By Karen Davenport

Under the Affordable Care Act (ACA), insurers must provide rebates to enrollees when their spending on clinical services and quality improvement, as a proportion of premium dollars, falls below a minimum threshold known as the “medical loss ratio” (MLR). Federal regulators have discovered some insurers are gaming the system by misallocating expenses or inflating their spending on providers, while minimizing their reported administrative expenses and profits. When this happens, consumers don’t receive the rebates they deserve. New proposed rules aim to crack down on these practices.

The ACA’s MLR rebate provision requires fully insured health plans participating in the individual and group markets to spend a minimum proportion of premium revenue—80 percent in the individual and small group markets and 85 percent in the large group market—on clinical care or quality improvement activities (QIA). Plans that do not meet this standard must return excess premiums to consumers in the form of rebates. The nitty-gritty reality of how this plays out can be complicated and depends on insurers accurately reporting their revenue and expenses. In recent draft regulations, the Centers for Medicare and Medicaid Services (CMS) has proposed some key changes that will, they say, place new limits on health plans’ ability to manipulate this process at consumers’ expense.

Background

Rebates are designed to discourage insurers from inflating premiums

To determine their premiums for the coming year, insurers project their enrollees’ likely health status and use of services. They also build in a margin for administrative costs and profit (or, in the case of non-profit insurers, contributions to surplus). The MLR rebate requirement is designed to dampen insurers’ incentives to inflate their profits, executive salaries or other administrative expenses. However, some evidence suggests that insurers have responded to the rebate requirement by strategically increasing their claims costs—which they can accomplish by increasing provider payments rather than paying for additional services – instead of reducing their administrative spending.

In 2020, insurers provided more than $2 billion in rebates to nearly 9.8 million consumers, with the majority of rebates occurring in the individual insurance market. (Self-funded plans, which insure almost two-thirds of covered workers, are not subject to MLR requirements.) Because MLR rebates are based on an average of insurers’ performance over three years, these 2020 rebates resulted from insurers’ lower-than-anticipated spending after significantly increasing their premiums in 2018 and 2019, in the wake of federal policy changes.

How is the Medical Loss Ratio calculated?

To administer the MLR provision, CMS generally requires health insurance issuers to report adjusted total premium revenue and expenses on an annual basis by state and lines of business. While premium revenue is relatively straightforward, expense reporting can be more complex. The ACA provides that expenses include payments for clinical services provided to enrollees, activities that improve health care quality, and all other non-claims costs, while regulations and guidance specify how plans should allocate and report expenses across these three categories. These reports drive the calculation of insurers’ MLR ratios, which equal the sum of claims and quality-related expenses divided by adjusted total premiums. Non-claims administrative costs, such as executive salaries, marketing, and agent and broker fees, as well as indirect costs such as facility expenses, are excluded from this formula and do not count toward the fulfillment of the MLR requirement.

What are “Quality Improvement Activities”?

Insurers, regulators, and consumer advocates have wrestled with how to report various plan QIA expenditures.

Provider incentive payments, such as bonuses and other incentive structures, have been an important element of quality improvement initiatives and may be counted as QIA expenses when plans report and calculate their MLR. Provider quality incentives—such as annual quality bonuses and at-risk compensation (which ties a percentage of total payments to performance)—typically evaluate provider performance in comparison to standardized quality measures. Plans may pay these incentives to all providers who reach specific quality targets, calibrate incentives to the degree to which providers exceed particular targets, or design incentive payments that reward performance improvement or focus on closing gaps in performance. Plans that use provider networks may establish quality incentives for participating providers and facilities while integrated plans may establish incentive programs for facilities under their ownership as well as salaried clinicians.

Pointing to Inappropriate Manipulation of QIA Reporting, CMS Proposes Changes

In the recent Notice of Benefits and Payment Parameters for 2023 (NBPP), CMS proposed some notable changes to QIA expense reporting in the wake of insurer behaviors that have manipulated QIA reporting to artificially support excess premiums, thus reducing the value enrollees derive from their premium dollars and in some cases depriving enrollees of MLR rebates.

CMS finds provider bonuses and expenses in lieu of passing savings on to enrollees

CMS has found that some insurers are sending payments to providers solely to raise their MLR, thereby reducing the amount of rebates they must pay to policyholders.

Within the NBPP’s preamble, the agency notes that MLR examinations have found incentive payments and provider bonuses triggered by the insurer’s failure to meet the MLR standard itself, rather than providers’ successful delivery of high-quality care or improvements in enrollees’ health.

These payments thus “[transfer] excess premium revenue to providers” and circumvent MLR rebate requirements. When the insurer classifies these payments as quality incentives, even though they are not tied to the provider’s performance on any quality or performance metrics, these payments artificially and undeservedly raise the insurer’s MLR. In some cases, according to the NBPP, these payments have inflated insurers’ paid claims by 30 to 40 percent, lowering or eliminating the rebate the issuer would otherwise owe to enrollees. The MLR examination reports available on the CMS website do not include findings related to these artificial incentive payments, but the most recent MLR examination reports date back to 2017, so these findings may be more recent and not-yet-published.

The NBPP also cites concerns with the wide range of expenses issuers have reported as QIA expenses, including costs related to marketing, lobbying, corporate overhead, and entertainment and travel. In some cases, according to CMS, these costs are reported as QIA expenses because the issuer has allocated indirect costs across a range of business centers, even though many of these costs are clearly excluded in MLR reporting guidance. In other instances, issuers may be allocating appropriate types of costs to QIA, but inappropriate expense amounts. As MLR examination reports demonstrate, insurers often do not have sufficient recordkeeping and reporting methodologies to support the level of costs they have attributed to QIA. CMS also notes that some insurers have included their profit margins for wellness programs and costs related to pricing and marketing QIA services to their policy holders in their reported QIA expenses.

The proposed rules would impose more stringent standards for quality improvement activity expenses 

In the preamble to the 2023 payment notice, CMS points to lack of clarity in existing regulations and guidance as a potential driver of these practices. Accordingly, CMS is proposing more specific regulatory language to establish brighter lines for issuers to heed as they develop their MLR reports.

The proposed rules specify that only incentive payments and bonuses tied to “clearly defined, objectively measured, and well-documented clinical or quality improvement standards” will count towards MLR calculations and clarify that QIA expenses for MLR reporting purposes are limited to expenditures “directly related” to quality improvement activities.

Whether these changes will result in valuable improvements for consumers—more generous rebates or larger issuer investments in quality improvement activities—will not be known for some time. The first step will be to see whether insurers have pushed back on these proposals in their comments to the proposed rule—something CHIR will explore in future blog posts.