Cath Lab Digest

Insurers Contemplate New Spending Requirements

Health insurers are considering the financial impact of mandatory medical loss ratios (MLRs) requiring them to spend minimum percentages of the premiums they collect on providing healthcare to customers. Starting in 2011, insurers will have to comply with federally mandated MLRs or provide rebates to consumers based on the amount that spending falls below these minimums. While stakeholders in the insurance industry work with regulators to determine precisely how the MLRs will be calculated and applied, some are taking preemptive action to bring their spending and accounting practices into compliance.

The new MLR requirements, which go into effect January 1, 2011, are part of the federal healthcare laws enacted this March. The Patient Protection and Affordable Care Act (HR 3590), now public law 111-148, was signed by President Barack Obama on March 23, 2010. A week later, the Health Care and Education Reconciliation Act of 2010 (HR 4872), now public law 111-152, was enacted, making several changes to HR 3590. Under the new laws, insurers are required to spend at least 85% of the premiums they collect in the large-group market on medical care. In the individual and small-group markets, the mandated medical loss is 80%.

A July 2009 report by the American Academy of Actuaries noted that before the enactment of new healthcare laws in 2010, MLRs for health plans sold in the individual market were common in most states but rare in the group market. New Jersey, for one, has required MLRs ≥80% for insurers selling individual policies since 1992.

In a memo prepared for the National Association of Insurance Commissioners (NAIC), actuary Rick Diamond said that determining whether health insurers’ current MLRs are within or near compliance with the new minimum standards is difficult because the new law defines MLRs differently than NAIC and various states. Despite these uncertainties, Mr. Diamond believes most insurers in small-group and large-group markets currently operate under MLRs higher than the newly enacted minimums.

“The situation is less clear in the individual market,” Mr. Diamond continued. “Some issuers would likely have MLRs below 80%...while others would be well above the minimum.”

Insurers have been working with regulators to determine how the new MLR rules will affect them. On April 27, 2010, an actuary representing 39 members of the Blue Cross Blue Shield (BCBS) foundation sent a letter to Steve Ostlund, chair of the NAIC Accident & Working Group, attempting to clarify which insurance products are subject to the new MLR requirements and which data elements will be used in calculations of the ratios.

In the letter, Shari Westerfield, FSA, MAAA, actuarial services, wrote that based on the language of the law, there appear to be multiple potential interpretations that regulators might reasonably consider in calculating MLRs. She made the case for one possible interpretation of the regulations governing which data elements will be included in MLR calculations, but conceded that the BCBS companies “certainly appreciate that the language of the law is not entirely clear and that other reasonable interpretations may exist, while the timeline to reach conclusions and develop the recommendations is very brief.”