The U.S. Department of Health and Human Services (HHS) has released interim final regulations (pdf) implementing the medical loss ratio (MLR) requirements imposed by the Affordable Care Act. Beginning in 2011, the new health care law mandates that health insurers, depending on the size of the insurance market, spend between 80 and 85% of premium revenue on reimbursement for clinical services or activities that improve health care quality, or provide a rebate to their enrollees starting in 2012. The HHS estimates that up to 9 million individuals will be eligible to receive rebates worth up to $1.4 billion. The purpose of these regulations, according to the HHS, is to increase the transparency and accountability in the insurance market. The regulations contain definitions and methodologies for calculating MLRs and enrollee rebates, outline disclosure and reporting requirements, and include adjustments and exceptions to the rule in order to maintain market stability. The HHS rule certifies and adopts the draft regulations approved by the National Association of Insurance Commissioners (NAIC) last month, and incorporates additional recommendations (pdf) made by the NAIC. The interim final regulations will be effective as of January 1, 2011.

The MLR is the ratio of incurred claims plus any expenses to improve quality – adjusting for certain conditions outlined in the regulation – to the earned premiums less federal and state taxes and licensing or regulatory fees. As of 2011, insurance companies in the individual and small group markets must spend at least 80 % (85 % for those in the large group market) of the premium dollars collected on medical care and quality improving (QI) activities. The higher the MLR, the easier it is for insurers to meet the minimum standards set by the Affordable Care Act. Therefore, it is desirable from an insurer’s standpoint to have as many expenses qualify as QI expenses as possible, as this would increase the MLR.

Those companies whose spending does not meet the mandatory threshold must provide rebates by August 1 of each year in the form of premium reductions, rebate checks, or, if the enrollee paid by credit or debit card, a lump-sum reimbursement in this amount used to pay the premium. If an employer or other entity pays the employees’ premium and submits it to the carrier, the rebate payment will be sent to that employer or entity, and distributed to the employees in an amount based on their premium contributions.

As discussed in a fact sheet, starting in 2011, insurance companies that issue policies to individuals and employers will have to report in each state it conducts business the following information by June 1 of each year:

• Total earned premiums;
• Total reimbursement for clinical services;
• Total spending on activities to improve quality; and
• Total spending on all other non-claims costs excluding federal and state taxes and fees.

The insurer will be required to report the aggregate premium and expenditure data for each market. Information on insurance provided to U.S. citizens living or working abroad (“expatriate” plans) and limited benefit (“mini med”) health plans can be reported separately, but on an accelerated basis. The HHS will apply a methodological adjustment to the way the MLR is calculated for these plans. The precise form and content of the data that issuers must report to the HHS Secretary will be announced in a separate Federal Register notice.

Among other things, the interim final regulations outline a number of specifications for activities that constitute “quality improving.” The regulations define QI activities as those that are grounded in evidence-based medicine, designed to improve the quality of care received by an enrollee, and capable of being objectively measured and producing verifiable results and achievements. Generally, QI activities are those that are designed to:

• Improve health outcomes including increasing the likelihood of desired outcomes compared to a baseline and reducing health disparities among specified populations;
• Prevent hospital readmissions;
• Improve patient safety and reduce medical errors, lower infection and mortality rates;
• Increase wellness and promote health activities; or
• Enhance the use of health care data to improve quality, transparency, and outcomes

The regulations detail the types of activities that fall under each of the above categories. In order to foster innovation, the regulations will not require insurers to present initial evidence in order to designate an activity as “quality improving” when the activity is first implemented. Measurable results must be subsequently shown, however, if the insurer intends to continue designating the activity as quality improving.

Expenditures and activities that will not be considered quality improving include the following:

• Those that are designed primarily to control or contain costs.
• The pro rata share of expenses that are for lines of business or products other than those being reported, including but not limited to, those that are for, or benefit, self-funded plans.
• Those which otherwise meet the definitions for quality improvement activities but which were paid for with grant money or other funding separate from premium revenue.
• Those activities that can be billed or allocated by a provider for care delivery and which are, therefore, reimbursed as clinical services.
• Establishing or maintaining a claims adjudication system, including costs directly related to upgrades in health information technology that are designed primarily or solely to improve claims payment capabilities, or to meet regulatory requirements for processing claims. For example, costs of implementing new administrative simplification standards and code sets adopted pursuant to the Health Insurance Portability and Accountability Act (HIPAA) would not be considered quality improving.
• The activities of health care professional hotlines that do not meet the definition of activities that improve health quality.
• All retrospective and concurrent utilization review.
• Fraud prevention activities, other than fraud detection/recovery expenses up to the amount recovered that reduces incurred claims.
• The cost of developing and executing provider contracts and fees associated with establishing or managing a provider network, including fees paid to a vendor for the same reason.
• Provider credentialing.
• Marketing expenses.
• Costs associated with calculating and administering individual enrollee or employee incentives.
• That portion of prospective utilization that does not meet the definition of activities that improve health quality.

The regulations include certain adjustments in order to protect against destabilization in the insurance market. As explained in the HHS fact sheet, the regulation permits insurers to add a “credibility adjustment” to their medical loss ratio when the insurer’s MLR for marketing within a particular state is based on less than 75,000 peopled enrolled for an entire calendar year. The regulations also delay the reporting requirement for certain insurers that have newly entered the market. Specifically, when 50 percent or more of an insurer’s premium income accounts for policies that have not been effective for an entire calendar year, the insurers are permitted to delay the reporting requirements until the following year.

Additionally, the HHS Secretary will be permitted to adjust the MLR for a particular state if meeting the MLR would destabilize the market. The regulations set forth a process whereby a state must demonstrate that adhering to the MLR requirements would result in destabilization.

With respect to penalties against noncompliant insurers, the HHS has adopted the HIPAA penalty of $100 per entity, per day, per individual impacted by the insurer’s failure to abide by the MLR reporting and/or rebate requirements.

The HHS intends to publish these interim final regulations in the Federal Register on December 1, 2010. Comments on any aspect of these regulations must be made within 60 days after publication, and include the filing code: OCIIO-9998-IFC. Written comments may be sent or hand-delivered to: Office of Consumer Information and Insurance Oversight, Department of Health and Human Services, Attention: OCIIO-9998-IFC, Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW, Washington, DC 20201. Alternatively, comments may be submitted electronically through the federal eRulemaking portal.

This entry was written by Ilyse Schuman.

Photo credit: Bartek Szewczyk