Health insurance company medical loss ratios improved in 2011-2012 to drive a $3.4 billion reduction in healthcare premium costs. But MLR's influence is expected to wane.
Health insurance company medical loss ratios improved sufficiently from 2011 to 2012 to drive a $3.4 billion reduction in healthcare premium costs, according to an announcement last Thursday by Centers for Medicare & Medicaid Services.
The medical loss ratio (MLR) provision of the Patient Protection and Affordable Care Act holds insurers to administrative costs that do not exceed 15% to 20% of premium revenue and requires that the remaining 80% to 85% of premiums be dedicated to direct medical costs. Any excess must be rebated to consumers. CMS officials contend that the rebate threat is moving insurers to reduce premiums.
At a media briefing, Gary Cohen, CMS deputy administrator and director of Center for Consumer Information and Insurance Oversight, described the MLR as "a critical part of the Affordable Care Act" that helps consumers "keep their costs down."
But healthcare industry stakeholders disagree.
America's Health Insurance Plans, the health insurance industry's lobbying organization and no fan of the MLR, contends that the MLR does nothing to address the main drivers of healthcare costs and thus reduce premiums. Those drivers include the added cost of providing benefits to consumers, such as rising medical prices, changes in the covered population, and new benefits required by the healthcare reform law.
Both CMS and AHIP make good points, says Timothy Jost, a professor at Washington and Lee University School of Law who has studied the MLR process. "I think CMS is correct in its analysis that the main effect of the MLR has been to drive down premiums. Insurers respond that the main driver of healthcare premiums is increasing healthcare costs, and that's obviously true."
But while healthcare costs continue to increase, they are doing so at a much slower pace. A just released report from PricewaterhouseCoopers Health Research Institute's notes that for the fourth consecutive year, the pace of medical cost increases will slow. In 2014, healthcare costs are projected to increase by 6.5%, a full percentage point lower than the 2013 projected rate.
Jost, who is also a consumer representative on the National Association of Insurance Commissioners, says that despite the slowdown in healthcare costs and a corresponding drop in healthcare utilization, insurers did not respond by cutting premiums, and as a result there were often high profits for insurers on the for-profit side and large reserves for the not-for-profit insurers.
He notes that when the MLR was first implemented in 2011, insurers who didn't meet the MLR requirements found themselves owing 12.8 million members more than $1 billion in rebates.
That was something of a wake-up call for the health insurance industry.
"They realized that the downturn in healthcare cost growth was not just a blip and they needed to align premiums more closely with those costs," Jost told HealthLeaders Media. The MLR provides "strong encouragement to take that step" by requiring rebates to be paid by insurers with for MLR excesses. Thus insurers have been paying more attention to administration components such as marketing costs and broker fees.
For 2012 the rebates were about 50% lower, $504 million, while the number of consumers in line to receive a rebate fell by 34% to 8.5 million.
Last year was the first time CMS identified a corresponding premium savings. Among the components of the $3.4 billion premium reduction, the large group market accounted for 43% or $1.5 billion, while the individual and small group markets each accounted for 28%, or $980 million and $970 million, respectively.
Jost notes that the large group market typically has a better understanding of costs and is "probably much more accurate in projecting premiums," which is reflected in its significant contribution to the premium reduction.
By contrast, the small group market is challenged in identifying risks, probably charges a risk premium, and is more likely to "overestimate costs, charge higher premiums, and then pay a rebate," says Jost.
Indeed, the small group market, which is often identified as the market that will suffer the most negative impact from PPACA in terms of premium increases and regulatory burden, accounts for 40% of the total 2012 rebate, or $203.3 million.
The MLR is a "transitional program," Jost says, as the MLR moves to three-year averaging in 2014 and rebates are paid only after accounting for state-based reinsurance and risk adjustment programs and the federal risk corridors program. Those programs are expected to protect against adverse selection and stabilize premiums in the individual and small group markets as health insurance exchanges begin operation.
Jost says the MLR has played a role in improving insurer efficiencies and forcing insurance companies to acknowledge that healthcare costs aren't increasing now at the same rate as they did earlier in the decade. But going forward, the MLR will be a smaller factor "because of the other reform programs coming into effect to try to stabilize the market."
He adds that stricter rate review and increased competition among insurers in the insurance exchanges will play roles in holding premium costs down.
CMS's Cohen also views the MLR influence as somewhat fleeting, especially as additional parts of the PPACA go into effect and other market forces, such as competition, influence premium rates. "Over time, we expect that there will be competitive markets everywhere and premium rates will reflect that," he says.
Margaret Dick Tocknell is a reporter/editor with HealthLeaders Media.
