The new Medical Loss Ratio will have a huge impact on health insurance companies. There is major concern in the industry that we could see some carriers pull of certain markets. The market that creates the most concern is the Individual market. This segment of insured represent a small portion of the overall block of business. Some companies will look at this block of business and ask themselves is it worth the risk. In the individual market a company might make money on one policy but then lose 300% on the next policy. In the past they have been able to pool the policies together to offset risk. This pooling is no longer an option for the carriers with the health care reform.
The Patient Protection and Affordable Care Act (or health care reform law) added a new provision to the Public Health Service Act that sets requirements for the minimum medical loss ratio. The medical loss ratio is the percentage of premiums that insurers spend on medical care (including claims and activities that improve health care quality), as opposed to the percentage spent on administrative expenses.Health insurance issuers offering insured group or individual coverage must meet the following minimums:
85% in the large group market
80% in the small group and individual market
Issuers who do not meet these minimums will be required to issue rebates.
The National Association of Insurance Commissioners (NAIC) was responsible for recommending to the U.S. Department of Health and Human Services which activities count as medical and quality improvement expenses, as well as how plans should calculate the medical loss ratio. The interim final regulations issued by Health and Human Services on November 22, 2010, adopted the NAIC’s model regulation in full but modified some of NAIC’s recommendations and added other provisions to the NAIC model.
Some key points from the interim final rules:
Medical loss ratio calculation would include premium used to pay medical claims and premium used for quality improvement activities. It would exclude federal and state taxes, and licensing and regulatory fees.
Issuers will need to report calendar-year premium, claims and other expenses for all insured group and individual health insurance coverage as an aggregate by legal entity state by state and by health insurance market (small group, large group, individual).
Reports must be submitted to Health and Human Services by June 1 of each year. Rebates must be paid by August 1 of each year.
The medical loss ratio provision does not apply to self-insured or ASO plans; it applies only to the issuer of insurance plans in the large and small group and individual markets.
Rebates will be provided to the enrollee (defined in the interim final rules as anyone covered by a group plan, as well as anyone covered by an individual policy, despite the fact that this term is not ordinarily used in the individual market).