The Medical Loss Ratio (MLR) mandate, within the Patient Protection and Affordable Care Act, requires insurance companies to spend 80 to 85 percent of premium dollars on medical care and health care quality improvement. This provision just started in August, but how will it impact the insurance industry and employers?
“The MLR Legislation has a perverse incentive; when utilization and costs increase, an insurance company makes more money,” says Mark Haegele, director, sales and account management, with HealthLink.
Smart Business spoke with Haegele about what MLR does and the ramifications for health insurance companies, brokers and, ultimately, employers.
How does the MLR mandate work?
Medical loss ratios refer to the percentage of premium dollars an insurance company spends on providing health care and improving the quality of care, versus how much it spends on administrative and overhead costs and, in many cases, salaries or bonuses.
In August, health insurance companies paid $1.1 billion in total rebates to customers when less than 80 percent (for individual and small group markets) to 85 percent (for large group markets) of premiums were not used for health care costs. Approximately 31 percent of Americans with individual insurance got the rebate, with an average check of $127, according to the Kaiser Family Foundation. Rebates went directly to businesses that sponsor their own plans and they decided whether to distribute them or put the funds toward lowering future premium costs.
Why does MLR create a problem for insurance companies and, subsequently, employers?
Many insurance companies have had to make up a gap of up to 10 percent by balancing their administrative costs in order to pay for overhead, employee salaries, etc., and to run their business. In the individual market, for example, typically 70 to 85 percent of a premium is used to pay for the claim, according to a 2010 report by the American Academy of Actuaries.
Now, if you are an insurance employer, suddenly you have to spend 85 percent of the premium that you take in on claims. That means that 15 percent is the only bucket of dollars that you have for profit, administration, overhead, etc. So, logically, there are only two ways that insurance companies make more money year over year and increase their profits. They can either reduce their administrative overhead by cutting staff or have a claims increase.
For instance, if your premium was $1,000, $850 goes back to claims and $150 goes to profit and overhead. Let’s say next year your premium is $1,500; now the insurance company has increased its potential for profit by 50 percent — to $225 rather than $150. Artificially increasing utilization isn’t good for our health care system, and increasing premiums wasn’t part of the reform game plan.
The more realistic and impactful method is reduction. Insurance companies are in it to win it; they are not going to sacrifice profits. With insurance companies facing huge budget constraints, what does that mean for employers and their employees? It means a lower level of service because there are fewer people answering phones and less staff to handle claim issues as insurance companies are forced to squeeze their administration expenses.
In addition, employers will want to know if their group is subsidizing other employers. Insurance companies will need to provide information about the cost of claims, how much is being spent administratively and where are the funds going, and how groups compare. The president of an insurance company recently received a call from an employer who was very upset about the payment of his rebate check because he knew that his premiums were artificially high for many years and that he’s been subsidizing other employers.
How have insurance brokers been negatively impacted by MLR?
The U.S. Department of Health and Human Services has decided that agent commissions are not exempt from the administrative calculations. This creates a difficulty because brokers rely on incentives/bonuses from insurance companies to sell their business.
With the MLR mandate, the broker’s commissions have been cut considerably, if not all together. The National Association of Insurance Commissioners recently released a study that reported that a significant number of health insurance companies have reduced commission levels, particularly for the individual market. Brokers and agents are worried that this will run them out of business.
In the era of health care reform, it is important for employers to have consultants to ask questions, which often is the broker’s role and where that person earns his or her 6 to 10 percent fee. This will be even more vital if insurance companies themselves are giving lower service.
Are there other health care solutions not affected by MLR?
Self-funded programs are not held to the MLR and other PPACA mandates. Therefore, consultants who work off commissions could be suggesting self-funding more frequently. If business owners feel their group is not benefiting from MLR requirements, they also could look at self-insured models.
There’s no doubt that the MLR is clearly another driver to push employers to look at alternative methods of health care, including self-funded insurance. This already has been demonstrated by more interest from brokers and others entertaining a self-funded solution; they are not all buying it, but they are all looking at it.
Mark Haegele is a director, sales and account management, with HealthLink. Reach him at firstname.lastname@example.org or (314) 753-2100.
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