Catching up on medical loss ratios

Working two gigs, going on vacation and attending a conference has set me back a bit, so I haven’t been keeping up with the medical loss ratio debate. On the other hand, the NAIC, which promised recommendations by July 1, then Aug. 1, hasn’t quite wrapped things up yet, either, so I guess everyone has been busy.

First recall Obamacare requires insurers to rebate back to customers if the medical loss ratio fell below 80% on individual policies or 85% for group plans. In its July 23 story the New York Times covers the political heat but offers too little policy meat:

The calculation of what is called the medical-loss ratio is crucial to insurance companies, because the law requires them to refund money to consumers if they spend too much on administrative costs.

But consumer advocacy groups and others see the insurers’ proposals and their lobbying for a more expansive definition of what would be permitted as an effort to water down the law by including too many administrative costs under the umbrella of patient care.

Meanwhile, I had been checking back with NAIC as the Aug. 1 deadline approached. The key committee here is the actuarial subgroup of the Accident and Health Working Group, whose members have been meeting weekly. And a busy agenda they’ve had.

They’ve tackled more than 70 issues related to the MLR and are considering the following:

  • Excluding loss adjustment expenses from the calculation. There will be some LAE that do qualify. This tends to lower the MLR, to the detriment of the insurer.
  • Calculating MLR at the company level (“statutory entity” in NAIC speak). The alternative would be to calculate at the group level, or combining results from several affiliated companies. However, several states’ results can be combined if the individual states don’t generate much business. In the same way, several affiliated companies can combine results, if the individual companies don’t write much business. This wouldn’t necessarily drive the MLR higher or lower, though it will make results more variable. It would also make the regulation more cumbersome.
  • Calculating a different MLR for each state. Again, this would make results more variable and compliance more difficult.
  • The MLR would have a credibility adjustment. (For you non-actuaries, a credibility adjustment raises or lowers an estimate to bring it closer to a long-term average.) The adjustment would be an addition to the calculated MLR – Medicare supplemental insurance has a similar adjustment. The alternative, weighting the calculated MLR with Z and the long-term average with 1-Z, was rejected.
  • Large losses would be pooled across affiliated companies within a state, if there would be no other way to make results credible. (Pooling lets exceptional events in one company be spread across several companies, lowering the MLR for the company that suffered the exceptional event and raising it for the others.)
  • Premium discounts for wellness plans would be subtracted from the denominator, premium. Rebates and rewards would be added to the numerator, losses.

Again, these are still proposals. NAIC in its documents make it clear that the final recommendations are still to come.

A full list of issues and their proposed resolution is here. It is summarized here.

The group has also posted a spreadsheet with examples of the calculation.

Update: From The Hill.

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