Understanding Medical Loss Ratio – MLR
Health
insurance provides protection against the financial risk associated with the
cost of illness
or
injury that could impose a burden on consumers. Those who enroll in health
insurance policies
pay
a premium for a specified set of benefits. When insurers set a premium, they
include not just
the
cost of the health care benefits, but also other costs such as overhead. In
broad terms, a
medical
loss ratio (MLR) measures the share of enrollee premiums that health insurance
companies
spend on medical claims, as opposed to other non-claims expenses such as
administration
or profits. Historically, a number of states, as the primary regulators of
health
insurance,
have had their own MLR requirements, which they use to evaluate companies and
compare
health plans.) Private entities, such as stock and bond analysts and lenders,
also use MLRs when assessing the financial performance of health insurers.
In
general, the higher a plan’s MLR, the more value a consumer is receiving (i.e.,
the more each
dollar
of premiums paid goes toward health benefits and not towards overhead). The MLR
is
based
on a health plan’s overall performance, however, not on individual experience.
It is an
aggregate
measure that in general terms compares the benefits paid to aggregate premiums.
Section
1001 of the Patient Protection and Affordable Care Act (ACA, P.L. 111-148, as
amended)
imposes a new federal, minimum MLR
requirement on fully funded health plans,
which
are plans where insurance companies assume the full risk for medical expenses
incurred.
Each
year that these insurance companies do not meet MLR standards established by
ACA for
individual,
small group, and large group policies, they must issue rebates to
policyholders. The
ACA
MLR requirement allows insurers to add certain quality improvements to the
health benefits calculation, while letting companies disregard certain taxes,
fees, and other expenses when calculating non-claims expenses. The MLR
requirement is intended to provide “greater
transparency
and accountability around the expenditures made by health insurers and to help
bring
down the cost of health care.”
MLR Reporting Requirements Under ACA
Minimum Standards Required
The
ACA MLR standards require that covered insurers in the individual and small
group markets
meet
a minimum MLR of 80%. For insurers that sell large group plans, the minimum MLR
is
85%.
The higher MLR requirement for the large group market accounts for economies of
scale; in other words, it’s more efficient to sell insurance to a large company
that will offer coverage for many individuals and families than it is to have
to market a product to one individual at a time, or to firms that cover a
smaller group of individuals. Thus, the higher MLR standard for large companies
reflects their assumed lower administrative costs.
For
purposes of calculating the MLR, the ACA defines large group policies as
policies sold to
employers
with more than 100 workers, and small group policies as those of up to and
including
100 workers.8 Individual policies
can be policies bought through an insurance agent or broker, or
through an association that is
not part of a larger group policy. Once health insurance exchanges are
established in 2014, an individual plan could be one purchased through an
exchange. In addition, MLR reporting requirements exclude premiums and claims
experience of newly introduced health insurance offerings, under certain
circumstances.
Timeline for Compliance
Under
ACA, health insurers were required to provide their first MLR reports to the
HHS by June
1,
2012, detailing financial activity for 2011. Each insurer covered by the law
must report
aggregated
activity within each state for the three market segments: large group, small
group, and individual policies. If a group policy covers workers in more than
one state, the activity is
recorded
in the state where the policy is issued. Going forward, the ACA requires annual
reports by June 1 of the year following the calendar year on which the MLR
calculation is based. The rules to implement the ACA MLR policies allow
penalties to be imposed on companies that do not comply with reporting,
auditing, rebate, or other requirements, equal to $100 per entity per affected
individual each day the insurer is out of
compliance.
Who Must Comply
The
ACA generally requires fully funded health insurers offering coverage
(including
grandfathered
health plans) to report their MLRs. For-profit, fully funded insurers had to
provide
their first MLR reports to HHS by June 1, 2012, and were required to issue
rebates by
August
1, 2012. While non-profit insurers also are required to report their MLR, their
actual MLR computation is different than for-profit insurers. The MLR reporting
requirement for non-profits worked out regarding the actual computation of
their MLR.
The ACA imposes
separate MLR standards for Medicare Advantage Plans, which are plans that provide
private insurance options, such as managed care, to Medicare beneficiaries
enrolled in both Medicare Parts A and B. Effective in 2014, the ACA requires Medicare
Advantage plans to achieve a minimum MLR of 85%. Plans that do not meet this
standard will have to pay HHS an amount equal to their total revenue multiplied
by the difference between the 85% goal and their actual M LR. If a plan’s MLR
is below 85% for three consecutive years, enrollment will be restricted. A
Medicare Advantage plan contract will be terminated if the plan is out of compliance for five consecutive
years. Further guidance for the MLR calculation for Medicare Advantage plans
will be specified in future regulations.
The
HHS in its final rules provided additional adjustments to the MLR formula for
two less
common
types of health insurance: expatriate and mini-medical policies. Expatriate
plans are
group
policies that can cover employees working outside their home country or
non-U.S. citizens
working
for American firms in their home country. Mini-medical plans are policies that
don’t
cover
the wide range of services of comprehensive health plans. Because of the unique
characteristics
of these plans, HHS determined that insurers would have difficulty meeting
minimum
MLR requirements.
The
MLR requirement does not apply to self-funded plans, which are health care
plans offered
by
businesses in which the employer assumes the financial risk for medical care.
During 2010,
57.5%
of private sector insurance enrollees were covered through self-funded plans.
Medigap
plans, which are supplemental policies that Medicare beneficiaries can purchase
to fill
gaps
in Medicare coverage, are not covered by the ACA MLR provisions. Medigap plans
are
subject
to their own separate MLR requirements, found in Title 18 of the Social
Security Act; the
MLR
requirements are 65% in the individual marketplace and 75% in the group market.
Finally,
the ACA’s MLR requirements do not apply to long-term care, dental, vision, or
retiree
health
insurance.
For more
information on understanding the MLR , please contact 305-227-2383 or
786-574-4560
Feel free to glance :
Paul G. Silverio-Benet
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