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PPACA: Minimum MLR Talks Turn to Reinsurance

by Allison Bell

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A National Association of Insurance Commissioners (NAIC) panel is debating how to treat reinsurance arrangements in medical loss ratio calculations.

The Patient Protection and Affordable Care Act (PPACA), part of the federal Affordable Care Act package, will require the MLR, or percentage of health coverage premium revenue spent on health care and quality improvement efforts, to be at least 80% for individual and small group health coverage and 85% for large group coverage.

If administrative costs are too high, insurers or plans are supposed to provide rebates.

The PPACA Actuarial Subgroup at the NAIC’s Accident and Health Working Group has been developing the detailed definitions needed to implement the minimum MLR provisions.

The subgroup recently posted a draft describing a number of minimum MLR issues on its section of the website of the NAIC, Kansas City, Mo.

Some of the questions under consideration have been treatment of new business, procedures for handling the experience of multi-state employers, and whether “grandfathered” plans that stay exempt from some PPACA rules should be separated from non-grandfathered plans for purposes of rebate calculations.

The subgroup also has been talking about reinsurance. Questions have included, “Should incurred claims and earned premiums used in the calculation of medical loss ratio for rebate calculations be on a net of reinsurance basis?” and “How should payments or receipts for risk adjustment, risk corridors and reinsurance be reflected in the MLR calculation?”

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The NAIC has talked about taking reinsurance out of all figures when an insurer transfers 100% of the premiums and claims for policies, but excluding the effects of “quota-share reinsurance that covers a percentage smaller than 100% of the claims obligations, because quota-share reinsurance can be used to ‘game the system’ by blending a low MLR from one company with a high MLR from a second company in order to avoid paying rebates based on the low MLR.”

The American Academy of Actuaries, Washington, says the rules should promote use of “net-of-reinsurance” figures with some restrictions, to avoid carrier efforts to use reinsurance to reduce or avoid rebates payable to enrollees.

Carriers should be able to include the effects of reinsurance agreements that serve legitimate risk management purposes, academy members told the NAIC.

Allan Schwartz, a risk consultant who represents consumers in NAIC proceedings, has argued that the MLR calculations should exclude the effects of reinsurance.

If regulators do permit use of commercial reinsurance in MLR calculations, regulators should keep transactions between affiliated entities, transactions which involve both ceding and assuming reinsurance between separate insurance groups, transactions involving ceding commissions, and transactions involving a low level of loss from the MLR calculations, Schwartz told the NAIC.

“For excess of loss reinsurance, the attachment point should be sufficiently high so that only significant risks are transferred,” Schwartz told the NAIC. “The attachment point should have an absolute dollar minimum (e.g., $250,000) and an alternate minimum related to the size of the insurance company (e.g., 2% of surplus, 1% of overall company premium, etc.). This second minimum is needed because while $250,000 may be a significant amount for some health insurance companies, for other health insurance companies that could be an insignificant amount”