Managing Healthcare Costs: Medical Loss Ratio

Today’s Managing Health Care Costs Indicator is $1.93 billion

The Commonwealth Fund released a study today estimating that insurers would have had to refund almost $2 billion to employers and consumers in 2010 if the Affordable Care Act provisions requiring “medical loss ratios” of at least 80-85% were in place.

The paper reviews MLR methodology -and points out that the Affordable Care Act has a broader definition of medical cost than that traditionally used by actuaries – including quality and antifraud programs, excluding tax payments from consideration, and allowing for additional administrative cost for plans with very few members. A number of states have received waivers – and the decreased rebates due to waivers is modeled in the calculations.

The rebates would have been highest in the individual market (53%; an average of $183 per policy), but lower for small group (24%; $85 per policy) and lowest for large group (15%; $72 per policy). This is not necessarily because health insurance plans are fleecing individuals. The MLR includes everything besides for claims costs paid to providers, and the marketing and administration costs are much higher for policies sold to individuals compared to policies where a single signature arranges insurance for hundreds or thousands of policyholders.

Some states already regulate MLR – and no insurers would have owed rebates for individual insurance in Hawaii, Rhode Island and Vermont, while 98% of the market would be owed rebates in Kentucky, and 95% in Arizona. Insurers representing 12% of the Minnesota market would have owed rebates, even though that state prohibits for-profit insurers.

I wouldn’t expect that health care costs would have been $2 billion lower if the ACA had been in place in 2010. There is considerable judgment in determining what is a medical cost and what is a nonmedical cost. When insurer stock price soared with low MLRs, health plans were more likely to count slightly clinical services as nonmedical. With regulations to prevent low MLRs, health plans will do all they can to move arguably nonclinical costs into the medical loss ratio.

While the MLR ratio requirements won’t save as much money as suggested in this white paper – it does put pressure on health plans to reduce nonmedical costs. That pressure will force tiny plans to consolidate, which will help them increase efficiency. It discourages health plan arms races that lead to inordinate investments in expensive marketing. It is likely to put downward pressure on brokers’ fees– and lead to health plan products that are simpler to administer and need fewer explanations. This regulation pressures the individual health insurance market to deliver health care products that have far more value to health care consumers (aka patients.)

That seems like a great idea to me.

Click on image to enlarge. Source

Today’s Managing Health Care Costs Indicator is 80%

Health care reform requires that commercial health plans spend at least 80% of their collected premium on delivering medical care. The idea of this rule is to prevent bloated administrative costs, including executives with sky-high compensation, high profit margins for shareholders of public companies, and massive administrative structures which add cost but not value to health care. But the devil, of course, is in the details. The Times reports that health plans are frantically lobbying to reclassify some costs as medical costs.

Insurers have focused on the “medical loss ratio,” or MLR, for years. Wall Street analysts routinely issue “sell” ratings for health plans with high MLRs, and regard health plans which have low MLRs as likely to ‘outperform’ the market. That’s why many plans sought to keep their MLRs low to please Wall Street, even if now they will need to keep MLR high to please regulators. But MLRs are like most of accounting – and are far more subjective than they might at first appear.

How do health plans spend their premiums?

They pay for health care delivery – cut checks to doctors, hospitals, pharmaceutical companies, medical device companies, and all sorts of other parties who directly deliver health care. Those payments are unequivocally part of the medical loss ratio – there is no argument.

BUT – some health plans, like Kaiser Permanente, pass more of their premium dollar on to their delivery system (the Permanente Medical Organization for outpatient and professional care). The Kaiser delivery system does some of the medical management that would be done by one of the national health plans (like Anthem, Aetna, Cigna or United) for providers not in an integrated system. So, there is general agreement that the cost of medical management programs, whether done by providers or done by health plans, can also be counted in the MLR.

There are some things health plans do which pretty obviously should NOT be counted in the MLR. For instance, a health plan sponsors a local baseball team, or purchases advertisements on television. I don’t think anyone would argue that this should be part of its medical loss ratio. Same goes for stock dividends, or bonuses for the senior leadership team. These are administrative expenses, plain and simple.

Then, there are health plan activities that might improve health care delivery, but feel very much like health plan administration. Aetna argues that its fraud detection programs should count as part of the MLR. Anthem wants to count its physician credentialing activities. AHIP wants MLR to include any health plan expense to move from ICD9 to ICD10, a method of classifying diagnoses.

The Washington Post reported that Anthem/Wellpoint recategorized a half billion dollars of expenses from administrative to MLR in April.

Many health plans are also seeking to exclude payments to brokers from the definition of premiums collected, since these premiums were not available to the health plan, and the brokerage commissions are critical to making health insurance available (much as it’s often hard to sell a home without a realtor).

There’s also another problem of small numbers. Health plans will be judged state by state, and some health plans have very small populations in some states. These small enrollments might have a low (or high) MLR based on chance alone, and this regulation could cause health plans to further consolidate or to forego expansion to contiguous states, diminishing competition. The Maine insurance regulator has requested a waiver from the 80% rule, fearing that one of two remaining health plans in that state would abandon Maine if forced to lower its profit margin.

My business school accounting professor, Mike Kirschenheiter, asked us to recite “There is no truth in accounting” at the beginning of each class session. He went on to point out that subjective decisions inherent in accounting should be made with a clear vision of the goals. In this instance, the goal is that health care premiums are used to improve health care. We should keep this in mind as regulators clarify what is counted in the “medical loss ratio.”