What's in a Medical Loss Ratio?

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.” 

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Administrative Waste In Office Practice

Today’s Managing Health Care Costs Indicator is

$7 billion dollars

Even in health care, $7 billion is a lot of money.   Athenahealth, a major force in physician billing, puts out a “pain in the butt” index each year, indicating how difficult each insurer makes it for physicians to collect their fees.  Athenahealth suggests that the excess cost of physician billing due to the multitude of different rules and different requirements from health plans is $7 billion. There, I’ve said it three times.

A few ‘fun facts’ from the NPR Planet Money podcast  about this:

• o   The average physician gets 1000 faxes from insurers each month
• o   Athenahealth bills 1700 different insurers. This vastly understates the issue, since each insurer has hundreds or thousands of plan designs, often dictated by self-insured employers.

o    

Researchers at the Mass General Physicians Organization published an insightful article in Health Affairs a few months back  simulating how much money this physician practice spends coping with the myriad of different insurer rules and requirements.  I’m pretty sure this article is where the $7 billion figure comes from.    The researchers built a new staffing model assuming that there was a single payer with uniform Medicare-like rules, and were able to reduce their total office costs by 12%.              

A few critical findings from this study (of 2006 claims)

• o   18.2% of claims were rejected in the first place on ‘nonclinical’ grounds. It’s hard to reject a clain on clinical grounds!
• o   They calculated wasted physician time per physician at 4 hours per week, and wasted nurse time at 5 hours per week.
• o   4 out of every 5 rejected claims were eventually paid

The MGH researchers only calculated the cost of this patchwork system in the physician office.  This calculation doesn’t include the cost of processing on the health plan side.

There’s no perfect answer to this mess.  HIPAA had requirements for standardizing billing requirements, and billing is much better structured already then, say, electronic medical records

I’m not confident that eliminating administrative waste alone would make health care affordable,.  But clearly creating administrative efficiency will be critical to managing health care costs.

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Preventive Services Regulations Issued

Today’s Managing Health Care Costs Indicator is

1.5%

The Obama Administration has announced regulations  clarifying the new requirement that health plans cover preventive care without copayments.   The regulations were announced less than four months after the passage of the Patient Protection and Affordable Care Act (PPACA), and apply to health plans that are not “grandfathered.”   Last week, the administration announced regulations around grandfathering, clarifying which changes in benefit design  will mean a plan will no longer be grandfathered.

There are three categories of required covered services

1. 1.     Those rated “A” or “B” by the US Preventive Services Task Force.   This list ranges from screening for cancer to providing folic acid supplements to women considering pregnancy to giving aspirin to prevent heart attacks. 
2. 2.     Immunizations recommended by the Centers for Disease Control and Prevention.  This includes pediatric and adult vaccines.
3. 3.     Recommendations from the Health Resources and Services Administration (HRSA) regarding preventive care for children  . Recommendations for women’s health are expected in early 2011.

Here’s a link to the complete list of required covered services. 

This is good news for health care.  Preventive services are among the most cost-effective services available in health care. Further, they are terribly underused. For instance, less than 7% (!) of adults get the Zoster vaccine to prevent shingles, a painful complication from childhood chickenpox that often affects adults over 50. 

This is good news for patients, since eliminating financial barriers will increase the use of these services than can help patients live better lives.

The regulations will cause some angst at health plans, where new systems will have to be developed to arrange for payment for a number of nonprescription drugs which have previously not been covered.  

Some intuitively believe that covering more preventive services will save money.  Some of these services (pediatric immunizations) are indeed cost saving.   However, most are cost-effective – so that there will be incremental cost, but it will be modest compared to the benefits.

The Obama Administration is being honest here, and says that these new regulations will increase health care costs by 1.5%.   To put this in perspective, employer-sponsored health care costs about $700 billion per year, so this type of an increase would cost $10.5 billion.  This isn’t a small amount, but it’s an investment well worth making.

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