EXECUTIVE SUMMARY
The Department of Health and Human Services (HHS) has issued an interim final rule on the medical loss ratio (MLR) requirements of the Patient Protection and Affordable Care Act (PPACA). The interim final rule is effective January 1, 2011.
The MLR provisions of PPACA require health insurers to spend 80 to 85 percent of premium dollars on medical care and health care quality improvement, rather than administrative costs, beginning in 2011. Insurers that do not meet these requirements must provide rebates to consumers beginning in 2012.
The MLR rule adopts all of the recommendations made by the National Association of Insurance Commissioners (NAIC) in its model regulation. HHS also took into account the suggestions in the NAIC’s October 13, 2010 letter to HHS, including its proposed treatment of broker and agent commissions. While these commissions are considered administrative expenses, and do not receive special treatment in the regulations, HHS will participate in a working group with the NAIC to address the impact of health care reform on agents and brokers.
The interim final rule provides guidance on the following items:
· Disclosure and reporting requirements
· Methods for calculating the MLR and providing rebates
· Adjustments to the MLR rules that may be made to prevent destabilization in the individual market
This Compliance Alert provides a summary of the MLR interim final rule. Please read below for more information. For additional information, see www.hhs.gov/ociio/regulations/medical_loss_ratio.html.
INTERIM FINAL MLR RULE
Background
The MLR rules are found in Section 2718 of the Public Health Service Act, as added by PPACA. The interim final rule implements Section 2718(a)-(c), relating to bringing down the cost of health care coverage through a new federal MLR standard.
The MLR requirements apply to health insurance issuers offering group or individual health insurance coverage. The rules apply to both new and grandfathered plans. However, the rules do not apply to self-insured plans.
Under PPACA, issuers must 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. This data to will allow enrollees of health plans, consumers, regulators and others to use MLRs as a way to measure health insurance performance.
MLR Requirements
Health insurance issuers in the large group market must spend at least 85 percent of premiums on medical care and health care quality improvement. Issuers in the small group and individual markets must spend at least 80 percent of premiums on those items. Issuers that do not meet these minimum requirements must provide rebates to consumers.
States may choose to set a higher minimum loss ratio if it seeks to ensure adequate participation by insurers, competition in the state’s health insurance market and value for consumers.
Calculating the MLR
An issuer’s MLR is calculated as a fraction. The numerator of the fraction is the amount of incurred claims paid, plus expenses for health care quality improvement activities. The denominator is the premium revenue, minus federal or state taxes and licensing and regulatory fees.
In general, the MLR for a particular year (the MLR reporting year) is based on data for that year, plus data from the prior two years. However, special rules apply for 2011 and 2012.
In determining whether the issuer meets the MLR requirements, amounts paid toward medical care include direct claims paid to providers (including incentive and bonus payments made to providers) and activities to improve health care quality.
Health care quality improvement activities include:
· Case management
· Care coordination
· Chronic disease management
· Wellness programs
· Supporting health information technology
· Hospital discharge programs
· Measures to improve patient safety and reduce medical errors
Items that are not considered health care quality improvement activities include the following:
· Activities primarily to control or contain costs
· Establishing or maintaining a claims adjudication system
· Retrospective and concurrent utilization review
· Fraud prevention activities (other than fraud detection/recovery expenses up to the amount recovered that reduces incurred claims)
· Costs of executing provider contracts or developing a provider network
· Provider credentialing
· Marketing
An issuer’s administrative expenses do not count toward medical care spending. The following are examples of administrative expenses highlighted by the interim final rule:
· Amounts paid to third party vendors for secondary network savings, network development, administrative fees, claims processing and utilization management
· Amounts paid (including amounts paid to a provider) for professional or administrative services that do not represent compensation or reimbursement for covered services provided to an enrollee (such as medical records copying costs, attorneys’ fees and compensation to administrative personnel)
· Cost containment and loss adjustment expenses
· Workforce salaries and benefits (including sales personnel)
· Agents and brokers fees and commissions
· General administrative expenses
· Community benefit expenditures
Insurers can deduct federal and state taxes from their administrative expenses in order to meet the new requirements, but cannot exclude taxes related to investments or capital gains.
Disclosure and Reporting
Under the MLR rules, issuers must submit a report to HHS concerning premium revenue and expenses related to the group and individual health insurance coverage that it issued for each MLR reporting year. The report must include information on the issuer’s:
· Earned premium for the MLR reporting year, including fees or other contributions associated with the health plan
· Direct claims paid to or received by providers, along with information regarding claim reserves, contract reserves, reserves for contingent benefits and lawsuits, and experience rating refunds
· Activities that improve health care quality
· Administrative expenses
In general, the report must be submitted to HHS by June 1 of the following year, in the form and manner required by HHS. Expatriate plans and mini-med plans that have an annual limit of less than $250,000 that report experience separately must report separately for each quarter of the 2011 MLR reporting year.
Rebates
For each MLR reporting year, the issuer must provide a proportionate rebate to each enrollee if the MLR does not meet the minimum requirements. The amount of the rebate is based on the premium received from the enrollee (less appropriate taxes and fees), which is then multiplied by the difference between the required MLR and the issuer’s actual MLR for the year.
No rebate is required to be paid if it would be less than $5 per subscriber covered by the policy. Also, an issuer’s solvency would be affected beyond certain levels, HHS may defer all or a portion of the required rebates. However, the issuer will be required to pay the rebates, with interest, in a future year.
The enrollee entitled to receive the rebate is the subscriber, policyholder and/or government entity that paid the premium for the health care coverage received by the individual during the MLR reporting year. For group health plans, the issuer can arrange with the group policyholder to distribute the rebates to enrollees on the issuer’s behalf, as long as the issuer maintains appropriate records regarding the rebates.
An issuer must provide any rebate owed to an enrollee no later than August 1 following the end of the MLR reporting year. If the rebate payment is late, interest on the rebate amount must be paid as well.
The MLR rules dictate the form of payment for rebates. For current enrollees, the rebate can be provided as a premium credit, a lump sum check, or, if the premium was paid by credit card or direct debit, by a lump sum reimbursement to the account used to pay the premium. If the rebate is given as a premium credit, the credit must be applied to the first month’s premium that is due on or after August 1. If the credit exceeds the premium due, the excess credit must be applied to succeeding premium payments. For former enrollees, the rebate can be paid by check or reimbursement, using the same method as the original payment.
When providing a rebate, the issuer must also give a notice to each enrollee receiving a rebate. The notice must include the following information:
· A general description of the concept of an MLR
· The purpose of setting a MLR standard
· The applicable MLR standard
· The issuer’s MLR
· The issuer’s aggregate premium revenue, minus any federal and state taxes, and licensing and regulatory fees
· The rebate percentage and amount owed to enrollees based upon the difference between the issuer’s MLR and the applicable MLR standard
Issuers must also provide a report to HHS on rebates provided to enrollees.
Adjusting the MLR for the Individual Market
In situations where enforcement of the 80 percent MLR requirement would destabilize the individual market in a particular state, HHS may adjust the MLR standard for individual insurers in that state. A request for adjustment must be made by the state’s insurance commissioner (or equivalent state official). The adjustment can be applied for up to three years.
In determining whether to adjust the standard, HHS will consider factors such as the number of issuers that would be likely to leave the state’s individual market, the number of individuals that would be affected and the impact on premiums in the state.
Enforcement
HHS is responsible for enforcing the reporting and rebating requirements of the MLR rules. In order to enforce these rules, HHS can audit issuers for compliance. Issuers must provide HHS with access to records and must maintain records to demonstrate compliance for 6 years.
Issuers that do not comply with the MLR requirements may be subject to civil penalties up to $100 per day for each individual affected by the violation. HHS can also order an issuer to pay rebates if it has failed to do so.
Penalties will not be assessed for periods where the issuer did not know of the failure, or would not have known about it if it had exercised reasonable diligence. HHS may not issue a penalty for the period after the issuer discovered the failure (or would have discovered it if it had exercised reasonable diligence), if the failure was due to reasonable cause and not due to willful neglect and the failure was corrected within 30 days.
