Insurers are further permitted to deduct federal and state taxes, licensing and regulatory fees from their premium charges. However, taxes on investment income and capital gains need to be included in the premium rates, together with any brokerage charges and commissions.
On December 2,
2011, the U.S. Department of Health and Human Services released its final ruling on the Medical Loss Ratio.
What does the Medical Loss Ratio final ruling say?
Effective January 1, 2012, the Affordable Care Act will require health insurance companies, operating in individual and small group markets, to spend at least 80% of the collected premium dollars on medical care and quality improvement initiatives. Health plans operating in large group markets need to expend minimum 85% of the collected premium amounts on administering medical care and quality improvement programs. Not only that, Insurance companies need to submit annual Medical Loss Ratio (MLR) data reports to HHS, so that residents of all U.S states can gauge their return-on-investment on the various health plans offered by different health carriers located in their states. Beginning 2012, insurance companies that fail to comply with the MLR regulation, will need to pay rebates to their consumers before August 1st of each year.
The final MLR rule also revised the rebate process for customers who are enrolled in group policies. The Health Insurers need to provide rebates in the form of lower premiums or in other non-taxable forms, to the group policyholder. Apart from this, insurance companies need to send regular detailed reports to the group enrollees and group policy holders, explaining Medical Loss Ratio, its purpose and details of any applicable rebate amount.
The new ruling also allows certain exceptions and adjustments for some special health plans. HHS in the final ruling indicated that in 2014, the mini-med policies will no longer be available as the federal sponsored State Health Insurance Exchanges will enable the U.S. citizens to procure health plans directly from the Exchange, at affordable rates. However, mini-med plans can apply for waivers until the federally sponsored Exchanges become fully operative. This measure will inhibit plans from dropping coverage, will reduce insurance companies’ administrative costs and will improve overall efficiency of the healthcare system.
In the final ruling, the HHS also revealed its intention to modify the expatriate policies to ensure that the people working in other countries do not lose their medical coverage.
Difference between traditional and new MLR calculation process
Let’s have a quick look on how the ACA modifies the traditional method of calculating MLR to ensure that consumers receive their money’s worth of services and benefits.
Traditional MLR calculation process
Traditionally, MLR has been calculated as Medical Claims divided by Premium amount. A lower value of MLR is usually preferred by investors and payers, as lower value of MLR signifies corresponding increase in the profit percentage. From an investor’s point of view, if the values of claims increase then the values of premiums need to be increased to maintain a low MLR quotient. Thus, the value of medical claims cost are directly proportional to the value of premiums charged.
Traditional MLR = Medical Care Claims (%)
Premiums
New MLR calculation
Affordable Care Act ruling on MLR also added other related expenses such as ‘quality improvement’, taxes and ‘regulatory fees’, to the equation to make the MLR calculation process more precise and transparent.
ACA’s revised MLR (%) = Medical Care Claims + Quality improvement Expenses (%)
Premiums – (Taxes + Licensing and Regulatory Fees)
The latest directives on MLR permit the health insurers to include costs of quality improvement under the medical costs umbrella, only if insurers can provide tangible proofs, that the medical care quality improvement initiatives are effective in administering improved care. In its final ruling, the HHS allowed insurers to add the costs (up to 0.3% of premiums) of conversion from International Classification of Disease code ICD-9 to ICD-10, under the quality improvement expenses, as many believe that new coding system will facilitate transfer and exchange of health data, thus improving medical care.
We hope that we, at hCentive, managed to clear all doubts that you may have had regarding the latest ruling on Medical Loss Ratio.
