Medical Loss Ratio explained: podcast with Avalere Health’s Bonnie Washington (transcript)

This is the transcript of my recent podcast interview about medical loss ratio (MLR) rules with Bonnie Washington of Avalere Health.

Williams:         This is David E. Williams, co-founder of MedPharma Partners and author of the Health Business Blog.  I’m speaking today with Bonnie Washington.  She’s Senior Vice President at Avalere Health.  Bonnie, thanks for being with me today.

Washington:    Thanks for inviting me.

Williams:         Bonnie, the Affordable Care Act has rules about minimum medical loss ratios. There’s a lot of interest on the specifics of the rules and regulations coming down on that topic. Maybe we can start with the definition of the medical loss ratio.  What is a medical loss ratio anyway?

Washington:    The medical loss ratio is a mathematical calculation, defined in the Affordable Care Act as the ratio of a health insurer’s premiums that are spent on medical claims and quality improvement activities divided by the total amount of premiums that the plan collects.  So it’s basically the medical and quality improvement costs divided by the plan’s total premium revenues excluding most state and federal taxes.

Williams:         What are the rules within the Affordable Care Act about the medical loss ratio (or MLR) and why is it something that matters?

Washington:    The Affordable Care Act instituted for the first time national medical loss ratio requirements in order to try to get plans’ premium costs under control and as a way to cap plans’ administrative costs and profits.

The Affordable Care Act does three things.  First it requires all health insurance plans to report the medical loss ratio that we just talked about to the public and to the Department of Health and Human Services.

Second, it requires that plans meet specific percentages for the medical loss ratio depending on the size of the plan.  Third, beginning this year plans have to issue rebates to their enrollees if they find themselves falling below the minimum medical loss ratios for the category that they’re in.

Williams:         The rates are different for different size plans or customers.  Why are those rates different?

Washington:    That’s right, they are different.  There is an 80% medical loss ratio for small group insurance and non-group or individual insurance. HHS has defined small group as fewer than 100 people. There is a higher medical loss ratio for the large group market, which is over 100 people, and that’s at 85%.

The reason why they are different is because when plans insure individuals or smaller groups they incur higher administrative costs.  It costs more per person to enroll people in your health insurance plan.  It costs more to process the claims.  It costs more to advertise to people.  It’s assumed that large employers have a lot more efficiency because you’re basically performing the same tasks for a larger group of people. Plans can afford to have a higher medical loss ratio because the “administrative load” (the words used in the insurance industry) is lower.

Williams:         When you described the medical loss ratio calculation it sounded pretty straightforward, but I noticed you talked about medical costs plus quality improvement activities.  If I had to take a wild guess my sense would be that there will be some arguing about what a quality improvement activity is.  What are the issues, how are they being resolved, and what issues remain open?

Washington:    You’re absolutely right. I gave you a very simplified version of the definition of the medical loss ratio.  In each of those words that I used, there are lots of details.   Some states have had medical loss ratios prior to the Affordable Care Act, but this is the first time that this concept has been in place across the country. It has spawned a whole new industry in terms of accounting for the medical loss ratio.

Over the past couple of years since the Affordable Care Act was passed, there have been a lot of different efforts from different organizations to try to define what all these terms mean.

One of the big issues was, as you said, what is a quality improvement activity versus an administrative cost? Because if you’re a plan, you want as many of your costs to operate your plan as possible to be in that numerator, to be in the definition of quality improvement and medical costs.

The National Association of Insurance Commissioners recommended a series of definitions to HHS and HHS has been putting out regulations to further define this.

Quite a few things are included in the definition of quality improvement activities.  These include case management, care coordination, expenses that improve patient safety, wellness and health promotion activities, information technology expenses related to quality improvements, and health care professional hotlines.

Recently HHS changed the rules and allowed plans to include costs associated with implementing ICD10, which is the new coding system, in quality improvement activities.

There are a fair amount of a plan’s administrative costs that can be considered quality improvement activities, but there are still some really important and big ticket items that are left as administrative costs.

Williams:         Some states have sought waivers from the MLR rules.  Why are they doing that? Also, why some of those waivers have been approved and others denied?

Washington:    Great question.  The law allows states to seek waivers from the Secretary if the state believes that requiring plans to meet these new minimum medical loss ratios would destabilize their insurance market.

Destabilization means that if insurers were required to meet those minimum medical loss ratios that the market would be destabilized if a number of the insurance carriers would leave the market or stop selling health insurance products, particularly to individuals, because they can’t meet the new rules.

Several states have applied for waivers. As of this week, the Secretary of HHS has approved waivers for six states and the Secretary has rejected waivers for about three states. There are also a handful of states whose waivers are still pending.  Some of the differences between the states that got waivers and the states didn’t have to do with the makeup of the insurance market in their state.

I think Maine was the first state to receive a waiver from HHS.  Maine has one dominant insurance carrier, which is the Blue Cross plan in that state. They had a historical medical loss ratio that was much lower than the requirements in the ACA.  Maine gave a bunch of information to HHS and showed that if the insurers in Maine were required to meet these medical loss ratios beginning this year that they would have a really hard time doing so and may leave the market. That would leave people in Maine without any insurance options.

Other states like Florida have gotten rejected.  HHS has rejected their waivers because there are a lot more insurers in Florida and the insurers’ historical medical loss ratios were a lot closer to the minimums than the situation that you have in Maine.

Williams:         It sounds like in places like Maine there may be objective, structural reasons why one could argue about destabilization.  For some of the other states that have applied for waivers and perhaps have been rejected, is it more of a political expression?  I don’t think of Florida as an uncompetitive insurance market.  Was it clear on the face of it that that would be rejected or was there some solid economic rationale for it?

Washington:   I think it was probably a little bit of both.  What we’ve heard and seen from insurers throughout this process is that, particularly in the individual markets in a lot of these states, plans were not meeting the minimum medical loss ratios that were in the law.

But particularly from the big insurance companies we’ve seen them make statements in their investor relations activities and others saying that they are restructuring their business, they’re making decisions and they’re taking steps to meet the minimums.

So there may be, in a state like Florida, some local plans that can’t meet the minimums and have to issue rebates and struggle, but overall particularly in a state like Florida where there’s lots of competition by the big national plans, they’re going to meet it.

Recently the Government Accountability Office (GAO) looked at the states’ early experiences in implementing the medical loss ratio. The GAO found that most insurers will be able to meet the medical loss ratio requirements in the Affordable Care Act.

One thing that’s going on in states that are requesting waivers is the issue of insurance brokers, which is very important.  The Affordable Care Act and the HHS rules consider the commissions that brokers make from insurance companies to sell their products as administrative costs.  This is a big portion of the administrative cost line and one that is coming under a lot of pressure as plans are trying to get those costs down.

The brokers are very well connected and, at this point, well organized. They have made a big push to try to reopen the definition so that brokers’ commissions are excluded from the calculation altogether.  So far, the National Association of Insurance Commissioners has agreed with the brokers that they should remove the fees.  There is legislation pending in Congress to remove broker commissions from the MLR calculation, but HHS has chosen not to act.

I think in a lot of these states that are asking for waivers, some of it may very well be driven by the brokers who are really feeling the pinch of the medical loss ratio requirements as plans are cutting their commissions or saying to brokers we are not going to pay your commissions directly.  You’re going to have to get paid either by the employer or the individual if you want to continue your role.

Williams:         From the health plan perspective I would imagine that these MLR limits could be somewhat threatening.  A lot of these are profit-making entities that have to report to their shareholders.  I suppose on the one hand the tradeoff is that they should get a lot more customers if the mandates on individual purchases in particular are upheld within the Affordable Care Act.  But on the other hand, the MLR rules are essentially a profit cap for them.  How do they respond?  Do they have an incentive to raise the premiums or to move into businesses where their profits are not regulated?

Washington:    What you see is a little bit of everything.  If you think about the medical loss ratio in and of itself, it could lead to higher premiums because one way in this calculation for plans to have more money for administrative costs and profits is to raise the overall amount of premiums that it has to charge. But there are a lot of other provisions in the Affordable Care Act that try to prevent that.  So you’ve got an incentive to raise premiums because of the medical loss ratio, but you also have premium rate review and a lot of other things going on in the Affordable Care Act that are further pressing down on premiums and putting pressure on plans.

What we see is plans looking market by market, business segment by business segment to try to figure out where they might want to discontinue operations or where they want to continue and restructure what they’re doing to be able to meet the minimum medical loss ratio.

To your point, there are also a few other things going on where plans are trying to diversify their business lines so it’s not quite as tightly regulated.  One area is growing the business for self-funded employers.  These are large employers that hold the insurance risk for their population themselves and just hire an insurance company to administer the benefits.  That’s one area.  Another area that plans are looking at, like you said, is different pieces of health insurance such as health information technology, clinical decision support, providing claims processing and other services for newly formed accountable care organizations.  You see a lot of the plans trying to diversify their business from fully insured to self-insured to some of these other administrative and clinical services in order to balance out the risk.

Williams:         I can understand the populist appeal of a minimum medical loss ratio approach, but if I think about it from the standpoint of the member or the purchaser of insurance, I wonder whether it really holds up.  If I think about other kinds of insurance that I have like life insurance and car insurance and home insurance, I’m happy when the equivalent of the medical loss ratio is zero on my account because that means I didn’t die or crash my car and my house didn’t burn down.  With health insurance, couldn’t you argue there’s something similar? In a year that I’m perfectly healthy, presumably, I’m highly profitable to the insurance company but I’m also pretty happy that I’m not sick. If they’re taking steps to keep me from being sick and to keep medical costs down, why are they being penalized for that?

Washington:    I think that’s a great question. There are some inherent differences between health insurance and other types of insurance that have evolved over time.  Most health insurance these days isn’t simply catastrophic coverage. There’s a big focus on prevention and wellness, so there’s a lot of things that people who are perfectly healthy or who are relatively healthy and managing various chronic conditions should be doing and the plan should be paying for those things.  Health insurance covers those maintenance costs whereas your auto insurance doesn’t cover the maintenance costs that you have at your dealership, such as rotating your tires and having the oil changed.

But I do think that the medical loss ratio was a provision that has populist appeal.  We’re capping insurers’ profits. But it’s really only one thing.  There are a lot of other things that need to happen in the insurance market overall in order to make coverage affordable for people and accessible to everyone. This is really a small piece that has populist appeal that happens to go into effect really quickly.

Williams:         The Affordable Care Act has a lot of different provisions that are rolling out over a few years.  The medical loss ratio in the current rules, would you say that’s the last word on this topic or will we see an evolution in the approach of medical loss ratio regulation?  I understand your point that there are a lot of other pieces of the puzzle here in terms of cost containment, both on the health plan side and maybe in the delivery system as well, but as far as MLR rules themselves, do you expect some evolution?

Washington:    With rules as complicated as this, there will definitely be some unintended consequences.  We’ve already seen HHS put out a modification of the rules that made some important changes and tried to reduce the administrative burden on plans of the MLR rules.  I think that the big issues have been decided, but I do think that HHS will continue to make tweaks around the edges to make it work better and be less burdensome for plans.  As we go through the process this year of figuring out who met the minimums and how the rebate process works, there will be some more changes.

The biggest issue still hanging out there is this issue of the future of insurance brokers.  This is a very big group of people who are very vocal and this is really their livelihood. So I think that they will continue to try to gain support to have their commissions outside of this calculation altogether.  I don’t think that that will go away.

Williams:         I’ve been speaking today with Bonnie Washington.  She’s Senior Vice President at Avalere Health.  We have been talking about the Affordable Care Act and in particular, the rules about the medical loss ratio.  Bonnie, thanks so much for your time today.

Washington:    Oh, thanks for having me.

December 22, 2011

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