New Medical Loss Ratio Policy Means Consumers Will Receive Less in Rebates – But That’s OK

We at CHIRblog will frequently call out insurance companies for bad behavior – and there is often way too much of it. But in the wake of the Affordable Care Act (ACA), we also recognize that many in the industry are simply doing the best they can under very challenging circumstances. So that’s why, when the Center for Consumer Information and Insurance Oversight (CCIIO) recently proposed giving insurers relief on the ACA’s medical loss ratio (MLR) requirement, I didn’t have strong objections.

The MLR requirement, often called the 80/20 rule, is a provision of the ACA limiting how much premium revenue an insurer can devote to profits and administrative costs (20 percent in the individual and small employer markets and 15 percent in the large employer market) compared to what they spend on patient care. In its first year of operation, insurers paid out $1.1 billion in rebates to consumers and employers.

The Administration’s stated rationale for providing relief on the MLR is that insurers faced “special circumstances” due to the technical problems with the launch of the new health insurance Marketplaces and the transition to the new market rules in 2014. To be sure, the transition to a post-ACA world has meant an increase in administrative costs for insurers, even prior to the technical problems plaguing the roll out. Insurers, particularly those participating on the Marketplaces, had to hire new staff, change their systems, and constantly adjust to evolving rules and guidance from federal regulators. Those increased costs were compounded when the forms insurers received from the federal government with critical data on new enrollees – called “834”s arrived riddled with errors, or did not arrive at all – requiring manual data entry and one-on-one follow up.

In addition, when the Administration announced in November that it would allow the renewal of non-grandfathered, non-ACA compliant plans up to October 1, 2014, many plans had to decide whether to reinstate cancelled policies. In many cases, doing so required not just the administrative and regulatory costs of maintaining two – and potentially three – parallel sets of policies (ACA-compliant, non-ACA compliant, and in some cases, grandfathered), but also re-sending hundreds – and even thousands – of notices to policyholders to let them know of the change. So it’s not surprising that some insurers’ administrative costs as a percentage of their premium revenue will be higher in 2013 and 2014 than they might otherwise be.

However, it remains to be seen whether all insurers are truly entitled to this relief. Some insurers did not participate on the Marketplaces and have not had to face the same massive technical challenges. It’s not clear yet how CCIIO will calibrate MLR relief to address the fact that not all insurers are created equal. Insurers who did the right thing to staff up and do everything they could to get people enrolled into a Marketplace plan in a timely way deserve some temporary relief. But those that didn’t, don’t.

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