Legislative and Health Care Reform Updates

Medical Loss Ratio (MLR) Requirement

Overview

One of the insurance market reforms enacted by the Affordable Care Act (ACA) was a Medical Loss Ratio (MLR) standard that requires insurance companies to spend a certain proportion of income on health care for their insured population. The medical loss ratio (MLR) is the ratio of our medical expenses to our collected premium for the year, or how much of every premium dollar is spent on medical expenses. The ACA sets minimum medical loss ratios for different markets, as do some state laws. The ACA also requires health insurance companies to issue rebates to enrollees if the insurer's MLR does not meet minimum standards.

Under the ACA, the MLR requirement for large group is 85 percent and the MLR requirement for small group is 80 percent. However, under Massachusetts law, the MLR requirement for the merged market (Individual*/Small Group) is 88 percent for policies sold or renewed on or after January 1, 2011.

The MLR reporting and rebate requirements apply to all health coverage, Group and Individual*, including grandfathered plans. They do not apply to companies who have self-insured plans.

Frequently Asked Questions (FAQ) on the MLR Rebate Requirement

Q. What is the Federal MLR Regulatory Requirement?

A. The ACA requires health insurers to report MLR to regulators and to meet certain MLR percentages. Health insurers must issue a rebate to enrollees if the insurer's MLR is less than the applicable percentage established by either the federal government or a respective state government. This means an insurer must spend a certain MLR percentage of the premium revenue it receives on health care services, such as doctors and hospital bills, and activities to improve health care quality, such as efforts to improve patient safety. The federal MLR standards require that profits above a certain level be returned to consumers and employers to ensure that consumers get value for their health care dollars.

Q. Who does the MLR standard apply to?

A. The MLR standard applies to health insurance plans offering group or Individual* coverage. It does not apply to employer groups who are self-insured.

• For Small Groups (1-50 eligible employees) and Individuals* the federal MLR standard is 80 percent. This means that insurers are required to issue a rebate to eligible premium-paying members if we do not spend at least 80 percent of our premium income on health care services (such as doctors and hospital bills) and quality improvement activities such as efforts to improve patient safety, smoking cessation programs, etc. No more than 20 percent of the premium dollars may be spent on administrative expenses such as salaries, advertising, rent, etc. This requirement is known as the '80/20 Rule.'
• For large groups (51+ eligible employees) the federal MLR standard is 85 percent, which means that at least 85 percent of every premium dollar goes toward medical expenses and 15 percent spent on administrative expenses.

Q. Does Massachusetts have a different MLR standard?

A. Yes. Although the federal government has provided minimum standards, each state has the option of establishing more stringent requirements. Massachusetts has set a higher MLR standard of 88 percent for the Small Group/Individual* market, known as the ‘merged market’ for policies sold or renewed on or after January 1, 2011. Since the Massachusetts MLR requirement is richer than the federal mandate, the Massachusetts MLR standard applies to this market segment. Under Massachusetts law, if an insurer's medical loss ratio is below the 88 percent requirement, the company must issue rebates to Individuals* and to the small employers and employees they insure.

Note: The Massachusetts MLR percentage increases from 88 percent to 90 percent for policies sold or renewed on or after January 1, 2012.

Q. What does this mean for individuals and employers in Massachusetts?

A. If a health insurer's MLR rate is below the standard, a rebate will be required. In Massachusetts, rebates for the ‘merged market’ (Individuals* and small employer groups ) must be issued by June 30, 2012 and for the large group market by August 1, 2012.

• Merged Market: The MLR is 88 percent in Massachusetts. This means up to 12 percent of earned premiums can be spent on plan administration expenses. If more than 12 percent is spent on plan administration, the difference must be returned (or rebated) to the employer group. If rebates are due to Individual* subscribers who are not associated with an employer group, the Individual* will receive a rebate check.
• Large Group: The MLR is 85 percent. This means up to 15 percent of earned premiums can be used for administrative expenses. If more than 15 percent is spent on plan administration, the difference must be returned to the employer group.

Q. How is MLR Calculated by Health Insurers?

The basic calculation for determining the MLR is to divide the medical expenses of the plan by earned premiums. This determines the percentage of revenue spent on claims costs.

• Medical expenses= Cost of health care, including health care services (claims) and activities to improve health care quality.
• Earned premiums= Revenue generated from plan premiums, minus state and federal taxes, licensing fees, and regulatory fees.
• Percentage of revenue spent on claims= Percentage of medical expenses using the calculations established by Massachusetts on the state level or by the Dept. of Health and Human Services at the federal level to determine if rebates are to be paid.

Q. Will NHP be issuing rebates to Individuals* and small groups?

A. Yes. NHP will be issuing approximately $3.3 million in rebates to the merged market. In 2011 NHP spent 85.7percent in premium dollars on health care and activities to improve health care quality therefore NHP will rebate 2.3percent (about $3.3 million) of premium paid in 2011.

• For Individuals* and Sole Proprietors, NHP will be sending a letter and with a rebate check to every subscriber. The rebate checks will be issued by June 30, 2012.
• For Small Business Accounts , NHP will send a letter with instructions and a check to the employer by June 30, 2012. It will then be the employer's responsibility to distribute the rebate to their enrolled employees according to the Department of Labor Rebate Regulations. The federal government has provided guidance to employers on how the rebate must be used. In some instances, the rebate must be used to by either giving a credit through the premium allocation or issuing a check back to the employee. The employee (subscriber) will also receive a letter from NHP informing them that NHP will be rebating a portion of their health insurance premiums through their employer or group policy holder.

Q. What is the average rebate amount from NHP?

A. NHP anticipates that the average rebate check will be approximately $128.01.

Q. How can an employer distribute the rebate?

A. The law states that if a group health plan is a non-Federal governmental plan, the employer or group policy holder must distribute the rebate in one of two ways:

• Reducing premiums for the upcoming year; or
• Providing a cash rebate to employees or subscribers that were covered by the health insurance on which the rebate was based.

Q. Will NHP issue rebates for the large group market?

A. No. For calendar year 2011, NHP met the target for large group markets (51+ eligible employees). The national and Massachusetts MLR standard for large groups was set at was 85 percent. For 2011, NHP's large group MLR was 86.9percent therefore rebates will not be required at the state or federal level.

NHP will be sending notices to all large group employers and their eligible employees (subscribers) informing them that they will not be receiving a rebate. The notice to both the employers and the employees will be issued by August 1, 2012.

Q. Who do I call if I have additional questions about my rebate?

A. If you have any questions, please call the Medical Loss Ratio Rebate Inquiry line at 800-229-0384. This phone line will be staffed from 10:00am – 4:00pm M-F

NHP will be sending notices to all large group employers and their eligible employees (subscribers) informing them that they will not be receiving a rebate. The notice to both the employers and the employees will be issued by August 1, 2012.

*Individuals are members paying for health insurance on their own versus through an employer group.