On December 1, 2010, the Department of Health and Human Services (HHS) published in the federal register an interim final rule requiring health insurers to spend at least 80 to 85 percent of premiums paid on medical costs and quality improvements. In other words, administrative expenses and profits are limited to 20 percent of premiums in the small group and individual market and 15 percent in the large group market.
The regulation, known as the “medical loss ratio” (MLR) provision of the Patient Protection and Affordable Care Act (ACA) certifies and adopts the recommendations submitted to HHS by the National Association of Insurance Commissioners (NAIC) on October 27, 2010. It also incorporates recommendations from a letter sent to HHS by NAIC on October 13, 2010, asking the Secretary to be responsive to requests from state regulators for a phase-in period of the regulations to prevent market destabilization in some state insurance markets.
The MLR rule takes effect January 1, 2011 and is intended to increase transparency and accountability and ensure that consumers receive good value for their premium dollar. Insurance companies will have to publicly report how they spend premium dollars and provide rebates to consumers if they do not meet the MLR standard. The first report, containing calendar year 2011 data will be due June 1, 2012. Rebates must be paid by August 1 each year, beginning in 2012.
According to the rule, insurance companies can deduct federal and state taxes that apply to health insurance coverage from an insurer’s premium revenue when calculating the medical loss ratio. Taxes assessed on investment income and capital gains may not be deducted from premium revenue. If insurance companies can show measurable results stemming from the quality improvement activities outlined in the regulation, they may be able to count them toward the 80 or 85 percent standard. Insurers will not be required to present initial evidence in order to designate an activity as “quality improving” when they first begin implementing the new rule.
The regulation also allows for adjustments to the MLR standard to guard against market destabilization. Consistent with the NAIC recommendations in its October 13 letter to HHS, the rule establishes a process for states to request an adjustment to the MLR standard for up to three years, if it is determined that meeting the 80 percent MLR standard may destabilize the individual market and result in fewer choices for consumers.
Other accommodations and adjustments included in the rule address the special circumstances of small plans, new plans, mini-med, and expatriate (covering U.S. citizens residing in foreign countries) plans.
Although HHS has direct enforcement authority under the ACA for the MLR requirements, it will accept the findings of a state audit of MLR compliance if they are based on the MLR requirements set forth in federal law and regulations. The monetary penalty for an insurer’s failure to comply with the reporting and rebate requirements is based on the Health Insurance Portability and Accountability Act of 1996 (HIPAA) penalties and is $100 per day, per individual affected by the violation.
