Getting Your Money's Worth Using The Medical Loss Ratio

The Affordable Care Act (ACA) contains a provision called the "medical loss ratio". This provision is to make the insurance marketplace more transparent and allow consumers the ability to purchase plans that make the best use of their premium dollars. Over 20 percent of consumers are now in plans that spend about 30 cents per dollar on administrative costs. Some insurance companies spend more than 50 percent of premium dollars on administrative costs. This new provision will eliminate the overspending on administrative costs and improve the value of the money spent by consumers on their health care premiums.

It is estimated that the new rule will protect about 74.8 million insured Americans in 2011. It is also estimated that almost 9 million people could receive rebates in 2012. The estimation of the amount of rebates is $1.4 billion. In the individual market the average rebate per person could be $164.

Insurance companies will be held accountable for their spending by the medical loss ratio. This will increase the value of consumers' premium dollars and will be accomplished in three ways beginning in 2011. First, insurance companies will be required to report publicly how the premium dollars they received were spent. This provides consumers an accounting of how far their money went to improving health care quality.

Second, insurance companies who provide individual and small group policies will be required to spend at least 80 percent of premium dollars on medical care and quality improvement. Insurance companies who provide large group policies will have to spend 85 percent on medical care and quality improvement.

The third way is to provide rebates to consumers when insurance companies don't comply with the medical loss ratio. The first rebates would occur in 2012 and would need to be paid by August 1 of each year. Consumers might receive a premium reduction, receive a rebate check, or have the amount returned to whatever account the premium was paid from. If the premium was paid by an employer then the employer would receive the rebate amount.

Health insurance companies will have to report certain information to every State where they do business. This information includes total premium amounts received, total reimbursement for clinical services, total spending on quality improvement and total spending on all other costs. These reports will then be publicly posted so every State resident will be able to see the value of health plans that are in their State.

The regulation specifies a set of comprehensive quality improving activities that an insurance company may implement and that can be counted toward the 80-85 percent spending standard. These activities must be evidence-based medical practices and the insurance company must be able to show measurable results. These activities must be based on the specific needs of patients and be designed to increase a desired health outcome. An example is having a case manager follow-up with diabetic patients to encourage them to follow their medical plan and decrease hospitalizations.

Health insurance companies are required to send their reports to the State by June 1 of each year. The first year it will be due is 2012 which will contain the 2011 data. Rebates will then be due by August 2012 based on the 2011 medical loss ratio.

The ACA has stipulations that are intended to prevent market destabilization and ensure continued access to health coverage. The reporting requirements and the way the medical loss ratio is calculated has been designed to take special circumstances into account.

The Secretary of the HHS can adjust the medical loss ratio standard for any State. If meeting the 80 percent standard will destabilize the individual health insurance market, the standard can be adjusted for that State for up to three years. The State must show that the 80 percent requirement will destabilize the market and that there will be fewer health plan choices for consumers.

The ACA gives the HHS Secretary direct enforcement authority over the medical loss ratio requirements. The States rights and capacity to assist in enforcement will still be recognized. Part of the enforcement includes requiring health insurance companies to retain documentation relating to the data they reported. They also have to allow access to their data and facilities for verification that they are complying with all of the regulations.

The overall intent of the medical loss ratio is to improve health care and lower health care costs. Allowing people to see where their dollars are spent will force health insurance companies to improve their spending and also to improve how they provide health care to their consumers.