensure policyholders receive value for their premium dollars. Issuers will provide rebates to enrollees when their spending for the benefit of policyholders on reimbursement for clinical services and quality improving activities, in relation to the premiums charged, is less than the MLR standards established.


The interim final regulation requires issuers to submit a report to the HHS that will allow enrollees of health plans, consumers, regulators, and others to take into consideration MLRs as a measure of health insurance performance.

For this information to be meaningful to consumers, the report provided to the HHS and made available to the public must include the amount of premium revenue received as well as the amount expended on each of these types of activities:

    (1) Reimbursement for clinical services provided to enrollees under the health insurance plan;
    (2) Activities that improve health care quality for enrollees;
    (3) All other “non-claims” costs; and
    (4) federal and state taxes and licensing or regulatory fees.

Issuers will report the premium earned, claims, quality improvement expenses and other non-claims costs incurred under health insurance that is in force during the calendar year (MLR reporting year). “Calendar year reporting will increase the reliability of the experience data that will be reported and that will be used as the basis for rebate calculations,” according to the regulation’s preamble.

The HHS requires that an annual report be submitted by June 1 of the year following the end of an MLR reporting year. The precise form and content of the data that issuers must report to the HHS will be announced in a subsequent Federal Register notice.

Some insurers expressed concern that the reporting and rebate requirements would disadvantage large or multi-state employers, including those with a small number of employees in one state and a larger presence in another. This regulation does not require these businesses to change the manner in which they operate, and accommodates issuers that provide coverage to such employers in a number of ways.

First, where an issuer insures employees of a business located in multiple states, the MLR reporting should be based on the “situs of the contract.” Under this approach, the premiums and claims experience attributable to employees in multiple states are combined and reported by the issuer in the MLR report for the state identified in the insurance policy or certificate as having primary jurisdiction over the policy—often the headquarters of the company.

Second, combined reporting across affiliates for “dual contracts” is incorporated. Under these types of insurance contracts, a single group health plan obtains coverage from two affiliated issuers, one providing in-network coverage, and a second affiliate providing out-of-network benefits to the plan. The experience of these two affiliated issuers providing coverage to a single employer can be combined and reported on a consolidated basis as if it were entirely provided by the in-network issuer. This maintains the experience of employees in a single reporting entity.

Third, where affiliated issuers offer blended insurance rates to an employer—rates based on the combined experience of the affiliates serving the employer—the incurred claims and expenses for quality improving activities can be adjusted among affiliates to reflect the experience of the employer as a whole.

Mini-Med Plans

The HHS received requests from issuers of so-called “mini-med plans” to be exempted entirely from the MLR and rebate provisions. The term “mini-med” generally refers to policies that often cover the same types of medical services as comprehensive medical plans but have unusually low annual benefit limits, often capping coverage on an annual basis for one or more benefits at $5,000 or $10,000, although some have limits above $50,000 or even $250,000.

For the 2011 reporting year, the HHS applies a methodological change to address the special circumstances of mini-med plans. The mini-med issuers, for policies that have a total of $250,000 or less in annual limits, will be permitted to apply an adjustment to their reported experience to address the unusual expense and premium structure of these plans.

Specifically, in the case of a plan with a total of $250,000 or less in annual limits, the total of the incurred claims and expenditures for activities that improve health care quality are multiplied by a factor of two. Because little information is available to inform this adjustment, this special circumstances adjustment applies for 2011 only. In order to determine whether, and if so what type of, an adjustment may be appropriate for 2012, mini-med plans that wish to avail themselves of this special circumstances adjustment for 2011 will be required to report MLR data on a quarterly schedule.

Calculating MLR

Insurers must provide their enrollees a rebate if their MLR is less than 85% in the large group market or less than 80% in the small group and individual markets. This means that issuers must spend at least 85 or 80%, respectively, of each premium dollar, as adjusted for taxes and regulatory and licensing fees, on reimbursement for clinical services provided to enrollees and activities that improve health care quality.

The numerator in an MLR equals the issuer’s incurred claims and expenditures for activities that improve health care quality. The denominator of the MLR equals the issuer’s premium revenue minus the issuer’s federal and state taxes and licensing and regulatory fees.

“Earned premium” is the sum of all monies paid by a policyholder as a condition of receiving coverage from a health insurance issuer including any fees or other contributions associated with the health plan, and accounting for unearned premiums. Unearned premium is that portion of the premium paid in the MLR reporting year for coverage during a period beyond the MLR reporting year. Any premium for a period outside of the MLR reporting year must not be reported in earned premium for the MLR reporting year.

Reimbursement for clinical services are direct claims paid and incurred claims during the applicable MLR reporting year. Incurred claims is the sum of direct paid claims incurred in the MLR reporting year, unpaid claim reserves associated with claims incurred during the MLR reporting year, the change in contract reserves, reserves for contingent benefits, the claim portion of lawsuits, and any experience rating refunds paid or received. Unpaid claims reserves are included in incurred claims. Unpaid claim reserves are the reserves for claims that were incurred during the reporting period but that had not been paid by the date on which the report was prepared.

Prescription drug costs should be included in incurred claims and prescription drug rebates should be deducted from incurred claims. Prescription drug rebates are rebates that pharmaceutical companies pay to issuers based upon the drug utilization of the issuer’s enrollees at participating pharmacies. Such rebates are an adjustment to incurred claims.

The interim final regulation allows a non-claims expense incurred by a health insurance issuer to be accounted for as a quality improvement activity only if the activity meets all of the following requirements:

    1. It must be designed to improve health quality;
    2. It must be designed to increase the likelihood of desired health outcomes in ways that are capable of being objectively measured and of producing verifiable results and achievements;
    3. It must be directed toward individual enrollees or incurred for the benefit of specified segments of enrollees or provide health improvements to the population beyond those enrolled in coverage as long as no additional costs are incurred due to the non-enrollees; and
    4. It must be grounded in evidence-based medicine, widely accepted best clinical practice, or criteria issued by recognized professional medical associations, accreditation bodies, government agencies or other nationally recognized health care quality organizations.


If an insurer does not meet the applicable MLR standard, then the issuer must provide a rebate to each enrollee unless the issuer has too little experience to calculate a reliable MLR. An insurer that has fewer than 1,000 covered lives does not have sufficiently credible data to determine that the MLR standard has not been met and thus is not required to pay any rebates.

The rebate requirement is most simply met by requiring the rebate returned to the enrollee to be proportional to the amount of premium paid by or on behalf of the enrollee. The total rebate owed by the issuer is required, by statute, to be a percentage of the issuer’s total earned premium. An individual who was covered by an issuer for only three months would have paid substantially less than an individual who was covered by the issuer for the entire MLR reporting year. According to the preamble in the regulations, “It would be unfair to pay both individuals the same dollar rebate.”

An insurer may choose to provide current enrollees with a rebate in the form of a premium credit (that is, reduction in a premium owed), lump-sum check, or, if an enrollee paid by credit card or debit card, by lump-sum reimbursement to the same account that the enrollee used to pay the premium.

If an insurer chooses to provide a premium credit to a recipient, the insurer must apply the full amount of the rebate owing to the first premium due on or after August 1. If the rebate exceeds the amount of the first premium due on or after August 1, the insurer must apply any overage to succeeding premium payments until the entire rebate has been credited. With respect to rebates owing to former enrollees, the rebate is to be made in a lump-sum.

Insurers must provide enrollees with a rebate notification along with any rebate check or premium credit. The HHS is not requiring issuers who do not have to provide a rebate to provide notification to enrollees about the MLR and the fact that no rebate is owed. However, issuers who do meet the MLR standard may choose to provide such notice to their enrollees.

Insurers must report, for each MLR reporting year, information regarding the rebates it makes to enrollees. The information required includes the following:

    1. the number and percent of enrollees who receive a rebate;
    2. the amount of rebates provided to enrollees, including a breakdown of how much of the rebates were paid to policyholders and how much of the rebates were paid to subscribers;
    3. the amount of de minimis rebates that were aggregated and a breakdown of how they were disbursed to enrollees; and
    4. the amount of unclaimed rebates, a description of the good faith efforts that were made to locate the applicable enrollees, and a description of how the unclaimed rebates were disbursed.

 Rebates from insurers to consumers are estimated in the rule to be $0.6 billion to $1.4 billion annually.

The interim final regulation provides for the imposition of civil monetary penalties in the event an issuer fails to comply with the reporting and rebate requirements set forth in the regulation. The civil monetary penalties provide for a penalty for each violation of $100 per entity, per day, per individual affected by the violation.

For more information on the interim final rule, contact Carol Jimenez, Office of Consumer Information and Insurance Oversight, HHS, at (301) 492-4457.

©2010, CCH. All Rights Reserved.


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