NAIC Releases Draft Regulation for Calculating Medical Loss Ratio Rebates

calculator.jpgThe National Association of Insurance Commissioners (NAIC) has released a draft regulation (pdf) that explains how insurers should calculate their medical loss ratios (MLR) and enrollee rebates for the 2011 through 2013 plan years. The Patient Protection and Affordable Care Act (“Affordable Care Act” or PPACA) added a new section to the Public Health Service Act (PHSA) that requires health insurance issuers offering individual or group coverage to submit annual reports to the Secretary of Health and Human Services (HHS) on the ratio of incurred claims to earned premiums, and to provide rebates to enrollees if this spending does not meet minimum standards for a given plan year. Beginning in 2011, at least 85% of premium revenue must be spent on reimbursement for clinical services or activities that improve health care quality in the large group market. Insurers in the large group market must provide a rebate for non-claims costs in excess of 15% of premium revenue. In the individual and small group market the cap on non-claims costs is 20%. The Affordable Care Act directs the NAIC to establish uniform definitions and a standardized calculation methodology for providing rebates of these premiums no later than December 31, 2010. Such rebates are to be in the form of either a premium credit against future premiums or a check. HHS has not yet issued regulations on the MLR requirements pending completion of NAIC’s work.

According to the draft regulation released by NAIC, the MLR is the ratio of incurred claims plus any expenses to improve quality – adjusting for certain conditions outlined in the regulation – to the earned premiums less federal and state taxes and licensing or regulatory fees. The higher the MLR, the easier it is for insurers to meet the minimum standards set by the Affordable Care Act. Therefore, it is desirable from an insurer’s standpoint to have as many expenses qualify as “quality improvement" (QI) expenses as possible, as this would increase the MLR.

In the draft regulation, the NAIC defines QI expenses as:

expenses, other than those billed or allocated by a provider for care delivery (i.e., clinical or claims costs), for all plan activities that are designed to improve health care quality and increase the likelihood of desired health outcomes in ways that are capable of being objectively measured and of producing verifiable results and achievements. The expenses must be directed toward individual enrollees or may be incurred for the benefit of specified segments of enrollees, recognizing that such activities may provide health improvements to the population beyond those enrolled in coverage as long as no additional costs are incurred due to the non-enrollees other than allowable QI expenses associated with self insured plans. Qualifying QI expenses should be grounded in evidence-based medicine, widely accepted best clinical practice, or criteria issued by recognized professional medical societies, accreditation bodies, government agencies or other nationally recognized health care quality organizations. They should not be designed primarily to control or contain cost, although they may have cost reducing or cost neutral benefits as long as the primary focus is to improve quality. Qualifying QI activities are primarily designed to achieve the following goals set out in Section 2717 of the Public Health Service Act (PHSA) and Section 1311 of the PPACA:    

  • Improve health outcomes including increasing the likelihood of desired outcomes compared to a baseline and reducing health disparities among specified populations;
  • Prevent hospital readmissions;
  • Improve patient safety and reduce medical errors, lower infection and mortality rates;
  • Increase wellness and promote health activities; or
  • Enhance the use of health care data to improve quality, transparency, and outcomes.

The draft regulation includes a detailed list of activities and measures that fall under each of the above five categories. Expenses under these categories that are not paid for by premium revenues, however, do not qualify as QI expenses. In addition, outlays for the following activities would similarly be disqualified as QI expenses:

  • All retrospective and concurrent utilization review;
  • Fraud prevention activities;
  • The cost of developing and executing provider contracts and fees associated with establishing or managing a provider network;
  • Provider credentialing;
  • Marketing expenses;
  • All accreditation fees;
  • Costs associated with calculating and administering individual enrollee or employee incentives; and
  • Any function or activity not expressly included in the NAIC’s extensive list of expenditures.

The appendix to the draft regulation contains formats to report rebate calculations for the 2011, 2012, and 2013 plan years, and instructions. The provisions of the draft regulation concerning the calculation and payment of medical loss ratio rebates are applicable to any health insurance issuer that provides coverage through a health plan that is subject to the Affordable Care Act for plan years 2011, 2012 and 2013.

The NAIC is seeking comments on these draft definitions and calculations by October 4, 2010. Comments should be sent to Eric King, NAIC, at EKing@naic.org and John Engelhardt, NAIC, at JEngelha@naic.org.

One area of concern with the MLR requirement has been its impact on so-called “mini-med” plans or limited benefit plans. Such plans may have higher administrative costs, making it more difficult to satisfy the minimum MLR requirement. Yesterday, Jay Angoff, Director of the Office of Consumer Information and Insurance Oversight at HHS, issued a statement addressing the application of the MLR requirement to mini-med plans.  Recognizing that some employers must make decisions regarding coverage options for 2011 prior to the issuance of regulations by HHS, Agnoff indicated that there will be some flexibility for mini-med plans. According to the statement: “the Secretary fully intends to exercise her discretion under the new law to address the special circumstances of mini-med plans in the medical loss ratio calculations.”

This entry was written by Ilyse Schuman.

Photo credit:  Bartek Szewczyk

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.