Academic journal article Inquiry

Medical Loss Ratio Regulation under the Affordable Care Act

Academic journal article Inquiry

Medical Loss Ratio Regulation under the Affordable Care Act

Article excerpt

The minimum medical loss ratio (MLR) regulations in the Affordable Care Act guarantee that a specific percentage of health insurance premiums is spent on medical care and specified activities to improve health care quality. This paper analyzes the regulations' potential unintended consequences and incentive effects, including." higher medical costs and premiums for some insurers; less innovation to align consumer, provider, and health plan incentives; less consumer choice and increased market concentration; and the risk that insurers will pay rebates if claim costs are lower than projected when premiums are established, despite the regulations' permitted "credibility adjustments." The paper discusses modifications and alternatives to the MLR regulations to help achieve their stated goals with less potential for adverse effects.

The Affordable Care Act (ACA) established minimum medical loss ratio (MLR) requirements of 80% for the individual and small group health insurance markets and 85% for the large group market. Beginning with 2011 experience and pursuant to regulations promulgated by the U.S. Department of Health and Human Services (HHS), insurers whose medical claims and expenditures on specified activities to improve health care quality total less than the required percentages of premiums (less certain taxes and fees) in a given state must rebate the shortfalls to customers. Although industry aggregate MLRs generally have exceeded the required percentages (U.S. GAO 2011a; Houchens 2011), MLRs vary significantly across insurers and markets. The HHS announced in June 2012 that rebates for 2011 would total $1.1 billion, with 38%, 17%, and 11% of consumers receiving rebates in the individual, small group, and large group markets, respectively, and an average rebate per household of $151 (above $500 in some states, U.S. HHS 2012a). (1)

Minimum loss ratio requirements have long been a feature of health insurance and property/casualty insurance regulation in many states. About half had pre-ACA requirements that insurers' rate filings with state regulators provide for a minimum MLR for individual health insurance, and roughly 20 states had minimums for the small group and/or large group health insurance markets (NAIC 2009; AHIP 2010). Compared with most traditional state-based requirements, the ACA's MLR requirements differ in several key respects. First, state MLR regulations establish a modest ex ante floor for projected medical costs in relation to premiums when policies are sold, rather than require ex post premium rebates if actual MLRs fall below the minimum after provision of coverage. Second, state regulations generally define the MLR as the ratio of medical costs to premiums, without addition of expenditures on quality improvement activities to the numerator or deduction of any taxes or fees from the denominator. Third, the state minimums generally are lower than the ACA thresholds, typically ranging from 60% to 75%. (2)

The stated goals of the ACA's minimum MLR regime are to promote transparency, consumer value, and greater efficiency of health insurers. Taking those goals as given, this paper analyzes the MLR regulations' potential unintended consequences and incentive effects, and it considers alternatives that might achieve the regulations' goals with less risk of adverse effects. The analysis is all the more important given that related regulations on prices and expenditures have been imposed historically in other contexts without a full understanding of the potential effects, often leading to their modification or repeal.

Particular attention is paid to the increased potential for unintended consequences from the inherent statistical volatility of insurers' claims experience, which cannot be addressed precisely through "credibility adjustments" that are based on the volume of insurers' business. Due to the unpredictable nature of medical costs, the federal MLR regulations may require that an insurer with lower than projected claim costs pay rebates even if the target MLR used in its pricing is equal to or greater than the regulatory minimum, without giving the insurer the ability to charge additional amounts to consumers if claim costs are higher than projected. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.