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Healthcare Update: CMS Issues Medical Loss Ratio Regulations; HHS Rejects Two State MLR Waiver Requests

December 5, 2011

Among the most hotly debated provisions of the Patient Protection and Affordable Care Act (PPACA) have been the medical loss ratio (MLR) requirements, which were intended to lower healthcare costs by requiring health insurance companies to spend less on marketing and overhead expenses and more on care. For an insurer, MLR represents the percentage of premiums spent on reimbursement for clinical services provided to subscribers – i.e., amounts that the insurer must use to pay for healthcare.

Effective January 1, 2011, insurers whose MLR does not meet the minimum PPACA standards must rebate the difference to their enrollees beginning with the 2012 plan year. PPACA requires large group plans to spend at least 85% of the premium dollar on care and quality improvement activities, and individual and small group plans to meet an 80% standard. Many insurers have lowered commissions for agents and brokers as part of their effort to reduce overall administrative costs in order to meet the MLR requirements.

New Regulations. On December 2, The Centers for Medicare & Medicaid Services (CMS) issued two regulations on the MLR which mostly reaffirm the general MLR requirements as spelled out in PPACA. One rule deals with distributions of rebates to consumers, and the other makes technical changes to the MLR calculation and reporting methodologies and the mechanism for distributing rebates to group health plan enrollees. The new rules will be published in the Federal Register on December 7 and will both take effect on January 1, 2012; however, CMS is accepting public comments on both rules for possible future modification. CMS issued a fact sheet on the new rules.

Industry Response. The National Association of Health Underwriters (NAHU), which represents health insurance agents and brokers, said in a statement that CMS “did nothing to mitigate the adverse effects the MLR rule is currently having on the ability of insurance producers to serve the demands and needs of health care consumers.” The new rules were also a disappointment to the National Association of Insurance Commissioners (NAIC), which on November 22 had passed a resolution urging the Department of Health and Human Services (HHS) to take immediate action to exempt producer commissions from the MLR calculations “in order to preserve consumer access to agents and brokers.” Senate Commerce Committee Chairman Jay Rockefeller had criticized the NAIC resolution, which he said would cost consumers millions of dollars in rebates from insurers that are unable to meet the MLR requirements.

The NAIC’s requested change would have required a congressional amendment to PPACA, because the statutory definition of MLR does not allow agents’ and brokers’ commissions to be exempt from the calculation. Two bills, one of which would exclude commissions from the MLR calculation and one of which would repeal the MLR rule entirely, have been pending before the House Energy and Commerce Subcommittee on Health since early this year.

Continued Exemptions for Mini-Med Plans. One of the new rules continues the separate treatment previously granted by HHS for limited benefit (“mini-med”) policies. HHS had permitted mini-med plans to apply for waivers that would allow them to have MLRs in 2011 as low as 40% for individual and small-group plans and 42.5% for large-group plans, one-half of the MLRs normally required. This 2011 adjustment is expressed as a “multiplier” of 2.0 in the MLR calculation for the plans. Under the final rule, the multiplier will be reduced to 1.75 in 2012, 1.5 in 2013 and 1.25 in 2014. Beginning in 2014, PPACA prohibits annual dollar limits on coverage and CMS, in its fact sheet, said that it expects mini-med policies to cease to exist at that time.

On November 28, HHS denied requests by the Indiana and Louisiana Departments of Insurance that would have given insurers in those states two extra years to meet the MLR requirements. In doing so, HHS rejected the states’ claims that the requirements are likely to destabilize the states’ individual health insurance markets, finding no evidence that the requirements will cause insurance companies to cease offering plans in the states.

In evaluating states’ waiver requests, HHS analyzes both the financial health of individual insurance companies in the state and the level of competition among them, among other things. HHS observed that only two smaller insurers have withdrawn from the Louisiana market since PPACA was enacted, and that carriers in the state already had an average MLR of 79%. In Indiana, only one insurance company offering policies in the individual market would no longer be profitable after granting an MLR rebate, HHS said.

Six states (Georgia, Iowa, Kentucky, Maine, Nevada and New Hampshire) have requested and received waivers of the MLR requirements, allowing insurance companies in each state to spend a lower percentage of premiums on healthcare until either 2013 or 2014. HHS had previously rejected waiver requests by Delaware and North Dakota; requests by Florida, Kansas, Michigan, North Carolina, Oklahoma, Texas and Wisconsin remain pending.

Edwards Wildman’s Healthcare Practice Group will continue to monitor healthcare news from Capitol Hill, HHS and CMS, and other federal and state agencies, as well as insurance news from health insurance industry trade organizations, and will bring you timely updates as new developments occur.

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