HHS releases medical loss ratio regulations

The Department of Health and Human Services announced Monday it has issued long-awaited regulations on the medical loss ratio provision of the Affordable Care Act.

New rules require health insurers to spend 80 percent (for individual and small-group markets) to 85 percent (for large group contracts) of consumers' premiums on direct care for patients and efforts to improve care quality. If they do not meet this requirement, they have to issue rebates to policyholders, beginning in 2012.

The interim final regs issued by HHS were, for the most part, not changed from those recommended by the National Association of Insurance Commissioners in late October. The Department announced it has also incorporated recommendations from a letter sent from the NAIC to HHS Secretary Kathleen Sebelius on Oct. 13 [See related: "NAIC updates Sebelius on MLR issues"]

The interim rules are effective Jan. 1, 2011, but HHS is seeking comments on regulation and will issue a final rule later this year.

"These rules were carefully developed through a transparent and fair process with significant input from the public, the States, and other key stakeholders," said Jay Angoff, Director of the Office of Consumer Information and Insurance Oversight at HHS, in a press statement. "As we build a bridge to 2014, when better, more affordable options are available to consumers, these rules will help make health insurance fairer for consumers now."

The Independent Insurance Agents & Brokers of America (IIABA or the Big "I") expressed disappointment with the interim final rule's inclusion of agent and broker commissions as "non-claims costs" in insurers' MLR calculations.

"The Big 'I' is disappointed with the interim final MLR rule, and we are extremely concerned that this rule will lead to severe market disruption, especially in the individual and small group markets," said Robert Rusbuldt, Big "I" president and CEO, in a statement.

Several agent groups, including IIABA, have in the past several months lobbied for agent and broker commissions to be recognized as a pass-through expense, as commissions are not part of insurer profits, but are passed on 100 percent to third parties. Therefore, commissions should never have been factored as part of the MLR formula. [See related: "Can brokers survive health reform?"]

The IIABA says the Department should have recognized the impact on producer commissions could destabilize a particular individual market.

"The Big 'I' is very concerned that the MLR provision of the new health care reform law will have a devastating effect on the private marketplace and that consumers will be negatively impacted," said Charles E. Symington Jr., Big "I" senior vice president for government affairs. "After hearing from various interested parties if HHS does not fix this language before the rule is final, we hope that Congress will step in and revise the MLR formula through the legislative process."

According to HHS: "Many insurance companies spend a substantial portion of consumers' premium dollars on administrative costs and profits, including executive salaries, overhead, and marketing.

"Thanks to the Affordable Care Act, consumers will receive more value for their premium dollar because insurance companies will be required to spend 80 to 85 percent of premium dollars on medical care and health care quality improvement, rather than on administrative costs, starting in 2011. If they don't, the insurance companies will be required to provide a rebate to their customers starting in 2012.

"In 2011, the new rules will protect up to 74.8 million insured Americans and estimates indicate that up to 9 million Americans could be eligible for rebates starting in 2012 worth up to $1.4 billion. Average rebates per person could total $164 in the individual market. Important details regarding the new regulation are included below.

"The medical loss ratio regulation outlines disclosure and reporting requirements, how insurance companies will calculate their medical loss ratio and provide rebates, and how adjustments could be made to the medical loss ratio standard to guard against market destabilization.

"Beginning in 2011, the law requires that insurance companies publicly report how they spend premium dollars, providing meaningful information to consumers. Also beginning in 2011, insurers are required to spend at least 80 percent of the premium dollars they collect on medical care and quality improvement activities. Insurance companies that are not meeting the medical loss ratio standard will be required to provide rebates to their consumers. Insurers will be required to make the first round of rebates to consumers in 2012."


Employers and insurers offering min-med policies will be given at least an extra year to gather data before falling under the MLR requirement, and in 2012 and 2013, they might be able to apply for an adjustment. According to the Wall Street Journal, "mini-med policies won a reprieve for 2011 that allows them to spend half as much of their premiums on medical care as most other insurers."

HHS says it will apply a "methodological adjustment" to the way the medical loss ratio is calculated for those plans:

"The methodological adjustment will address the unusual expense and premium structures of mini-med and expatriate plans, and enable their issuers to apply for an adjustment to reported medical claims and quality improvement expenses. Because limited data are available to inform such an adjustment, this regulation requires accelerated reporting by issuers of mini-med and expatriate plans so that HHS may receive and review data on their expense structures and profitability.

"These changes to the methodology for reporting and rebates apply only in calendar year 2011, and as noted above, such plans are required to provide early reporting to the Secretary if they claim such an adjustment. To improve transparency and ensure consumers are aware of the product they are purchasing, HHS will require insurers that sell mini-med policies to provide prominent notice regarding the benefits and coverage provided by the policy."

The new regulations offer other modifications to avoid disrupting the insurance markets before 2014:

  • Expatriate plans, which cover U.S. citizens working abroad, will also get special treatment until 2014;
  • Small plans (between 1,000 and 75,000 enrollees) will be allowed a "credibility adjustment" of a certain number of percentage points to help them meet the requirements while the smallest plans (fewer than 1,000 enrollees) will be exempt;
  • New plans -- those getting half or more of their premium income from policies that are less than a year old -- are eligible to delay reporting by a year; and
  • Plans that cover employers who have employees in different states don't have to aggregate their policies by state for purposes of calculating their MLR.

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