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ABA Health eSource
March 2010 Volume 6 Number 7

MLR: The Controversial Calculation Makes Its Appearance In The Health Care Reform Debate

By Wendy J. Stein, Law Office of Wendy J. Stein, P.A., Hollywood, Florida

Three letters of the alphabet have caused a whirlwind of legislative activity in 32 states and were the subject of a Congressional investigation, complete with former health insurance executive testimony. They are now a major battleground in the current health care reform debate in Washington. Those letters are MLR which stand for Medical Loss Ratio, the proportion of health care insurance premium dollars spent on health care claims. 1 Uses of MLR by health insurance companies include (1) evaluation of an organization’s performance by management and investors; (2) providing consumers with information on the relative quality of competing health plans; (3) projecting future earnings growth of HMOs; (4) testing products against minimum loss standards; and (5) solvency regulation. 2

History and Evolution of MLR

In 1980, the National Association of Insurance Commissioners adopted “Guidelines for Filing of Rates for Individual Health Insurance Forms.” 3 The Guidelines aimed at setting a threshold of what constitutes reasonable medical expense payments in comparison to premiums. 4 The Guidelines delineated minimum MLR for determining whether premiums are reasonable. 5 Here are some examples:
  • Optionally renewable policies (renewal at the option of the insurance company) – 60 percent
  • Guaranteed renewable policies (renewal cannot be declined for any reason, but company can revise rates for classes of individuals) –55 percent
  • Non-cancelable policies (no denial, no raise in rates) –50 percent 6

According to Congressional research as spelled out in a November 2, 2009 open letter from Senator Jay Rockefeller, Chairman of the Commerce, Science and Transportation Committee, to H. Edward Hanway, the Chairman and Chief Executive Office of Cigna, in 2008, insurers in the individual market spent an average of 74 percent of premiums on health care, 80 percent in the small group market, and 84 percent in the large group market, with some insurers as low as 64 percent in the large group market. 7 Insurers dispute the validity of the numbers. For instance, according to Cigna, where the study showed 87 percent MLR for individual market product, the MLR was truly 120 percent and Cigna was losing money. 8

Wendell Potter, a former Cigna executive, testified before the Commerce, Science and Transportation Committee on June 24, 2009: “On these calls, Wall Street investors and analysts look for two key figures: earnings per share and medical loss ratio…To win the favor of powerful analysts, for-profit insurers must prove that they made more money during the previous quarter than a year earlier and that the portion of the premium going to medical costs is falling. Even very profitable companies can see sharp declines in stock prices moments after admitting they’ve failed to trim medical costs.” 9 According to Potter, strategies used to exert continuous downward pressure on MLR’s included but were not limited to:
  • Post underwriting rescission (“looking to see if a policyholder omitted a minor illness, or a pre-existing condition when applying for coverage, and then they use that as a justification to cancel the policy”)
  • Purging small businesses with high health care expenses 10

Status of Current Regulation of MLR

Presently, MLR has been largely ignored and is unregulated by the federal government, although it is one of the battlegrounds in the health care reform debate. Thirty-two states have regulated MLR, 11 but Congressional Democrats are looking to change that as part of the currently debated health care reform package. Current proposals as part of health care reform include requiring MLR minimums set federally as part of the heavily-debated Patient Protection and Affordable Care Act (“PPACA”). 12 The Senate proposal includes an 85 percent MLR for plans sold to large groups and 80 percent for small groups and individuals. 13 The House Proposal seeks to set an MLR minimum of 85 percent for all insurance categories. 14 Both proposals suggest refunding any overage of MLR to policyholders. 15 In other words, if there is a mandatory MLR of 85 percent and the insurance company ends up with an MLR of 80 percent, that 5 percent overage must be refunded back to the policyholders in the form of a dividend. The Senate and House passed different versions of the PPACA and since they have not yet resolved their differences, the bill has not yet been presented to the President for approval. 16 MLR will likely be a talking point in these ongoing negotiations. Having recently lost its filibuster-proof majority with the passing of Senator Ted Kennedy, it is no surprise that President Barack Obama’s February 22, 2010 health care reform proposal makes no mention of MLR. 17

There is also at least one piece of proposed legislation seeking even greater MLR ratios which was introduced by Senator Al Franken of Minnesota, called the Fairness in Health Insurance Act, S.B. 1730 which is currently being reviewed in committee. 18 In this bill, (1) insurers must demonstrate at least 90 percent MLR, (2) the Secretary of Health and Human Services must establish uniform definition of MLR, (3) Insurers would need to report their compliance to the Secretary of Health and Human Services, and (4) Insurers would have to provide rebates to enrollees where MLR is less than 90 percent. 19

Insurer Response to the Push for Federal Regulation of MLR

Insurers claim that MLR regulations could prompt some health plans to cut administrative costs by reducing prevention and wellness programs (such as disease management for chronic conditions), along with investments in computer systems, electronic medical records and other efforts to streamline electronic processes for doctors and hospitals . 20 It has also been suggested that insurers might overpay claims in order to meet MLR minimums to keep their averages high rather than charge lesser premiums, defeating the ultimate purpose to keep health premiums more affordable. 21

Insurance Commissioner Response to the Push for Federal Regulation of MLR

Insurance commissioners Sandy Praeger of Kansas and Kevin Lembo of Connecticut weighed in on federal regulation of MLR, respectively, “Insurers can make their medical care numbers look pretty darn good if they add some things we might not consider part of claims for medical expenses,” and “I see more good than harm if it’s done thoughtfully. A lot goes back to the definition of (what is included in the medical expenses), who is monitoring it and how aggressively they do so.” 22 What constitutes “medical costs” could be nebulous (e.g., does it include paid claims only, or does it include wellness programs) has presented as an issue in state legislation leading states to require insurers in some cases to certify the method of calculation of the loss ratio, such as Kentucky, Massachusetts, and Michigan. 23

Congressional Budget Office Response to the Push for Federal Regulation of MLR

On December 13, 2009, the Congressional Budget Office (“CBO”) opined that, “Combining this [MLR] requirement with the other provisions of the PPACA would greatly restrict flexibility related to the sale and purchase of health insurance. In CBO’s view, this further expansion of the federal government’s role in the health insurance market would make such insurance an essentially government program, so that all payments related to health insurance policies should be recorded as cash flows in the federal budget.” 24 In light of the already-fragile state of the U.S. economy, CBO’s prediction could be particularly alarming.

Conclusion

Despite such prediction from the CBO, Democrats maintain that regulation of MLR is a rudimental step in health care reform. According to Howard Dean, M.D., Former Democratic National Committee Chairman, strengthening of the MLR regulations is the “most important thing of all [in health care reform]…It requires insurance companies not to take quite as much off the top of your premiums as they have in the past.” 25 With the changing ratio of Congressional Democrats to Republicans, this issue may not survive on the federal level, but it will always be a hot topic when it comes to the delivery and payment for health care services in the United States.
1 Abelson, Reed, Senate Pressing Insurers on The Amount of Premiums they Spend on Care, New York Times, November 2, 2009 found at www.nytimes.com/2009/11/03/business/03insure.html.
2 America’s Health Insurance Plans, State Mandatory Medical Loss Ratio (MLR) Requirements for Comprehensive, Major Medical Coverage: Summary of State Laws and Regulations (Sept. 8, 2009).
3 Id.
4 Id.
5 Id.
6 Id.
7 Senate link
8 Forcing Insurers to Spend Enough on Health Care, Kate Pickert, Time Magazine, December 22, 2009 found at http://www.time.com/time/nation/article/0,8599,1949390,00.html.
9 Senate link
10 Id.
11 Examples of state regulation of MLR include setting a finite MLR as in New York (75 percent) and Florida (65 percent) and requiring annual submissions to the insurance commissioner with the anticipated and actual loss ratios (Connecticut and Maryland). See America’s Health Insurance Plans, State Mandatory Medical Loss Ratio (MLR) Requirements for Comprehensive, Major Medical Coverage: Summary of State Laws and Regulations (Sept. 8, 2009).
12 http://democrats.senate.gov/reform/patient-protection-affordable-care-act.pdf
13 Id.
14 Id.
15 Id.
16 http://www.govtrack.us/congress/bill.xpd?bill=h111-3590.
17 http://www.whitehouse.gov/sites/default/files/summary-presidents-proposal.pdf.
18 www.govtrack.us/congress/bill.xpd?bill=s111-1730
19 Id.
20 AHIP Board of Directors Statement On Health Care Reform, December 2009 found at http://www.ahip.org/content/default.aspx?bc=31|44|28841.
21 Forcing Insurers to Spend Enough on Health Care, Kate Pickert, Time Magazine, December 22, 2009 found at http://www.time.com/time/nation/article/0,8599,1949390,00.html.
22 Democrats Move To Regulate How Insurers Spend Customers’ Money, Julie Appleby, Kaiser Health News, December 20, 2009 found at http://www.kaiserhealthnews.org/Stories/2009/December/20/insurers.aspx.
23 America’s Health Insurance Plans, State Mandatory Medical Loss Ratio (MLR) Requirements for Comprehensive, Major Medical Coverage: Summary of State Laws and Regulations (Sept. 8, 2009).
24 Budgetary Treatment of Proposals to Regulate Medical Loss Ratios, Congressional Budget Office, December 13, 2009 found at http://www.cbo.gov/ftpdocs/107xx/doc10731/MLR_and_budgetary_treatment.pdf.
25 Forcing Insurers to Spend Enough on Health Care, Kate Pickert, Time Magazine, December 22, 2009 found at http://www.time.com/time/nation/article/0,8599,1949390,00.html.

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