Medical Loss Ratios Tighten Under PPACA

Carriers didn't anticipate the volume of claims they saw after the implementation of the Patient Protection and Affordable Care Act.

Health insurers spent on average 92% of premium dollars from individual health plans on patient care or quality improvements in 2014, far exceeding the 80% threshold for medical loss ratios mandated by the Patient Protection and Affordable Care Act, according to a study by the Urban Institute and the Robert Wood Johnson Foundation.

Before the PPACA was implemented in 2010, the average MLR in 29 states for all insurers was below 80%. By 2014, every state had an average MLR at or above 80%. That percentage, however, can vary significantly from state to state.

Most states had an average MLR between 80% and 89%. Ten states and the District of Columbia had an average individual plan MLR of more than 100%, which means policy holders in those states could face a significant premium increase this year, said Kathy Hempstead, director of coverage issues at RWJF.

Hempstead spoke with HealthLeaders Media about her study. The following is an edited transcript.

HLM: Are your findings an endorsement of the PPACA mandates on MLR?

Hempstead: It's a bit of a mixed message. You could liken it to someone who needs to lose weight but they lose too much weight and you're thinking 'you don't look so good.' It's clear that some of these MLRs are pretty high. In fact, some of them are over 100%. That's a little too much of a good thing.

HLM: How did that happen?

Hempstead: It's called carriers losing money. That's easier for some carriers to deal with than others. It's not good for any carrier in the long run.

HLM: What's a good 'fighting weight' for MLR?

Hempstead: Most people feel like 80% to 85% is pretty good. When you start getting up into the mid 90s that's a place where it is really hard to see carriers making a living. You have to have people who are selling insurance if you want the market to work.

HLM: Health plans are sophisticated business organizations. How could they miscalculate to this degree?

Hempstead: The carriers have said they didn't anticipate how many claims this population would have, especially with the use of expensive pharmaceuticals. They did not anticipate how much utilization this population would have. They underpriced in the first year and they didn't even quite figure it out in the second year and some of them had even lower prices in the second year and now this is a big adjustment.

HLM: Should we anticipate a significant premium bump in the next year or so, and a leveling out after that?

Hempstead: You should imagine this to be a one-year adjustment because coverage has expanded. This is a one-trick pony. You can't keep seeing this because a lot of this population is now enrolled in coverage. Cruising at a higher altitude maybe the way to think about it; leveling off at a higher level of claims and a different experience with the population that people weren't pricing for.

At the aggregate level, healthcare spending is driven by increased utilization which is sort of what we are talking about with the ACA. The increased utilization is coming from coverage expansion. It's not coming from the covered person using more healthcare, except for people who just became insured. That is affecting the ACA plans, but not the employer-sponsored insurance.

Then there is the drug issue, which affects everybody, but maybe it affects ACA plans a little bit more if they have more people on specialty drugs. Healthcare service prices are not rising much. Hospital prices, and doctors' prices are increasing at a moderate pace. If that holds true and they make this one-time adjustment to account for the higher level of utilization and the higher use of prescription drugs, then you are at a situation where you would not expect to see continued big increases.

You would see increases reflecting changes in health services prices and maybe other changes with new drugs coming onto the market.

HLM: Why is the MLR fluctuating from state to state?

Hempstead: It has something to do with the markets in the different states. In some markets there may have been more of a price war. Some of these carriers knew they were pricing pretty low and there was some downward pressure in some markets, and a lot of people looked at the co-ops as injecting that into the market.

Some people said that some carriers priced really low because they thought 'I'm going to be OK with these risk corridor payments if things don't go that well.' That leads other carriers to price down there too. There could have been differences in the populations and differences in utilization. It might be interesting to look at the differences between states that expanded Medicaid and states that didn't because there is a whole segment in the (qualified health plans) in the non-expansion states that weren't there.

HLM: MLRs have tightened tremendously in four years. Is that simply because of an ACA mandate, or is something else in play?

Hempstead: It's because the product itself totally changed. The products that were on the market in 2010 (with a couple of states as an exception) were completely not comparable with the products on the market in 2014. They were weren't covering 10 essential health benefits. They were medically underwritten in a lot of states. They weren't necessarily offering super comprehensive coverage. They weren't the things that we today would define as health insurance. It was a funky market before the ACA and it wasn't the same in all states, but definitely it would be very hard to compare those products.

It looked like they were more profitable for insurers, for sure, in the pre-ACA times. On the other hand, they had much less volume. Now it looks like the carriers blew by the MLR requirement. That wasn't their problem, keeping it at 80%. The problem was keeping it under 99%. It was more the population and the market and the claims experience and the price competition and the whole dynamic of the market that priced optimistically and had low margins. I am sure a lot of carriers anticipated that 'yeah we want to get out there and get customers and stake a piece of the market' and they are willing to price aggressively to capture part of that market. If you do that you are going to have an MLR that satisfies the requirement and then some.

HLM: What do you anticipate over the next couple of years?

Hempstead: Probably some small carriers are going to have a harder time in this market than others. The individual market is not as profitable as the group market for obvious reasons. You don't have the economies of scale and there are more administrative costs per policy.

But the plans feel like it's this part of the market that is going to grow over the next several decades so I understand why everybody wants to be there. And I do feel that this is a one-time adjustment. But the market does favor larger carriers that can be more efficient in their own administrative costs and more importantly can leverage lower prices.