PPACA HEALTH REFORM UPDATE MEDICAL LOSS RATIO AND REBATE REQUIREMENTS SHRM GUAM CHAPTER MONTHLY MEETING 06 JUNE 2012
AGENDA Summary of Law Definitions Reporting Requirements Calculating Medical Loss Ratio Premium Rebates Notification Requirements
Summary of Law The provision providing for medical loss ratio requirements is Sec. 2718 of the Public Health Service (PHS) Act, as added by Sec. 1001(5) of the Patient Protection and Affordable Care Act (PPACA) (Public Law 111-48). It is codified at 42 U.S.C. Sec. 300gg- 18.
Summary of Law (cont’d) • PHS Sec 2718 seeks to establish greater transparency and accountability surrounding insurers’ expenditures for benefits versus administrative expenses and profit to “reduce” the cost of health care coverage. • The statute also establishes medical loss ratio (MLR) standards . Insurers must provide annual rebates to enrollees when spending for clinical services and quality improvement activities (in relation to the premiums charged) is less than MLR standards of 85% for the large-group market and 80% for the individual and small-group markets.
Summary of Law (cont’d) • Under the statute, beginning in 2011, insurers covering large groups must spend at least 85 cents per dollar of premium revenue on medical care or activities that improve health care quality. • Small-group and individual plans must spend 80 cents per dollar. • PHS Sec. 2718 requires the National Association of Insurance Commissioners (NAIC) to develop uniform definitions and methodologies for calculating MLRs.
Definitions For purposes of the MLR, the following definitions apply (45 C.F.R. Sec. 158.103): Enrollee – an individual who is enrolled in group health or individual insurance coverage for any length of time during an MLR reporting year. Health Plan – health insurance coverage offered through individual coverage or a group health plan Large Employer – an employer who employed an average of at least 101 employees (regardless of number of hours worked or full- time versus part-time status) during the preceding calendar year. Until 2016, a state may substitute 51 employees for 101 employees in its definition (see PPACA Sec. 1304(b)(1)(3)).
Definitions MLR reporting year – a calendar year during which group or individual coverage is provided by an insurer. Policyholder – any entity that has entered into a contract with an insurer to receive health insurance coverage as defined under PHS Sec. 2791(b) (benefits consisting of medical care provided directly, through insurance or reimbursement). Situs of the contract – the jurisdiction in which the contract is issued or delivered as provided for in the contract Small Employer – an employer that employed an average of at least two but not more than 50 employees during the preceding calendar year. For 2016 and later years, a small employer will be defined as one that employs one to 100 employees (see PPACA Sec. 1304(b)(2)).
Reporting Requirements • For each MLR reporting year, insurers must submit reports on premium revenue and expenses related to group and individual coverage that is issued. • These reports must be submitted by June 1 of the year following the end of the MLR reporting year. • Under this guidance, the first reports were due by June 1, 2012 to HHS.
Reporting Requirements (cont’d) • An insurer must submit a report for each state in which it is licensed to provide coverage and report the experience of all policies issued in the state for the MLR reporting-year. • The report must aggregate data separately for the large-group market, the small-group market and the individual market (45 C.F.R. Sec. 158.120(a)). • If an insurer covers employees of a business in multiple states, reporting must be attributed to the applicable state based on the situs of the contract (45 C.F.R. Sec. 158.120(b)).
Reporting Requirements (cont’d) • Insurers must report all premiums paid by a policyholder or subscriber as a condition of receiving coverage. • The annual report must also include insurer expenditures for activities that improve health care quality such as case management, care coordination, chronic disease management, medication and care compliance initiatives and HIT expenditures related to quality initiatives (45 C.F.R. Sec. 158.150(b)(2)). • The annual report also must include non- claims costs, such as expenses for administrative services, and it must provide an explanation of how premium revenue is used other than for healthcare delivery or quality initiatives.
Calculating MLR
Calculating MLR (cont’d) • An insurer’s MLR is calculated as a fraction. • The numerator of the fraction is the amount of incurred claims paid plus expenses for health care quality improvement activities. • The denominator is the premium revenue, minus federal or state taxes and licensing and regulatory fees. • An insurer’s MLR figure is not based on the experience of a single employer. • MLRs are calculated using the data for the MLR reporting year being calculated and the data for the two prior MLR reporting years.
Calculating MLR (cont’d) • However for 2011 and 2012 there will be insufficient data reported to use the three-year average. So, for the 2011 MLR reporting year, an insurer’s MLR is calculated using the data reported for the 2011 MLR year only (45 C.F.R. Sec. 158.220(b), (c)(1)). • For the 2012 and 2013 MLR reporting years, the numerator may include any rebate paid for the prior MLR reporting year (45 C.F.R. Sec. 158.221(b)(1), (2)).
Calculating MLR (cont’d) • To address the special circumstances faced by smaller insurers, these plans may adjust their MLRs by applying a credibility adjustment if the MLR is based on partially credible experience. • Credibility of experience is based on the total number of life years covered by an insurer. • The adjustment modifies an insurer’s reported MLR by adding to the reported percentage additional percentage points in recognition of the statistical unreliability of the reported number. • Credibility adjustments allow insurers, particularly smaller ones, to hit the medical spending targets, even if they don’t spend 80 percent on medical care.
Calculating MLR (cont’d) Credibility adjustment is the product of the base credibility factor multiplied by the deductible factor Table 1: Base Credibility Factor Life-Years Base Credibility Factor <1,000 No credibility 1,000 8.3% 2,500 5.2% 5,000 3.7% 10,000 2.6% 25,000 1.6% 50,000 1.2% >75,000 0.0% (full credibility)
Calculating MLR (cont’d) Table 2: Deductible Factor Health Plan Deductible Deductible Factor <$2,500 1.000 $2,500 1.164 $5,000 1.402 >$10,000 1.736
Premium Rebates • If an insurer’s MLR does not meet or exceed the minimum percentage (85% for large groups, 80% for small groups and individuals), the insurer must provide a proportionate rebate. • Rebates are calculated using calendar-year activity, irrespective of a plan’s renewal date, based on a formula developed by the National Association of Insurance Commissioners (NAIC).
Premium Rebates (cont’d) • The amount of the rebate is based on the premium received (less appropriate taxes and fees), which is then multiplied by the difference between the required MLR and the issuer’s actual MLR for the year. • Under the final regulations, issuers are generally required to provide rebates to policy holders. • When a rebate is issued to the policyholder, it is the employer’s responsibility to distribute the rebate to plan enrollees, proportional to the premium amount paid (i.e. based on cost-sharing arrangement).
Premium Rebates (cont’d) • Employers have options for how to handle rebate funds to benefit participants (enrollees). • The options for employers will vary depending on whether the employer’s plan is subject to ERISA. • For non-ERISA plans, the HHS guidance distinguishes between governmental plans and non-governmental plans (such as certain church plans). • You can refer to US Department of Labor (DOL) Technical Release 2011-04 for more information regarding distributions from health insurers to policyholders and fiduciary requirements.
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