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Musings on the MLR

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As we ended the summer of 2012, the Obama administration touted one of the more popular aspects of the Affordable Care Act – the requirement that health insurers spend at least 80 cents of every premium dollar on medical care and health care quality (85 cents for large employer groups purchasing health insurance), and if they do not, requiring these insurers to rebate the difference back to subscribers or their employers. According to the Administration, the “80/20 Rule” or the “Medical Loss Ratio (MLR) Rule,” as it alternately known, resulted in 12.8 million Americans receiving directly or indirectly more than $1.1 billion in health insurance rebates this past August. The 80/20 Rule sets this national minimum MLR standard that can only be lowered by a state’s insurance commissioner applying for, and receiving, a waiver from HHS. To receive a waiver, the state has to demonstrate that the application of the 80 percent threshold may destabilize the individual market. These waivers have been hard to come by – at least 18 states and territories have sought HHS approval to permit their insurers to spend below the 80 percent threshold on medical care and quality in the individual and/or small group markets (and therefore to spend more than 20 percent for administrative expenses and profits). Yet HHS has only approved six of these waivers, and most at levels, and for durations, different than requested by the state. On the flip side, states that want to impose a higher MLR threshold – like Massachusetts at 90 percent, and New York at 82 percent — have done so without federal approval.

Meanwhile, this past month, House Republicans have advanced legislation that would give states the authority to adjust the MLR down in the individual and small group markets in their state without federal approval, thereby giving insurers greater flexibility to spend more on administrative expenses, and to earn higher profits. House Bill 1206 is primarily designed to allow insurers to count broker fees as “medical expenses” in their MLR calculation, a policy choice that continues to be hotly debated between the broker industry and consumer advocates. But buried in the bill is a provision that would require the Secretary of HHS to “defer to the State’s findings and determinations regarding destabilization” of their individual and small group markets in justifying lower MLR thresholds. The bill has over 200 sponsors, bipartisan support, and was recently approved by the House Energy and Commerce Subcommittee.  

What is particularly interesting in following the proposed tweaking of the MLR Rule is that there appears to be an acknowledgment by lawmakers on both sides of the aisle, and many stakeholders across the health care spectrum, that some minimum MLR requirement on insurers makes sound public policy. But does it?

Not necessarily. As recently posted by David Kestenbaum on NPR’s Planet Money Blog, “as is sometimes the case, what is popular with the people is not so popular with economists.” Kestenbaum spoke with six health care economists, and he claims that none thought the MLR would do much good, “and several thought it could be harmful.” In particular, he cites Jonathan Gruber, an MIT economist who helped write the ACA, as opposing the idea of a minimum MLR requirement, and indicating that “the rule has the potential to do exactly the wrong thing — to drive up the cost of health care.” Here are a couple of my own thoughts on some of the problems with relying on a minimum national MLR requirement as opposed to addressing health care costs directly:

  • It assumes there are no competitive health insurance markets   in competitive insurance markets (like in Massachusetts), competitive forces provide the incentives that drive insurers to offer consumers the highest quality products at the lowest possible premium rates. Massachusetts insurers are consistently the highest quality insurance plans in the country (as ranked by the NCQA), while having among the lowest administrative costs and margins. This has been the case even before Massachusetts lawmakers recently required these insurers to meet a 90 percent MLR for 2012 and 2013 – by far the most stringent threshold in the country. Ironically, some of the states with the least competitive insurance markets (the ones that, arguably, would benefit from a more stringent MLR requirement), are those states that received waivers from HHS that allow their insurers to meet lower MLR thresholds. 
  • It penalizes the most efficient insurance carriers – in a competitive market (without an MLR requirement), if an insurer is able to reduce medical expenses below targets, it is rewarded with additional margin that it can invest in innovation and infrastructure, making it an even more competitive and efficient market participant. But under the MLR Rule, it must give that money back. As one insurance executive has observed, the MLR Rule gives plans the incentive to spend money on staff and systems that could reduce medical expenses and improve quality, but little incentive to actually achieve those savings and quality improvements.

Of course, many stakeholders and policy makers believe health insurance markets are far from competitive, and argue that the MLR requirement – which is essentially a form of rate regulation – is necessary to force insurers to become more efficient. They may be right – in the short term. But in the long term, as Professor Gruber observed, the MLR requirement may prove counter-productive in the fight to reduce actual health care costs. 

EBG counsels insurance carriers on MLR compliance as well as ACA implementation requirements. For more information, contact the author at jcaplan@ebglaw.com.