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MLR Calculations to Get Even More Complicated

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The National Association of Insurance Commissioners (NAIC) has been working to figure out how to correctly compute health insurers’ medical loss ratios (MLR) for future years, as mandated under the Patient Protection and Affordable Care Act (PPACA).

For example, committee members are asking in draft documents whether reporting of MLR rebate calculations for 2014-2016 be modified to reflect reinsurance, risk corridor payments and risk adjustment payments and credits.

They are also asking: Should the MLR rebate payments reflected in the numerator prior to 2014 also be reflected in the numerator in 2014 and 2015 if they represent an incurred rebate for one of the three calendar years in the current year’s MLR calculation?

The documents are still in their early phases and are emblazoned with the caveat that they do not represent the position of the NAIC.

The MLR has been a contentious issue since it was written into the recently upheld law. As health insurance agents and brokers are aware, the MLR provision in the PPACA requires insurers to spend at least 80% of individual and small group health insurance premiums and 85% of large group policies on medical or quality improvement expenses.

Since it went into effect in January 2011, the MLR has prompted most insurance companies to slash the commissions of insurance agents and brokers, say agent groups. The MLR has publicly split the NAIC on occasion in its approach to dealings with the U.S. Department of Health and Human Services (HHS), which oversees it.

The NAIC’s Health Care Reform Actuarial (B) Working Group (HCRAWG) MLR Subgroup is looking at how rebate payments in years before 2014 will effect MLR calculation in subsequent years in draft paper IRD14-013.

The MLR subgroup wrote that to “avoid a situation where an issuer pays a rebate based upon multiple years of experience where a rebate has been paid previously, the numerator of the MLR formula includes previous rebates paid for the last two previous years included in the formula.”

For example, in the 2012 reporting years MLR calculations (done in 2013), an issuer will include the rebates paid in 2012 from the 2011 reporting year in the numerator if the 2011 and 2012 experience is combined. But an issue will not include rebates incurred as part of the 2012 reporting year calculations.

Previous rebates paid in the last two years for a reporting year that is not one of the last two actual years are not to be included in the formula, concluded the NAIC subgroup. Thus, any rebate paid in 2012 for the 2011 reporting year is not to be included in the 2014 MLR calculation, but rebates paid in 2013 for the 2012 reporting year are to be included.

Timothy Jost, an NAIC consumer representative, health insurance law professor and textbook writer at Washington and Lee University School of Law, opposed the subgroup’s calculation, stating that it “does not achieve the statutory MLR thresholds of 80% or 85% if the insurer prices to achieve an MLR below 80% or 85%.”

Jost assumes that a carrier prices products to achieve a loss ratio of 70% each year. He says that if the rebates are the previous rebates are not added to the numerator of the formula for subsequent years, then each year the rebate is sufficient for the sum of the (losses + rebates ) / premium to equal 80%. Otherwise, it will be about 76%, he says, which is too low.

In, RD14-016, the HCRAWG MLR Subgroup recommended that reporting of MLR rebate calculations for 2014-2016 be modified to reflect reinsurance, risk corridor payments and risk adjustment payments and credits –or “the 3Rs.”

Much of the calculation is contingent on information and guidance from the states and from HHS, so carriers need to pay careful attention to updates and changes from multiple regulators.

The MLR subgroup tentatively says that reinsurance will not be reflected in risk adjustment.

An insurer must attribute reinsurance payments and contributions and risk adjustment payments and charges to the benefit year to which they apply. A potentially significant change to the 2015 risk adjustment values, the subgroup warned, could come from the effect of a modification to risk adjustment payments and credits based on errors in the 2014 risk adjustment calculations.

To fairly complete the MLR calculation for 2014 through 2016, a transitional series of delayed due dates is necessary, the subgroup stated. MLR calculations for 2014 and 2015 should be due two months after HHS provides risk adjustment payment and credit amounts (projected date is 6/30/2015).

The hope is that states will be able to resolve all reinsurance program calculations by this time. Companies can complete preliminary MLR calculations similar to what is used for 2011-2013 (i.e. without accrual for the 3Rs) and await the detailed data on reinsurance (from the States) and risk adjustment (from the States or HHS), which should be prepared for direct input into the MLR calculation forms.

There are also contingencies to the calculation depending on the results of audits, but calculations should be clearer by 2017.

Whether or not the same period should be applied to 2016 will depend on the experience from 2014, including the potential impact on 2015 from the results of audits, stated the subgroup recently.

For 2017 and thereafter, the experience from 2014 through 2016 should allow companies to more accurately estimate the accruals for risk adjustment. And there will be no risk corridor program then, the subgroup pointed out.

On other MLR matters, there is no word from industry or the Hill on the stalled MLR relief bill, H.R. 1206, to provide a fix for agents’ compensation/commissions on the ratio.

Agents and brokers say health insurers are citing the provision as a reason to slash producer commissions or to eliminate producer compensation. Producers have been arguing that MLR calculations ought to exclude producer commissions, because, producers say, customers pay the commissions; and insurers collect the commissions as a convenience for the customers.

If implemented as written, H.R. 1206 would get producer compensation out of the MLR calculations.


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