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How MLR Can Hurt or Help Contract Negotiations

Karen Minich-Pourshadi, for HealthLeaders Media, January 10, 2011

Healthcare reform is changing how everyone transacts business in the industry, and that’s not just providers but also payers. Of course, when payers’ profits diminish, providers can expect to feel it too. Now that 2011 has arrived, payers will start to feel the pain of the medical loss ratio taking effect, which means hospital and health system financial leaders should prepare themselves for contract negotiations that may require them to think outside the norm, and work with payers.

Under the Patient Accountability and Affordability Act, the MLR is an attempt by the government to discourage insurance companies from spending a substantial portion of consumers’ premium dollars on administrative costs and profits, including executive salaries, overhead, and marketing. The reasoning is that consumers should receive more value for their premium dollar.

Starting this year, regulations require health insurers to spend 80% to 85% of consumers’ premiums on direct care for patients and improving quality of care, rather than on administrative costs. If payers fail to do so, they must provide a rebate to their customers starting in 2012. The Department of Health and Human Services released the regulations in November along with a fact sheet.

Insurers have to make up their loss in funds somehow, and that’s the question: How? Note, that payers do have a possible way out. The MLR percentage can vary from state to state if the Federal secretary of state approves an adjustment to the standard. The only way to get that adjustment is if the secretary deems that meeting the 80% standard would destabilize the individual state market and that it would result in fewer choices for consumers.

Most healthcare experts believe that getting a state adjustment in most instances is unlikely, which means that payers need to recoup these losses in order to maintain the status quo. While you can certainly anticipate that your contract negotiations will be more rigid this year, payers are also inclined to find other ways to tighten their belts—and that’s where providers can actually help.

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