CMS Issues Final Loss Ratio Rule, Does Not Address Broker Concerns

Health Insurance Report™ helps you track and analyze legal, legislative, and regulatory developments affecting the health-insurance industry throughout implementation of the Affordable Care Act...

By Nathaniel Weixel

The Centers for Medicare & Medicaid Services Dec. 2 issued two regulations on the medical loss ratio (MLR) that require health insurance companies to spend a certain amount of consumers' health insurance premiums on medical care, not on overhead and marketing.

If insurers do not meet the MLR requirements, they must provide a rebate to their customers starting in 2012, according to CMS, which noted that the rules do not alter the fundamental structure of the MLR requirements, set forth in the health reform law. One rule, an interim final rule with a comment period, pertains to distributions of rebates by insurers that do not meet the MLR requirements. The other, a final rule with comment period, makes changes that “largely address technical issues involved in the way issuers calculate and report their MLR and the mechanism for distributing rebates to enrollees in group health plans,” CMS said in a fact sheet.

The rules will be published in the Federal Register Dec. 7. They both take effect Jan. 1, 2012.

The interim final rule (CMS-9998-IFC2) with comment period “revises the regulations implementing MLR requirements for health insurance issuers … in order to establish rules governing the distribution of rebates by issuers in group markets for non-Federal governmental plans.” Comments on the interim final rule are due Feb. 6.

The final rule (CMS-9998-FC) with comment period amends certain provisions of the interim MLR rule that was issued in 2010 “to provide certainty going forward.” Among other things, the final rule directs insurers to provide rebates to a group policyholder (usually an employer) through lower premiums “or in other ways that are not taxable.”

Comments are due Jan. 6 on certain aspects of the final rule.

Criticism of the new rules included concerns that they did not address the needs of insurance agents and brokers, and that the overall requirement of the MLR does nothing to actually lower health care costs.

‘Unprecedented Transparency.’

CMS said the final rule provides “unprecedented transparency and accountability of health insurance companies for customers.”

Created by the Patient Protection and Affordable Care Act, the MLR requirements provide protection and value to approximately 74.8 million insured Americans, CMS said. The MLR provisions require health insurers to spend at least 80 percent of individual and small group plan premiums on medical claims or quality improvements rather than administrative costs, and at least 85 percent of large group premiums.

Health plans that do not meet the ratios must refund the difference to policyholders beginning in 2012. Estimates from last year indicate that, starting in 2012, up to 9 million Americans could receive rebates worth $600 million to $1.4 billion, CMS said.

Follows a 2010 Rule

CMS first issued an interim final MLR rule in late November 2010 that limited how much health insurers could spend on nonmedical expenses (see previous article).

The provisions of that interim MLR rule took effect Jan. 1, 2011, but the newest final rule makes modifications and provides certainty regarding how the MLR is calculated, CMS said.

Sondra Roberto, staff attorney for Consumers Union, the policy and advocacy division of Consumer Reports, said in a statement that overall, the changes reflect “improvements and continued protections for consumers but leaves more work to be done.”

Roberto said the revised final rule helps ensure that individuals and employers know their rights and actually receive rebates through new notice requirements that explain the MLR and detail how much is owed to each consumer.

Concerns of Commissioners, Industry

In November, the National Association of Insurance Commissioners adopted a resolution urging Congress and the Department of Health and Human Services to adjust the MLR “in order to preserve consumer access to agents and brokers.” Brokers and agents said they wanted relief from the provision because insurers, in order to meet the MLR requirement, have lowered administrative costs, which include commissions (see previous article).

The new final rule did not address those concerns. The National Association of Health Underwriters (NAHU), which represents professional health insurance agents and brokers, in a statement expressed disappointment 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.”

NAHU, along with the National Association of Insurance and Financial Advisors (NAIFA), called on Congress to pass the Access to Professional Health Insurance Advisors Act (H.R. 1206), introduced in March by Rep. Mike Rogers (R-Mich.) and Rep. John Barrow (D-Ga.). The bill, which has 138 co-sponsors, would exclude agent and brokerage fees from the MLR calculation, which would make it easier for insurers to pay commissions.

Tax Aspects, Notices to Enrollees

In the previous rule, rebates in the group market would have been subject to tax. Rather than having insurers send checks that could be taxed, the final rule directs issuers to provide rebates to the group policyholder (usually the employer) through lower premiums “or in other ways that are not taxable.” CMS said policyholders must ensure that the rebate is used for the benefit of subscribers.

In an effort to increase transparency, CMS said the final rule also requires that issuers provide notice of rebates to enrollees and the group policyholder. All enrollees must be given information about the MLR and its purpose, the MLR standard, the issuer's MLR, and the rebate provided.

“If your insurance company doesn't spend enough of your premium dollars on medical care or quality improvement this year, they'll have to give you rebates next year. This will bring costs down and give insurance companies the incentive to focus on what matters for patients—high quality health care,” CMS acting Administrator Marilyn Tavenner said in a statement.

CMS estimated that for the years 2012 and 2013, 800,000 enrollees in the small group market and 1 million enrollees in the large group market would receive rebates each year. Only a fraction of these enrollees will be in non-federal governmental plans, the agency said. The interim final rule would lower administrative costs related to rebate disbursement for issuers of group health plans and would largely eliminate the tax burden on employers and consumers inherent in the prior rebate mechanism, CMS said.

‘Mini-Med' Exemptions

CMS said the interim final rule provided separate treatment for so-called mini-med plans—low-cost plans with low annual benefits—as well as plans sold to expatriates. HHS has given waivers from PPACA rules to many mini-med plans that restrict annual benefits, and the agency in the interim final rule said it was willing to give special consideration to the plans concerning the medical loss ratio.

In 2011, mini-med plans received a special circumstances adjustment to their MLR in the form of a multiplier of 2.0 for 2011. The final rule phases it down from 1.75 in 2012 to 1.5 in 2013 and to 1.25 in 2014, but does not eliminate the exemption. In 2014, the use of annual dollar limits on coverage will be banned and “we expect that these mini-med policies will cease to exist,” CMS said in its fact sheet.

Roberto of Consumers Union said the group was not pleased with the mini-med provision. Roberto said mini-med plans provide only limited benefits and may leave consumers with the false impression of adequate coverage.

“Today's announcement by HHS recognizes the need for mini-med plans to start increasing value for policyholders by requiring them to phase-in the new MLR standard,” Roberto said. “But as long as these plans continue, policyholders may be left with unexpected medical debt in the event of a major illness.”

ICD-10, Fraud

CMS said the final rule makes other changes, such as allowing ICD-10 conversion costs (that is, the conversion of International Classification of Diseases code sets from ICD-9 to ICD-10) of up to 0.3 percent of an issuer's earned premium in the relevant state market to be considered quality improvement activities, for each of the 2012 and 2013 MLR reporting years.

CMS's fact sheet said the final rule “also levels the playing field within States by allowing an issuer to deduct from earned premiums the higher of either the amount paid in State premium tax or actual community benefit expenditures up to the highest premium tax rate in the State.”

In the final rule, CMS also said in response to comments that it will continue to exclude fraud prevention activities from quality improvement activities.

‘Will Cost Jobs.'

Sen. Michael B. Enzi (R-Wyo.), ranking member on the Senate Health, Education, Labor and Pensions (HELP) Committee, said in a statement that “mandating that insurance companies spend a certain percentage of health care premiums on claims does nothing to actually lower skyrocketing health care costs and will instead cost thousands of jobs.”

In denouncing the final rule, Enzi also called for complete elimination of the health reform law. “We cannot wait to repeal this partisan health care law. We must start over with something that actually will help lower costs, improve care, increase choice, and put Americans back in charge of their health care.”

DOL's Guidance for Plans

In addition to the CMS actions, the Department of Labor issued guidance on the rebates Dec. 2.

According to the guidance from DOL, any rebates in connection with group health plans covered by the Employee Retirement Income Security Act of 1974 may constitute plan assets.

“If the plan or its trust is the policyholder, in the absence of specific plan or policy language to the contrary, the entire rebate would constitute plan assets, and the policyholder would be required to comply with ERISA's fiduciary provisions in the handling of rebates that it receives,” the guidance stated.

If the plan sponsor is the policyholder, determining the plan's portion, if any, may depend on provisions in the plan or the policy or on the manner in which the plan sponsor and the plan participants have shared in the cost of the policy. Any portion of a rebate constituting plan assets must be handled in accordance with the fiduciary responsibility provisions of Title I of ERISA, the guidance stated.

Health Insurers Pleased

Health insurers were pleased that HHS changed the 2010 interim final rule to allow them to send rebates to employers, rather than requiring them to ensure that the rebates were received by enrollees in group health plans, as the interim final rule would have done.

“Employers can use that to lower premiums for employees,” Justine Handelman, vice president of legislative and regulatory policy for the Blue Cross and Blue Shield Association, told BNA.

The requirement in the interim final rule that insurers would have been responsible for getting rebates to employees “was a very challenging requirement for health plans and employers,” Handelman said. Health plans often do not know how much employees in group health plans pay for premiums, she said. The final rule “really does make it administratively feasible for health plans and employers, and does it in a way that benefits employers,” she said.

In addition, allowing insurers to include up to 0.3 percent of premiums for converting to the new ICD-10 claim classification system required by the federal government should cover most insurers' conversion costs, Handelman indicated.

Further, “The greater granularity [of the ICD-10 code classification system] many believe can be used to do quality improvement programs,” she said. “We thought it made sense to have the conversion cost count as quality improvement.”

America's Health Insurance Plans President and Chief Executive Officer Karen Ignagni issued a statement applauding the inclusion of a portion of ICD-10 costs as quality improvements.

However, Ignagni added that “health plans' programs to prevent and combat health care fraud should be given similar consideration.” Health insurers had pushed for including more fraud prevention costs as quality improvements.

Brokers' Concerns Not Addressed in Rule

In her statement, Ignagni also said that “additional steps should be taken to ensure that consumers and small employers do not lose access to the guidance of a trusted health benefits advisor between now and 2014.”

Ignagni's statement was a reference to problems faced by health insurance brokers and agents, whose commissions have been cut by insurers trying to hold down administrative expenses to meet the MLR requirement.

NAIFA President Robert Miller said in a statement that the brokerage organization is “disappointed that the administration rejected the NAIC recommendation that would ensure continued consumer access to professional health insurance agents in its final MLR rule.”

“Our focus is obviously going to be on the congressional side of things,” Diane Boyle, vice president of federal government relations for NAIFA, told BNA. “Having that NAIC resolution now and a definitive answer from HHS, we have a little more strength in going back to the Senate” to get legislation introduced similar to H.R. 1206 introduced in the House, she said.

The NAIC resolution on brokerage commissions was pushed by Florida Insurance Commissioner Kevin McCarty, who is president-elect of NAIC. “The resolution passed by the NAIC adequately outlines our positions and our concerns,” Florida Office of Insurance Regulation spokesman Jack McDermott said in an e-mail to BNA.

NAIC President and Iowa Insurance Commissioner Susan Voss issued a statement saying that state insurance regulators “are glad that HHS has released the final medical loss ratio rule giving insurers the information they need to appropriately set rates, adjust business practices, and assess their position in various markets. We are especially pleased to see the final MLR rule closely follows the recommended definitions and methodologies for calculating the MLR the NAIC submitted to Secretary Sebelius in 2010.”

A prepublication copy of the interim final rule is available at . A prepublication copy of the final MLR rule is available at . A CCIIO fact sheet on the final rule is available in HealthDocs™. DOL's guidance on ERISA aspects is available in HealthDocs™.