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Most investors consider Medical Loss Ratio as the most important factor to gauge an insurance company’s present and future profitability. On December 2, 2011, HHS released its final ruling on the Affordable Care Act’s Medical Loss Ratio policy. Beginning 2012, the revised policy guarantees tax-free rebates to consumers if the percentage of premium spent on medical care and quality improvement by their insurers, falls below 85% in larger group insurance sectors and below 80% in the small and individual insurance markets.

Visible impacts of ACA’s standardized Medical Loss Ratio ruling

Availability of precise data

Before the latest MLR ruling, it was difficult to obtain financial reports or enrollment data for individual, small groups and large group markets, even more so at the state level. Unavailability of data made comparison among health plans difficult which further made the insurance process seem impervious.  The Supplemental Health Care Exhibits documents issued by NAIC requires uniform reporting standards to be followed that will make it easier to:

-    Maintain reporting standards  and analyze different market segments data within a state
-    Establish a yardstick on standards for premiums, quality, claims etc.
-    Compare direct product sales vis-a-vis customer acquisitions by brokers/agents etc.

Need for re-defining quality improvement activities

Health plans may have to re-visit the ACA-MLR to get a better understanding about services that qualify as ‘quality improvement activities’. Health plans will need to be very careful in their selection and rejection of quality improvement programs.  While it may seem obvious to cut down on activities such as ‘retrospective utilization review’ as the HHS doesn’t consider it a ‘quality improvement activity’, increased instances of fraud and scams may occur, if the health plans cease to validate and review patient records post-treatment.

Effect on market selection decisions

The ACA-MLR standardizations may also influence insurers’ market selection decisions. Insurers may be forced to exit individual, small group or large group markets due to complications in maintaining the MLR threshold figures. Although states can apply for waivers if they feel that the MLR threshold figures will destabilize their local markets, their petitions may be denied if the government remains unconvinced. Irregularities among state MLR figures can give rise to complications in financial data analysis and may shoot up the administrative costs for health carriers.

What we think

Contrary to common perception, this is not the first time that large U.S. health corporations will be spending a considerable percentage of the health premium amount, in providing quality medical care to their customers. Reportedly in 2008, Kaiser Foundation Health Plan and Cigna had offered medical ratios of 90.6% and 94.3% respectively while L.A Care Health Plan spent 97.1% of premiums amount on medical care.

The U.S. Government Accountability Office (GAO) issued a report in July 2011 which revealed that between 2006 and 2009, the average figures of MLR’s calculated using the traditional approach had exceeded the minimum standards of MLR laid down in the Affordable Care Act.

We at hCentive believe that these new MLR regulations are easily attainable and the insurance industries would not get massively impacted with the new directives. Agents and Brokers on the other hand, may feel the heat as their brokerage fees and commission charges will be counted under administrative costs.

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