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PPACA: State regulators eye loss ratio formula

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Health insurers and the people who speak for consumers in proceedings at the National Association of Insurance Commissioners (NAIC) are clashing in discussions about medical loss ratio (MLR) computations.

The Patient Protection and Affordable Care Act of 2010 (PPACA) now requires insurers to spend at least 80 percent of individual and small group revenue and 85 percent of large group revenue on health care and quality improvement efforts or else provide rebates.

America’s Health Insurance Plans (AHIP) and the Blue Cross Blue Shield Association say insurers should be able to treat the PPACA rebate payments as expenses when calculating MLRs starting in 2015.

Shari Westerfield, a senior actuary with the Blues, said that PPACA itself does not distinguish between the value provided to policyholders through medical expense payments and through rebate payments, and that precedent is on the insurers’ side.

“The NAIC previously recognized that the MLR rebates provide the same value to policyholders as experience-rating refunds and prescribed the same accounting treatment for the rebates as for other experience-rating refunds,” Westerfield wrote. “For purposes of the MLR calculation, the NAIC determined that experience-rating refunds should be included in the numerator of the MLR.”

That means insurers should include MLR rebate expenses with claims expenses in the MLR formula, Westerfield said.

Timothy Jost, one of the consumer representatives, said the NAIC consumer reps want insurers to keep rebate payments out of the MLR computations.

“The intent of the statute is to ensure that a plan which fails to achieve this target must pay a rebate,” Jost wrote in a letter to the NAIC’s Health Actuarial Task Force.

If an insurer can treat PPACA MLR rebates as ordinary claims expenses, the insurer might have an incentive to increase the price of individual or small group coverage, in such a way that the MLR will be below 80 percent, and then simply make up for money spent on rebates by including the rebates in medical expenses for the following year.

If an insurer always prices coverage too high, “consumers will never realize the full medical loss ratio to which they are entitled under law,” Jost said.

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