• Interim Final Regulation Implementing the PPACA Medical Loss Ratio Rules
  • December 6, 2010 | Authors: Kara S. Baysinger; Gary A. Hernandez; Kenneth B. Schnoll
  • Law Firms: SNR Denton - San Francisco Office ; SNR Denton - Chicago Office ; SNR Denton - San Francisco Office
  • On November 22, 2010, the Department of Health & Human Services released interim final regulation implementing the Medical Loss Ratio (MLR) requirements for health insurance issuers under the Public Health Services Act (PHS Act), as added by the Patient Protection and Affordable Care Act (PPACA).

    Published on December 1, 2010 and effective on January 1, 2011, the interim final regulation generally apply to plan years beginning on or after January 1, 2011.  Comments on the interim final regulation are due 60 days after publication.  The MLR interim final regulation can be found here.

    A request for information relating to the MLR provisions of the PHS Act Section 2718 was published in the Federal Register on April 14, 2010 (75 FR 19297).  The interim final MLR regulation is the latest in a series of interim final rules implementing PPACA provisions.

    HHS considered and adopted all the recommendations in the model regulation submitted by the National Association of Insurance Commissioners entitled "Regulation for Uniform Definitions and Standardized Methodologies for Calculation of the Medical Loss Ratio for Plan Years 2011, 2012 and 2013 per Section 2718(b) of the PHS Act."

    The material provisions of the interim regulation include:

    • The interim final regulation applies to health insurers offering large group, small group or individual health insurance coverage, including grandfathered plans.  Section 158.102.

    • Issuers are required to report annually to the Secretary of HHS information relating to earned premiums and expenditures in specified categories.  Section 158.110.

    • MLR Reporting Year is defined as calendar year.  Section 158.103.

    • Data is to be aggregated by-state and each of the large, small, and individual insurance markets.  Experience for group coverage issued by a single issuer is to be attributed to the State based on the situs of the contract.  Section 158.120(b).

    • In States that have established under State law a higher MLR standard than that described in section 2718, such higher percentage applies to issuers in that State and must be substituted for the percentages set forth in PPACA.  In States that have established under State law a lower MLR standard than required by section 2718, the higher percentage set forth in section 2718 applies to issuers in that State.  Section 158.211.

    • Non-employment based group coverage (i.e., trusts or association business) is to be reported for MLR purposes as individual coverage.  Section 158.120(d).

    • Earned premium is defined as the sum of all monies paid by a policyholder as a condition of receiving coverage and is to be reported on a direct basis.  Section 158.130.

    • The definition of earned premium excludes unearned premium, group conversion charges, premium assessments paid to or subsidies from Federal and State high risk pools, and adjustments for experience rating refunds.  Section 158.130(b).

    • For the 2011 reporting year, mini-med plans (those with a total of $250,000 or less in annual limits) may apply an adjustment (a factor of two applied to the total of incurred claims and expenditures for activities that improve health care quality) to the reported experience to account for the unusual expense and premium structure of these plans.  Section 158.221(b)(3).

    • For fully reinsured business (assumption and indemnity), the earned premium for such business must be reported as premium income by the assuming entity and excluded from the premium revenue by the ceding company.  Commercial reinsurance and stop-loss arrangements do not trigger adjustments to the reported earned premium.  Section 158.130(a) (2) and (3).

    • Credibility adjustments are permissible to reflect less than complete credibility of data in smaller blocks of business - in special circumstances these may be applied to experience covering 1,000 to 75,000 life-years.  Section 158.230 -158.232.

    • Rebates are to be based upon the amount of premium paid, minus taxes and other permissible adjustments, multiplied by the percentage by which the resulting MLR is below the standard.  Section 158.240, 242, 260.

    • The calculation of rebates is based upon the following:

      • Numerator:  Issuer’s incurred claims plus permitted expenditures for activities that improve health care quality.

      • Denominator:  premium revenue minus Federal and State taxes and licensing and regulatory fees.  Section 158.220-158.221.

    • For each MLR reporting year, Issuers are required to report to HHS rebates paid by relevant market.  Section 158.260.

    • Expenses that are not included in the definition of "activities that improve health care quality" are the following:

      • Activities primarily designed to control or contain costs;

      • Utilization review;

      • Fraud prevention activities (beyond those that reduce incurred claims);

      • Management and development of provider network;

      • Provider credentialing;

      • Marketing expenses;

      • Costs for calculating and administering enrollee or employee incentives;

      • Establishment or maintenance of claims adjudication system; and

      • That portion of the activities of professional hotline that does not meet the definition of activities that improve health quality.  Section 158.150(c).

    • Payment of rebates to current enrollees may be paid by check or premium credit, however, former enrollees must be paid by check or a reimbursement using the same method used to pay premium.  Section 158.241(a).

    • Secretary has discretion to adjust the MLR requirement for the individual market in a State if the Secretary determines that the 80% standard may destabilize the individual market in the State.  Section 158.301.

    • Enforcement

      • HHS - HHS has oversight and enforcement authority over the MLR reporting and rebate provisions, including but not limited to, the requirement to submit timely reports and the requirement to report data in compliance with the requirements.  HHS also has the authority to audit issuers to determine compliance with reporting and rebating requirements.

      • States - States have authority over regulation of solvency, rate oversight in certain states, and continue to have the authority to conduct examinations and audits of issuers relating to rating, MLR calculations and rebating practices.