Understanding MLR Waiver Requests

Since January health insurers have been required to meet certain medical loss ratio targets.

The MLR, mandated by the Affordable Care Act, requires insurance companies to spend no more than 15% to 20% on administrative expenses such as executive salaries, overhead, and marketing, and the rest must be spent on patient care and/or quality improvement.

That means payers must spend 80% to 85% of premiums collected in the individual and small group markets on direct patient care and efforts to improve care quality.

And here's the kicker: Health plans that don't meet the MLR must provide a rebate to their customers. We're talking some big collective bucks. The Department of Health and Human Services estimates that 9 million members could be eligible to share rebates worth up to $1.4 billion. That's money health plans aren't anxious to part with so they have appealed to their state departments of insurance to request state waivers to delay implementation of the MLR requirement.

So far 12 states – Kentucky, Maine, Nevada, New Hampshire, Delaware, Florida, Georgia, Indiana, Iowa, Kansas, Louisiana and North Dakota  –  have filed waiver requests with HHS. Politico, which has been tracking the waiver process, lists another four states – Alaska, Oklahoma, South Carolina and Texas  – as likely applicants. And it identifies 23 states as unlikely to enter the waiver process, including Alabama, Maryland, Utah and West Virginia.

The plans of 11 states are unknown, including North Carolina, South Dakota, and Nebraska.

Although there's no firm deadline for submitting a waiver applications Tim Jost, who has studied the waiver applications, says time is running out for states to complete the process before the first round of rebate calculations begin. Jost, a consumer representative on the National Association of Insurance Commissioners and a law professor at Washington & Lee University, explained that "HHS puts the waiver applicants through their paces.

The process takes months to complete and often involves requests for additional information." The rebate requirement goes into effect on Jan. 1, 2012 for any state that hasn't already been granted a waiver.

For the most part, the basis for requesting a MLR waiver – at least for the states that have applied so far – falls into a single category: fear that meeting the standard will destabilize the individual market and result in fewer choices for consumers.

That's an ongoing concern for HHS, as it develops rules and regs to implement the ACA and the department has let it be known that it is open to granting waivers to states that can make that case.

But as North Dakota has learned, making that case is easier said than done.

In its waiver application, the state contended that an increase from the 55% MLR required by state law to the 80% required by the ACA would pressure insurers to reduce or eliminate broker's commissions. That could lead to a reduction in services by brokers and "cause poor purchasing decisions" which could "cause financial harm to our marketplace."

HHS didn't buy it. Last week it notified the state's insurance commissioner that its waiver request had been turned down flat.

Although market destabilization is an overarching concern, in making its MLR waiver decisions HHS looks at five factors:

• Whether insurers will leave the market or stop offering insurance
• How many enrollees will be affected by the departures
• Will access to brokers/agents be limited
• What alternative coverage is available
• How will premiums and benefits be affected

In its 10-page reply to North Dakota's insurance commissioner, HHS noted that the two insurers that suggested they would leave the state unless they received a reprieve from the MLR requirement already met the 80% threshold and wouldn't be subject to issuing rebates.

HHS also quoted a letter from the state's dominant insurer, Blue Cross Blue Shield of North Dakota, asking the insurance department to withdraw its waiver request. "We see no evidence that insurers are in risk of leaving the North Dakota market," HHS concluded in denying the waiver request.

In addition to North Dakota, HHS has completed its review of waiver applications from Iowa, Kentucky, Maine, Nevada, and New Hampshire. HHS agreed to those requests, with some modifications:

• Iowa. Insurance companies will have an additional two years – until 2013 – to hit the 80% MLR standard. Incremental targets are 67% for 2011 and 75% for 2012. HHS was worried that three small issuers could owe rebates in 2011 and would leave the Iowa market. Golden Rule, Coventry and American Republic have MLRs of between 48% and 68%, pay high broker commissions and need more time to adjust their business models.

• Kentucky. Insurers received a one-year reprieve. They must achieve a 75% MLR standard for 2011 and meet the required 80% level in 2012. Anthem, the dominant insurer, said it would adjust its business model to meet the 80% standard. Humana and Golden Rule have MLRs well below 80% while Time operates at a loss. High agent commissions also played a role in HHS's decision to grant a modified waiver.

• Maine. HHS accepted the state's request for an MLR of 65% for 2011 and 2012 with a possible extension to 2013. MEGA Life & Health Insurance Co. covers about one-third of the individual market and threatened to leave the market if required to meet the 80% standard in 2011 and 2012. MEGA offers lower cost policies and HHS was concerned that individuals would not be able to replace the policies if MEGA left the state.

• Nevada. The state requested a 72% MLR standard for 2011. HHS agreed to a 75% adjustment. HHS noted that seven of Nevada's top 10 issuers are expected to have 2011 MLRs above the 72% requested by the DOI.

• New Hampshire. The state DOI requested a 70% MLR standard for 2011, 2012, and 2013. HHS agreed to 72% for 2011, 75% for 2012 and 80% for 2013. In making the decision HHS recognized potential losses that some insurers might incur if rebates were necessary. It noted that individual policies in the state are medically underwritten and if a firm dropped out of the market members with pre-existing conditions might have a difficult time finding alternate coverage.

Granting the waivers is controversial. Advocacy groups contend that HHS is taking rebate money out of the pockets of consumers and that HHS is granting waivers based on little or no evidence that a given insurer will actually leave a state.

Carmen Balber, the Washington, D.C. director for Consumer Watchdog, points out that many states have a requirement that once an insurer leaves a state it can't return for five years. With billions of dollars in premium tax credits coming online for insurers in 2014 threats to walk away from a book of business could be nothing more than empty threats.

But the NAIC's Jost says reducing the cost of healthcare insurance premiums – not assessing rebate penalties ? is the real goal of the MLR requirement and that's where the focus should be.

See Also:
3 MLR Questions Payers, Providers Should be Asking