Guidance On New Health Care Reform Regulations Concerning Medical Loss Ratio Reporting, Calculation And Rebates

January 2011

 Group and individual health insurance issuers, and employers who sponsor insured group health benefit plans finally have some guidance regarding “medical loss ratio” (MLR) calculation, reporting and rebate requirements under the Patient Protection and Affordable Care Act, based on new regulations issued by the Department of Health and Human Services (“HHS”) that take effect as of January 1, 2011. The purpose of these regulations (which apply to both grandfathered and non-grandfathered plans) is to bring down the cost of health care coverage by increasing transparency and by ensuring that enrollees receive value for their premium dollars. Yet, the impact on insurers will be costly. HHS estimates that from 2011 to 2013, issuers will incur approximately $33 million to $67 million in one-time administrative costs, and $11 million to $29 million in annual ongoing administrative costs of compliance. Although these new regulations largely impact health insurance issuers, employers that sponsor insured health benefit plans should also be aware of the new rebate requirements in particular.

Following is a brief overview of this lengthy set of regulations which contain many defined terms and methodologies developed primarily by the National Association of Insurance Commissioners (“NAIC”), in conjunction with regulators and other interested stakeholders. If you have questions after you review this information, please do not hesitate to contact any of the attorneys listed below for more targeted assistance.

The Purpose Of The MLR - Ensuring Consumer Value

An insurer will be required to issue a premium rebate when its MLR for a particular policy is less than 85% in the large group market, or less than 80% in the small group market (100 enrollees unless a State lowers the threshold to 50) or individual market. Imposition of these rebates, in essence, requires insurers to spend at least $0.85, or $0.80 (depending on the applicable market), out of every premium dollar received (adjusted for taxes and regulatory and licensing fees) on either reimbursement for clinical services provided to enrollees or activities that improve health care quality. Another way of expressing this formula is to say that, in the large group insurance market, an insurer may only spend $0.15 out of every earned premium dollar on “non-claim costs”, while insurers in the small and individual markets may only spend $0.20 out of every premium dollar earned on “non-claim costs.”

States are allowed to substitute higher MLRs so long as measures are taken to ensure adequate industry participation and competition, and to preserve consumer value. In addition, a State insurance commissioner can request that HHS adjust the 80% MLR in the individual market if application of the 80% MLR may destabilize the individual market in that State.

Calculation Of The MLR

An issuer’s MLR is calculated as follows: incurred claims + expenses for activities that improve health care quality ÷ premium revenue less certain taxes, licensing and regulatory fees. The MLR is calculated for each calendar year, referred to as the “MLR reporting year”. For the 2012 MLR reporting year, an insurer may include in the numerator a rebate
paid for the 2011 MLR reporting year if its experience is not fully credible (discussed below). For the 2013 MLR reporting year, an insurer may include in the numerator any rebates paid for the 2011 or 2012 MLR reporting years. Further, beginning in 2013, the MLR will be calculated on a three year average - to include the current and prior two MLR reporting years.


The MLR may be adjusted by a “credibility factor” - referring to whether an issuer insures a sufficiently large number of lives for its claims experience to be statistically valid. An insurer that issues coverage for more than 75,000 lives is considered “fully credible” and is required to pay rebates based on its reported MLR. In contrast, an insurer that issues
coverage for less than 1,000 lives is considered “non-credible”, and is not required to pay a rebate if it does not satisfy its reported MLR. An insurer is considered “partially credible” if it issues coverage for greater than 1,000 but less than 75,000 lives, in which case the regulations provide a scale of credibility adjustments to the insurer’s MLR calculation.

Mini-med and Expatriate Policies

For the 2011 MLR reporting year, the MLR for “mini-med” policies (those with an annual limit of $250,000 or less) and expatriate policies (covering enrollees out of the country) are to be adjusted by multiplying the ratio numerator (incurred claims + expenses for activities that improve health care quality) by a factor of two.

Taxes and Fees

Certain Federal and State taxes and licensing or regulatory fees are to be excluded from an insurer’s total premium revenue and are not taken into account when calculating an insurer’s MLR. Exclusion of these taxes and fees from an insurer’s earned premium effectively increases the MLR. In addition, a non-profit organization is allowed to deduct “community benefit expenditures” (paid in lieu of certain taxes), which similarly effectively lowers its MLR.

Calculation Of Premium Rebates

When an insurer fails to comply with its applicable MLR, it will be required to issue rebates to enrollees. A rebate is calculated as the total amount of premium revenue paid by an enrollee, minus taxes and other permissible adjustments, multiplied by the amount by which the applicable MLR standard deviates from the issuer’s actual MLR.

Based on historical industry data, HHS estimates that rebates for the period 2011 - 2013 will total $1.8 billion in the individual market, $770 million in the small group market and $440 million in the large group market.

Paying Rebates To Enrollees

Insurers are required to pay rebates by August 1 following the end of the MLR reporting year in the form of a premium credit, lump-sum check or payment method reimbursement. For group policies, rebates can be paid to the employer or policyholder by agreement, but the insurer is ultimately responsible for ensuring that rebates are accurately distributed to individual employees/enrollees. Rebates to group policyholders must be made in amounts proportionate to the amount of premium paid by the employer and the employees. For example, if the employer paid 70% of the premium and the employees paid 30% of the premium, the rebate would be distributed 70/30 as between the employer and the employees. States are authorized to defer rebates that would adversely affect an insurer’s solvency.

Insurers are not allowed to retain either de minimis rebates (less than $5.00 per subscriber) or unclaimed rebates. In the case of de minimis rebates, insurers must aggregate all of these rebates and distribute them in equal amounts to all then-current enrollees who receive a premium credit. In the case of unclaimed rebates, the disposition of these funds will be subject to relevant State law provisions.

Along with any rebates, insurers are required to provide a notice to enrollees explaining what an MLR is, why the Affordable Care Act created the policy (i.e. to increase transparency, incentive to lower premiums), and why the enrollee is receiving this particular rebate. It must also include the aggregate amount of premium revenue reported by the insurer during the MLR reporting year, the insurer’s MLR, the required threshold, the percentage being rebated and the total amount being paid/credited to enrollees. Finally, insurers are required to report all rebates to the Secretary of HHS for validation.

Greater Transparency Through Public Reporting

Beginning in 2011, insurance companies will be required to compile and report to HHS a wealth of financial information, including total premium revenue and the amount of premiums spent on the following categories:

• Reimbursement for clinical services;
• Activities that improve health care quality for enrollees;
• All other “non-claim” costs; and
• Federal and State taxes and licensing or regulatory fees.

Insurers will be required to report these figures annually beginning on June 1, 2012 for the 2011 MLR reporting year. Issuers must report data by market size - for large, small and individual categories - and aggregated by the State of issue.

In order to properly report this financial information, insurers will need to have a clear understanding of the terms discussed below. Further guidance on the precise form and content of required data will be announced by HHS, but it is anticipated that required submissions will track the type of similar data currently filed by issuers with State departments of insurance as part of their annual statements.

Earned Premium

An insurer’s earned premium is broadly defined as the sum of all monies paid by a policyholder for coverage, including any fees or other contributions associated with the health plan, less unearned premiums. An unearned premium is the portion of the premium paid in the MLR reporting year for coverage provided after the MLR reporting year.

Earned premiums do not include any premium assessments paid to or subsidies received from Federal and State high risk pools, the portion of premiums associated with group conversion charges, or adjustments for experience rating refunds.

Reimbursement for Clinical Services Provided to Enrollees

Clinical services include any direct claims or “incurred claims” paid by insurers during an MLR reporting year. Direct claims are just that - payments to health care providers for clinical services or supplies covered under the policy. Incurred claims are defined as the sum of direct paid claims incurred in the MLR reporting year, claim reserves associated with claims incurred during the MLR reporting year, the change in contract reserves, reserves for contingent benefits and the claim portion of lawsuits, and any experience rating refunds paid or received. Incurred claims may not include claims recovered as a result of fraud and abuse programs, as these expenses are otherwise categorized as quality improving activities.

Insurers are also required to deduct from incurred claims any prescription drug rebates they receive from drug manufactures and pharmacies in exchange for utilizing certain drugs under their plan which lowers the total amount reported as reimbursement for clinical services. Adjustments that may be included in incurred claims are:

• Any market stabilization payments or receipts that are directly tied to claims incurred and other claims-based or census-based assessments;
• State subsidies based on a stop-loss payment methodology; and
• Incentive and bonus payments made to providers.

Activities That Improve Health Care

An activity that improves health care quality, or a “quality improvement activity” is defined as an activity that first:

• Improves health outcomes through initiatives such as quality reporting, case management, care coordination, and chronic disease management;
• Implements activities that reduce hospital readmissions, such as through comprehensive discharge planning;
• Implements activities that improve patient safety and reduce medical errors, such as through the use of best clinical practices or evidence-based medicine;
• Implements wellness and health promotion activities, such as wellness assessments or coaching programs; or
• Implements activities that enhance the use of health care data to improve quality, transparency and outcomes, and support meaningful use of health information technology.

Secondly, a quality improvement activity must also satisfy the following requirements:

• Improves health quality;
• Increases the likelihood of desired health outcomes in ways that are capable of being objectively measured and of producing verifiable results and achievements;
• Directed toward individual enrollees or incurred for the benefit of specified segments of enrollees or provide health improvements to the populations beyond those enrolled in coverage as long as no additional costs are incurred due to the non-enrollees; and
• Grounded in evidence-based medicine, widely accepted best clinical practice, or criteria issued by recognized professional medical associations, accreditation bodies, governmental agencies or other nationally recognized health care quality organizations.

The regulations also set forth certain enumerated activities that may not be reported as quality improvement activities, such as those designed primarily to control or contain costs, provider credentialing, utilization review, and fraud prevention.

Other “non-claim” costs

Non-claim costs include expenditures for administrative services that are not used to adjust premiums, and are not defined as incurred claims or activities that improve quality care. In essence, this is the catch-all category in which insurers are to report and explain every other expenditure to which they apply enrollee premiums. Nonclaims expenses include sales expenses, agents’ and brokers’ fees and commissions, non-exempt taxes (such as foreign taxes), community benefit expenditures, general administrative expenses, and claims adjustment expenses.

Finally, the new regulations provide that HHS is authorized to audit insurers’ records and impose civil monetary penalties for noncompliance, which can be up to $100 per day for each individual affected by the violation. Further, insurers must make facilities and records available for inspection to HHS, the Comptroller General or their designees.

For any questions about the new MLR regulations, feel free to contact the following:

Kimberly J. Ruppel is a member in the Troy office. Her expertise is in Insurance & Healthcare and ERISA Litigation, including defending benefit denial disputes and breach of fiduciary duty allegations. She can be reached at 248.433.7291 or kruppel@

Cynthia A. Moore is a member in the Troy office and Practice Department Manager for the Tax, Estate Planning, Employee Benefits, Health Care, Immigration and Gaming departments. She can be reached at 248.433.7295 or cmoore@dickinsonwright. com.

Deborah L. Grace is a member in the Troy office. Her expertise is in Employee Benefits Law, including welfare benefit plans, qualified retirement plans and non-qualified deferred compensation plans. She can be reached at 248.433.7217 or dgrace@