The Medical Loss Ratio Requirements Are Being Carefully Crafted

Aug 25, 2010

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In their August 23 opinion column, Douglas Holtz-Eakin and Michael Ramlet attack both the new health overhaul law's requirement that health insurers spend a minimum percentage of their premium revenues to benefit their enrollees and the process through which it is being implemented. As a National Association of Insurance Commissioners consumer representative, I have been engaged all summer in the NAIC's meticulously transparent and participatory process for implementing the medical loss ratio requirement. Holtz-Eakin and Ramlet present a distorted perspective of both the requirement and the process.

We can all agree that the high and rapidly growing cost of health care has reached crisis proportions.  Indeed, many have criticized the health law for not doing enough to control costs.  But health care costs as experienced by consumers include not just the cost of clinical health care services, but also the administrative costs of private health insurance. 

A recent Wall Street Journal article reports that some insurers spend 65 percent or less of their premiums on health care services. Before we ration access to health care services or cut the pay of health care providers, shouldn’t we encourage health insurers to be more efficient? That was the judgment of Congress in enacting section 2718 of the new health law, which requires insurers to spend at least 80 percent of their premium revenues in the individual and small group and 85 percent in the large group market on clinical health care services and on "activities that improve health care quality." 

Under section 2718, insurers that fail to achieve these "medical loss ratio" targets must rebate the difference between their actual expenditures and the target to their customers. Although insurers can still apply all of their investment income to administrative costs and profit, they will face a significant incentive to spend more of their revenues on health care. The grandfathering rules announced this summer should also encourage greater efficiency, since like the MLRs, they discourage unreasonable cuts in benefits as a share of premiums.

Far from being the bludgeon that Holtz-Eakin and Ramlet condemn, however, section 2718 is a finely-tuned instrument.  First, it allows for various deductions from the premium revenues counted in the denominator, excluding some taxes, regulatory fees, and risk adjustment payments. Second, it permits the Department of Health and Human Services to "adjust" the required ratios on a state-by-state basis during a transitional period to avoid destabilization of the individual market. Third, it requires implementing regulations to take into account the circumstances of newer, smaller and different types of plans. Finally, and most importantly, the law delegates to the NAIC, the nation's recognized experts on insurance regulation, the task of establishing definitions and methodologies for implementing section 2718, leaving to HHS only the task of certifying the regulations.

The NAIC has taken this responsibility very seriously. It established two working groups to implement 2718.  One has designed a form for insurers to report the expenses that go into calculating the MLR and established the definitions to be used to complete that form. The NAIC unanimously approved this form at its Seattle summer meeting. A second group is still working out the rules that will be used in actually calculating the MLRs. This group has struggled with difficult problems such as how to treat small health plans whose experience varies considerably from year to year or plans that pay for services on a capitated basis, as well as how to deal with the transition between now and 2014. 

Accommodations being made will assure that many Americans will be able to keep the insurance plan they now have, even if it does not initially meet the targets. Both working groups have carried out their assignments through open conference calls, sometimes involving over 400 participants, in which the industry, consumer groups and other interested parties have had their say. The working groups have met from two to four hours a week over a nearly four month period.

One important issue has been defining the activities that improve health care quality. The NAIC definition is broad and flexible. Expenditures for activities that improve health outcomes, prevent rehospitalizations, protect patient safety, promote wellness and some health information technology expenditures, are all allowable. If insurers devise new approaches to quality improvement, they can request that these activities be recognized as well. 

The yet unfinished task of defining the taxes that can be excluded from the ratio has also been contentious. A deduction for "federal taxes" was added to the MLR formula by the Senate right before it passed the legislation in December 2009. The chairs of the six committees that drafted the legislation have explained that only the three new federal insurance taxes added by the health law were intended to be excluded, and unless one is prepared to call them liars, this must be accepted as what they meant. 

The statute links federal taxes with premium revenues and licensing and regulatory fees in the same sentence, making the intended reading quite plausible. Taxes have always been administrative costs under state MLR formulas. To say that including taxes in premium revenues is double taxation is silly.  Rebates are payments to consumers, not to the government, and thus are simply not taxes. 

The claim of Holtz-Eakin and Ramlet that Congress’ "interjection" into the regulatory process is "unprecedented" is surely disingenuous. Congress has always kept a close eye on legislative implementation, as Holtz-Eakin must remember from his days in the Bush White House. Political circumstances required Congress to pass the health overhaul without a conference committee report, making it likely that Congress will continue to clarify what it intended.  

For the present, however, both the NAIC and HHS are pursuing a careful, open process to implement the MLR legislation. Once implemented, the efficiencies driven by section 2718 will benefit millions of American health insurance consumers by holding down the cost of health insurance.