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Industry, Consumer Advocates Divided on Statutory MLR Ratio Calculations

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The NAIC is trying to figure out if medical loss ratio (MLR) rebate payments reflected in the numerator prior to 2014 also should 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.

While a consumer representative opposition said that he does not support the current thinking in the NAIC draft, the health insurance industry does.

IRD14-013 raises the question of which rebates are to be included in the three-year MLR calculations. The issue description addresses whether inclusion should be based on incurred year or payment year. Both the NAIC and the U.S. Department of Health and Human Services (HHS) previously determined that rebates are to be included in the MLR numerator.

The MLR is a financial measurement tool used in the Patient Protection and Affordable Care Act (PPACA) to make sure insurers are spending enough on enrollees. If an insurer uses 80 cents out of every premium dollar to pay its customers’ medical claims PLUS activities that improve the quality of care, the company has an MLR of 80%. An MLR of 80% indicates that the insurer is using the remaining 20 cents of each premium dollar to pay overhead expenses, such as marketing, profits, salaries, administrative costs, and agent commissions.  

America’s Health Insurance Plans (AHIP) says in a letter to the NAIC that it doesn’t see the rationale for expanding the scope of IRD14-013 to deal with other options for including the rebates paid.

AHIP wants the rebates included in the numerator over the three years (incurred), according to what it apparently purports in a document submitted to the NAIC’s MLR Discussion Subgroup  of the 18th Health Care Reform Actuarial (B) Working Group. AHIP and the industry were unavailable for further explanation of their position.

AHIP said in the letter that it intended what is said could be a possible earlier misinterpretation in its June 27th letter, which may have mistakenly expressed a desire to change methods.

“Our intent was to note that if rebates, and other experience rating credits, were not included in the numerator, then standard statutory accounting would require them to be deducted from the denominator, so that complete exclusion…does not seem to be a reasonable treatment,” a consultant to  AHIP wrote. For drafting the AHIP position, the trade association hired Omega Squared consultant William C. Weller.

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 with the NAIC on occasion in its approach to dealings with the HHS, which oversees it.

The MLR Subgroup is looking at how rebate payments in years before 2014 will effect the 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. 

The document in opposition, written by consumer advocate and Washington & Lee University School of Law Professor Timothy Jost, had submitted a table, showing what he believes is the right cumulative MLR occurring when prior year rebates are excluded from the numerator, but the industry called his calculations “highly misleading,” and did its own.


Jost had argued that the approach recommended by IRD14-03 does not achieve the statutory MLR thresholds of 80% or 85% if the insurer prices to achieve an MLR below 80% or 85%, and the NAIC formula won’t produce a sufficient rebate, as required under the Affordable Care Act.

Jost assumes that a carrier prices products to achieve a loss ratio of 70% each year, but then issues rebates. However, with the rebates included in the numerator, the  NAIC IRD014-013 formula will not produce a sufficient rebate, since the sum of the money spent as well as rebates does not reach 80%, but converges to about 76%.  If the rebates are not added into the numerator of the formula for subsequent years, then each year the rebate is sufficient, he said.

First, AHIP wrote, “we do not believe that a continuing assumption of a 70% pricing standard is reasonable. All else being equal, this would require premiums 14.3% higher than pricing at an 80% loss ratio. This probably could not be sustained in a competitive marketplace.”

“Furthermore, including rebates in the MLR numerator does not necessarily eliminate the excess of the cumulative MLR above the threshold; it may only reduce the excess.”

AHIP points out that if prior rebates are included in the numerator, the cumulative MLR, including rebates, will still be above 80%, as required, looking at a specific seven-year tally of experience-based MLRs, from 74% to 86% with averages around 80%.

With three year averaging, if the threshold has been met in prior years (whether by initial pricing or by rebates), but the current year’s experience does not meet the threshold, the impact of that year’s experience for MLR calculations (and potential rebates) occurs throughout the three years that any below threshold experience is included in the MLR calculations.

AHIP concludes that there is more than one way to skin a cat, or meet MLR requirements: “If an issuer has paid a rebate for a given year in accordance with the prescribed MLR calculations, then it has in fact met the statutory threshold for that year, just as much as if the initial pricing met the threshold and no rebate was necessary.”

The MLR has been a contentious issue since it was written into the recently upheld law. 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 HHS.

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.