HHS Releases Final Rules on Medical-Loss Ratios Under Health Overhaul

Last week, HHS Secretary Kathleen Sebelius formally released new medical-loss ratio rules under the health reform law, which closely followed recommendations issued last month by the National Association of Insurance Commissioners, Politico reports (Haberkorn, Politico, 11/22).

Background

Under the overhaul, large health plans beginning on Jan. 1, 2011, will be required to spend at least 85% of premiums on medical services and quality improvement, rather than administrative costs or profits. Individual and small-group health plans' MLR must be at least 80%.

The law would require insurers to pay a rebate to customers if their MLRs fall below the new limits.

NAIC Recommendations

In October, NAIC unanimously approved its recommendations for the medical-loss ratio provision under the federal health reform law and will submit the proposal to HHS this week for final review and implementation by Jan. 1.
In its recommendations, NAIC identified physician bills as cost items that insurers could count as medical spending. Other costs NAIC recommended that insurers can count as medical expenses under their MLR calculations include:

• Expenses intended to increase patient safety;
• Investments in health information technology; and
• Preventive measures against medical errors and hospital readmissions.

NAIC also recommended against allowing insurers to aggregate medical spending across states and factor it into their MLR calculations. Among the other items that NAIC ruled could not be counted as medical expenses included:

• Nurse hotlines that do not deal directly with patient care;
• Initiatives to address fraud; and
• Insurance brokers' commissions (California Healthline, 10/22).

The rules allow insurers to exclude nearly all federal taxes from the MLR calculations, except for taxes on investment income (Politico, 11/22).

HHS Rules

To address concerns from state officials that the MLR rules could destabilize insurance markets, federal officials inserted a provision in which they can lower the standards in states where "there is a reasonable likelihood that market destabilization, and thus harm to consumers, will occur."

HHS Office of Consumer Information and Oversight Director Jay Angoff said four states -- Georgia, Iowa, Maine and South Carolina -- already have requested such adjustments.

The rules also provide a one-year exemption for "mini-med" plans, which feature high deductibles and typically cap coverage. Employers, such as McDonald's, who offer such coverage had warned HHS that the MLR rules could force them to stop offering such plans.

Federal officials will collect data on mini-med plans in 2011 and then determine how to treat such plans in 2012 and 2013, before the major provisions of the health reform law take effect in 2014.

The MLR rules are expected to affect about 75 million U.S. residents: 10.6 million in individual policies, 24.2 million with small-group coverage and 40 million in large employee coverage (Pear, New York Times, 11/22).

Nine Million U.S. Residents Could Get Rebates Under New MLR Standards

The rules also state that insurers that do not comply with the new rules must pay rebates to customers starting in 2012 (New York Times, 11/22).

Sebelius estimated that as many as nine million U.S. residents would receive payouts from insurers who do not meet the MLR standards, which could total and estimated $1.4 billion beginning in 2012. That amounts to about $164 per person on average in the individual market.

The first round of rebates must be paid by insurers by August 2012, based on 2011 MLR data (Norman, CQ HealthBeat, 11/22). About 45% of U.S. residents who purchased health coverage on the individual market are in plans that currently fail to meet the MLR standards, according to federal officials (New York Times, 11/22).

Sebelius defended the payments as necessary to rein in out-of-control premiums in the insurance market. She said, "While some level of overhead costs is certainly necessary, we believe they have gotten out of hand" (Alonso-Zaldivar/Murphy, AP/USA Today, 11/22).