It’s safe to say that the medical loss ratio provisions in the Patient Protection and Affordable Care Act are among the least favored facets of the law, at least by benefit brokers.
This summer, a bipartisan bill that would separate broker compensation from the MLR rules in the legislation won plenty of praise from brokers and agents who have argued that the law’s provision is threatening their livelihood.
The Access to Professional Health Insurance Advisors Act — H.R. 2328 — was introduced by Reps. Mike Rogers, R-Mich., and John Barrow, D-Ga.
The Independent Insurance Agents & Brokers of America said the bill would “preserve consumer access to agents and brokers.”
“Since going into effect more than two years ago, the MLR regulations have had a detrimental impact on agents and brokers,” Charles Symington, IIABA senior vice president for external and government affairs, said in a statement.
The legislation would provide “much needed relief to health agents and brokers across the country” by clarifying that agent compensation is not an insurance company administrative expense.
Now, whether the legislation actually gets anywhere is the big question. Congress recently returned from its summer recess, but mostly it’s been occupied by Syria, the budget and bigger issues than the MLR.
Here, the answers to seven critical questions to help you understand the ins and outs of the MLR provisions of the PPACA:
1. What are the health reform provisions relating to reducing the cost of health insurance?
Health reform added PHSA Section 2718 entitled “Bringing Down Cost Of Health Care Coverage.” The purpose of the law is to limit the amount insurers can spend on administrative costs. If an insurer exceeds the limit, it is required to rebate the excess. The medical loss ratio (MLR) is the cost of claims plus amounts expended on health care quality improvement as a percentage of total premiums, excluding taxes, fees, and adjustments for risk adjustments and risk corridors, as well as reinsurance.
Health care reform’s Medical Loss Ratio rules became effective Jan. 1, 2011, and the first rebates were required to be issued on Aug. 1, 2012. These rules apply to individual insurance policies and insured group plans but not self-insured health plans. Insurers must provide rebates (refunds) if their percentage of premiums spent on medical claims (and quality improvement) for policies issued in a state is less than 80 percent in the small group and individual markets or 85 percent in the large group market.
Until 2014, the rebate is to be calculated using the figures for the reporting year. Beginning on Jan. 1, 2014, the calculation to determine rebate amounts will be based on the average ratio over the previous three years. Notices of rebates must be sent to both plan sponsors and participants in the plan to which the rebate relates.
Rebates must be paid by Aug. 1 of the year following the year for which the medical loss ratio (MLR) data are calculated. Insurers must also report how the rebate was calculated. Insurers who fail to comply with the law are subject to civil fines to be assessed by HHS up to $100 per day per individual affected by the violation.
2. How may the insurance company rebates be paid to persons (“enrollees”) purchasing individual policies in the individual market?
For current individual policy owners, insurers may issue rebates in the form of either a premium credit, a reduction in the premium, or a lump-sum payment. For former individual policy owners, only a lump-sum payment is permitted. If an insurer finds that its MLR is lower than the standard required during an MLR reporting year, it may also institute a premium holiday to avoid paying rebates, but only if permitted under state law. An insurer seeking to suspend or reduce premiums must obtain permission from the governing state agency and do so in a non-discriminatory manner. An “enrollee” for rebate purposes is the policyholder or government entity that paid the premium for healthcare coverage received by an individual during the respective MLR reporting year.
In addition to a premium credit or a lump-sum payment, if the premium is paid using a credit or debit card, an insurer is permitted to return the entire rebate to the account used to pay the premium and no additional fees are charged.
3. How are insurers to pay rebates in connection with employer health insurance plans?
If an employer selects the insurer and administers the health insurance plan, it is an employee welfare benefit plan and subject to ERISA. Section 3(l) of ERISA describes an employee welfare plan as “any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise . . . medical, surgical, or hospital care or benefits.”
Insurers must provide rebates for group health plans subject to ERISA (private employers) or the PHSA (state and local governments) to the policyholder, which is generally the employer sponsoring the plan. For these plans, the rebates can have both ERISA and income tax ramifications.
4. What if the plan has been terminated when the rebate is due?
If a group health plan, regardless of whether it is subject to ERISA, has been terminated at the time of rebate payment and the insurer cannot, despite reasonable efforts, locate the policyholder (the employer), the insurer must distribute the entire rebate, including the employer’s share, to the participants who were enrolled in the terminated plan during the MLR reporting year on which the rebate was calculated by dividing the rebate equally among the individuals entitled to a rebate. If an insurer is able to locate the policyholder with respect to a terminated ERISA plan, the policyholder would need to comply with ERISA’s fiduciary provisions when handling any rebate. Despite the fact that the plan has been terminated, the plan document should be consulted and its terms followed. If the plan document does not provide direction, the employer must pay the employees’ portion to them unless it is not cost-effective.
5. What if the MLR limits on insurers cause financial problems for insurers?
HHS may “adjust” (but not waive) the MLR target in individual states where enforcement of the 80 percent target would “destabilize” the individual market. HHS must provide detailed, public information as to its conclusions and the public may comment. HHS may elect to hold a hearing and must respond promptly to state requests.
6. Do the MLR rules limit commissions paid to brokers and agents?
Brokers and agents commissions reportedly may account for 5 percent or more of premiums as of this writing. The statute requires that sales commissions be counted as administrative costs, although HHS could consider such compensation in assessing market destabilization.
7. How is the MLR computed?
The numerator of the MLR formula includes reimbursement of claims for clinical services and expenditures for quality improvement activities. Clinical services reimbursement includes direct payments for services and supplies as well as changes in contract reserves (where an issuer holds reserves for later years when claims are expected to rise as experience deteriorates) and reserves for contingent benefits and lawsuits. Payments under capitation contracts with providers may be counted fully as claims, but insurers must count as administrative costs rather than claims costs payments made to third party vendors (such as behavioral health or pharmacy benefit managers) that are attributable to administrative services.
The definition of quality improvement activities found in Section 2717 of the health reform law is used for the MLR rules. Quality improvement activities include activities that:
- improve health care outcomes,
- reduce medical errors,
- improve patient safety,
- encourage wellness and prevention, and
- reduce rehospitalizations.
- MLR quality improvement costs also include:
- related IT expenses,
- the cost of healthcare hotlines,
- the cost of collecting and reporting quality data for accreditation purposes, and
- expenditures for facilitating the “meaningful use” of certified electronic health record technologies.
Prospective utilization review may be considered quality improvement to the extent it is intended to ensure appropriate treatment, but concurrent and retrospective utilization review activities are administrative costs.
The regulations provide that the MLR is calculated as follows:
medical care claims + quality improvement expenses
premiums – (federal and state taxes + licensing and regulatory fees)
Fraud Prevention. PPACA does not allow insurers to count fraud prevention costs in the numerator as quality improvement expenses. However, the rule allows insurers to offset their fraud detection and recovery expenses against successful fraud recoveries.
Quality Improvement Expenses Must Be Verifiable and Objective. The HHS rule states that only activities “capable of being objectively measured and of producing verifiable results and achievements” can be counted as quality improvement. The preface to the HHS rule states: “While an issuer does not have to present initial evidence proving the effectiveness of a quality improvement activity, the issuer will have to show measurable results stemming from the executed quality improvement activity.”
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