Medical loss ratios (MLR) are all the buzz at the moment in the insurance world, and some folks may have noticed little snippets seeping into the mainstream media as of late. So, what is this all about and what’s the big deal?
Well, under the health reform law, health insurance companies are required to disclose detailed information on how they spend their customers’ money. A MLR is essentially the ratio of how much they spend on health care services versus how much they spend on administrative stuff like advertising and salaries. Under the ACA, health insurers have to spend a minimum of 80% (New York actually passed a state law last year that says insurers need to have an MLR of at least 82%), or 80¢ out of every premium dollar, either to pay for health care services or on improving the quality of those services For large employer plans, this MLR is bumped up to 85%. Insurers that don’t meet these requirements need to send out rebates to their customers at the end of the year.
The MLR conversation has heated up lately because one of the ways that insurance companies can cut their administrative costs in order to meet the new requirements is to lower the commissions they pay to agents and brokers for enrolling customers in their plans. The broker community has responded, in part, by requesting that broker commissions be reclassified from an “administrative expense” to a “health care quality” expense.
There is controversy in shifting these costs to consumers, however. If these costs are kept under the “administrative” side of the MLR, insurance companies can protect their own profits by instead cutting commissions and thus hurting the broker community. But, if these costs are shifted to the health care services side of the MLR, the customers will get hurt because they don’t have a way of protecting themselves from the new costs. These administrative costs will instead cut into the percentage that insurers will pay for their customers’ health care costs and the consumers will have to pay more out-of-pocket for their health care to make up for it.
So, as you can see, it’s kind of a double-edged blade.
But here’s some food for thought. The National Association of Insurance Commissioners (NAIC) recently did a study to determine the impact of these new MLR requirements in the ACA, and they found that it is already showing results. Claims costs are not growing as fast as they have in the recent past and insurers are moderating premium increases to avoid paying rebates.
Looking at last year’s MLRs, prior to the new requirements, the NAIC found that had the new rules been in place then, American health care consumers would have been paid almost $2 billion in rebates. This year, rebates this large or larger can be expected from insurers that have not reduced their premiums costs to account for the new MLRs.
The NAIC also found that taking agent and broker commissions out of the administrative portion of the MLR would cut customer rebates by more than 66% of this amount—$1.27 billion – and raise health care premiums going forward.
Remember, as a result of our own state law which raised New York’s MLR to 82%, insurers in our state have recently been ordered to refund over $114 million to New Yorkers (see the November 10th blog post, below) becuase they didn’t meet our state’s MLR requirement. So, these refunds are the real deal.
The NAIC is expected to vote Tuesday on whether to recommend to congress that this change be made. There is potentially a lot riding on their decision no matter which way they go, so many eyes will be watching to see which way this goes. HCFANY, for one, will be watching too.
I couldn’t find the NAIC report on their lovely and extremely complex website, but I did find a staff report put out by the U.S. Senate Committee on Commerce, Science and Transportation’s Office of Oversight and Investigations, which cites the NAIC data heavily. It’s pretty short too. You can click here if you’d like to read it.