Why You Should care about the Medical Loss Ratio

Filed in Health Law by on January 30, 2013 1 Comment

Emblem-notice.svgHealth experts and non-experts alike agree that the U.S. healthcare system is in need of significant reforms. Yearly increases in health insurance premiums are particularly vexing. To relieve some of the pressure, President Barack Obama promised significant reforms when he signed the Affordable Care Act (“ACA”) into law –- arguably the biggest healthcare overhaul in U.S. healthcare history since the passage of Medicare and Medicaid in 1965.

One of the key additions to the ACA is section 2718 of the Public Health Service Act, which requires health insurance issuers offering individual or group coverage to submit annual reports to the Secretary of Health and Human Services on the percentages of premiums that the issuer spends on reimbursement for clinical services and activities that improve healthcare quality and to provide rebates to enrollees when the issuers fail to meet the given year’s minimum requirements.

Under the direction of section 2718, the National Association of Insurance Commissioners (“NAIC”) developed uniform definitions and standardized calculating methodologies, which the HSS fully adopted, for requiring issuers to spend at least 80-85% of their premiums on actual medical care, with the remaining 15-20% going towards administrative costs, marketing, and other non-health care-related expenses. The NAIC defined these activities as the Medical Loss Ratio (“MLR”), also known as the 80/20 rule.

In response to consumer advocates’ concerns the final rule implementing the MLR standards, was revised to establish a mandatory onetime simple MLR informational notice requirement for issuers in the group and individual markets that meet or exceed the applicable MLR standard. The purpose of the notice was to inform the current subscribers of the new regulation. These onetime MLR informational notices are different from MLR rebate notices, which have to be send every time the issuer fails to comply with the 80-85% requirement The final MLR regulation entered finally into effect on June 15, 2012.

This new MLR rule reflects the ACA’s main goal to ensure that “hardworking, middle class families […] get the security they deserve” and that every American is protected from the “worst insurance company abuses.” Essentially, the MLR is intended to help ensure that all of us receive value for our premium dollars by requiring health insurance companies to spend at least 80-85% on healthcare and activities that improve the quality of healthcare (“QIA”). However, if the issuers spend less than the required minimum of 80-85%, they will have to return the portion of the premium revenue in excess of the limit as a rebate.

The new amendment requires all issuers, independent of whether they complied with the 80-85% MLR rule to notify their subscribers of this new regulation, which is an important step towards reinforcing consumer protection. However, as I argue in this post even the improved notice rule falls somewhat short of addressing all of the consumer advocates’ concerns.

In the global scheme of the current MLR regulation, consumer advocates are satisfied with the added notice requirements. However, they demand that the Department of Human Health and Services (“HHS”) strengthens the notice requirement, removes ambiguities and takes a step further by requiring health insurance companies to disclose how much they have spent on healthcare and quality of care in their current and previous year.

Consumer advocates believe that these improvements will increase health plan transparency, reduce consumer confusion, and ensure that all consumers receive information about how their premiums are spend. However, there is some criticism from health insurance companies about the added notice requirement. They claim that, in addition to the added cost of preparing and sending out notices, providing consumers with more information will only lead to more confusion as to how the 80-85% MLR is calculated. They reason that because the MLR has many value enhancing services that, according to the issuers, are not captured by the MLR formula, but nevertheless benefit all of us, we as consumers will draw mistaken inferences about insurer’s spending. Essentially, keeping us in the dark about how insurance companies spend OUR premium dollars, as was the case in the past, will only benefit us – along the lines “I know what’s best for you, so the less you the know/care the happier you’ll be.”

In an attempt to meet the demands of consumer and health insurance advocacy groups, the HHS adopted a balanced approach seeking to minimize the cost of additional notice requirement to the issuers while protecting the interests of consumers. Essentially, the HHS determined that while failing to require MLR information notices from issuers would result in reduced transparency, any greater notice requirements, like those demanded by the consumer advocates, would impose a greater burden on the issuers than is necessary. As such, the HHS decided to merely impose a simple onetime notice that only provides standard limited information about the MLR rule. However, the HHS misses the mark.

First, the MLR notices are intended to simply inform consumers of the existence of the new law. The fact that they were required to be sent only this year, raises the question of whether the notices will reach every subscriber as intended. Also, even assuming that they do reach every subscriber, the problem with the onetime notice is that all future subscribers will be out of luck and thus remain ignorant. However, Issuers that owe rebates will still be required to send out rebate notifications. There is an interesting notion in the regulation where the HHS explicitly “allows” issuers to voluntarily send out MLR notices. But, relying on issuers’ willingness to volunteer additional disclosure is not only impractical, but can be counterproductive because sending out random notices will only increase confusion and irritation among consumers. The ongoing annual MLR notices, on the other hand, will establish a ubiquitous presence, which is essential in creation of new expectations among consumers. Knowing where and how the premiums are spend, will likely reduce consumers’ resentment and disappointment with the relentless annual health insurance cost increases.

Second, the general information about the MLR rule and the actual MLR percentages is available on the HHS website and must be referenced in the MLR informational notices. Thus, the issuers’ fear that providing such detailed MLR information to the consumers in the notices will be too burdensome and counterproductive, is unjustified. Rather, by requiring the issuers to provide more information in the actual MLR notices, the HHS would only ease consumers’ access to such information and enable consumers to evaluate their issuer’s performance on the spot. Likewise, issuers contention that consumers might misinterpret the MLR information because the MLR formula is too complex and contains value enhancing services that according to the issuers, are not captured in the MLR formula, is unpersuasive because the NAIC and the HHS have already determined that MLR is a reliable measure of issuers’ performance in terms of their healthcare and quality of care versus administrative spending. Accordingly, the HHS should require issuers to include more information about the MLR in general, and demand that issuers’ provide their current and past year’s MLRs.

Finally, issuers argue vehemently that the mandatory notice requirement is too costly and imposes a great burden on the issuers. There appears little support for that. The HHS has already determined that the benefits to consumers will outweigh the administrative costs incurred by insurers through the issuance of notices to the policyholders. In particular, according to the HHS estimates, the total administrative cost for preparing and mailing notices to issuers that meet or exceed the MLR target would merely amount to approximately three million dollars, an average cost of $9,000 to 10,000 per issuer for the 2011 reporting year, translating to an average added cost of $0.16 per enrollee for preparing and sending a notice by mail, including labor and supply costs. Importantly, the estimates are for the first time notices only. By requiring frequent annual notices, the cost of such notices can be reduced even further as the notices become more automated. This only supports the recommendation that the HHS should require annual notices.

With these important amendments to the final rule the HHS can expect to achieve greater transparency and more accountability regarding how the issuers use their premium revenue, which is the main purpose of the ACA.

Bottom Line:

The HHS has promulgated an important consumer empowering regulation, but there is still a lot of work to be done. Consumers deserve to know how their premium dollars are spent and demand that the bulk of their premium dollars is primarily spent on health care.  The MLR rules help move us toward that goal.


Ina Ilin-Schneider is a fourth year part-time student at Seton Hall University School of Law. She graduated summa cum laude from Hunter College in 2008 with a B.A. in Psychology and a minor in Economics. While an undergraduate, Ina worked as a teaching assistant in the “Statistical Methods in Psychology” class and as a research intern at the Memorial Sloan-Kettering Cancer Center performing analysis on prevalence of alcohol abuse in the gay community. During her second year of law school, Ina served as a Judicial Intern to the Magistrate Judge, the Honorable Mark Falk, providing assistance in legal research and drafting memoranda on legal questions. Ina intends to practice compliance law after she graduates in May of 2013.

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  1. Kate Greenwood says:

    This was an interesting post, Ina! You might be interested in the very comprehensive policy brief on medical loss ratios that Tara Adams Ragone, who is a Research Fellow & Lecturer in Law here at Seton Hall Law, wrote for New Jersey’s Department of Banking and Insurance. You can access it here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2088900. In her brief, Professor Ragone discusses the intersection of federal and state regulation of medical loss ratios. I wonder if, given HHS’ decision regarding the one-time notices, New Jersey or other states could/should consider requiring issuers to provide the regular, enhanced disclosures that you recommend.

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