Navigating Healthcare Reform: Medical Loss Ratio Mandate
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One of the most challenging mandates contained within the Patient Protection and Affordable Care Act of 2010 (PPACA), as modified by the Health Care and Education Affordability Reconciliation Act of 2010, is the maximum medical loss ratio (MLR). To achieve compliance,carriers will be required to retool critical business processes and revamp product portfolios, sales models and distribution channels.
The PPACA is redefining the health insurance marketplace, ushering in multiple regulatory mandates that impact nearly every aspect of carrier operations. Yet because of complexity it will require, managing the MLR was identified as a top priority by carriers that participated in a recent independent survey conducted by the Gantry Group on behalf of HealthPlan Services.
Market Impact
Under the PPACA, large group carriers must have an MLR of at least 85%, while small group and individual carriers must meet an 80% MLR. If the threshold is exceeded, they will be required to distribute rebates to plan members.
It is a particularly vexing mandate from a compliance perspective for multiple reasons. A significant portion of administrative expenses are difficult to scale back because of the nature of what is defined as non-claims expenses. Yet if the threshold is exceeded, it reduces or even eliminates the limited profits possible under the PPACA. Conversely, if the MLR is too far below the threshold, it triggers the rebate requirement and a process few carrier processes and systems are equipped
to manage.
Many of the final elements of the MLR mandate remain unknown, giving rise to a plethora of questions that will ultimately impact carrier response. These include whether or not:
- It will be measured by state or in the aggregate
- Small group and individual will be combined
- It will be durationally sensitive
- It will be calculated on policy or calendar year
- Rebates will be paid pro-rata or to those with MLRs of greater than 80%
Also unknown is what expenses will be included, and if plans will be given a three-year window to calculate their MLR.
Yet even with many elements still requiring clarification, most industry experts are warning carriers to expect the worst. The primary “losers” will be those plans with high administrative costs, forcing carriers to pay out rebates as early as March 2012. Even best case scenarios show only a 1% shift from administrative to medical costs and 1% of tax release out of the expense calculation.
A 1% MLR gap can equate to millions of dollars in rebates and requires the same administration as a 5% gap, Further, if rebates are triggered it will drive up administrative costs even more, thus perpetuating MLR issues.
Strategic Objectives
Despite the unknowns, there are strategies carriers can be executing now to mitigate the risk of failing to meet the MLR. Doing so can deliver benefits beyond avoiding rebates or the hit on limited profits. Significantly, every percentage shift in administrative costs can be applied to commissions for strategic differentiation and additional points to profitability.
The focus now should be on implementing new and efficient administration and sales models to shift expenses and position the carrier to achieve optimal pricing to avoid going over or under the MLR. Also important is to manufacture or import an ancillary product strategy to replace lost revenues.
The most crucial strategies, however, should be designed to specifically address the MLR threshold – both avoiding it and being equipped to process rebates if/when required. This includes:
- Downsizing corporate overhead and technology
- Establishing rules and requirements to maintain accurate eligibility and contact information
- Developing the ability to acquire stream of future rebates from policyholders
HealthPlan Services
Partnering with HealthPlan Services (HPS) enables carriers to efficiently and cost-effectively retool business processes and support them with the scalable technology necessary to survive and thrive in today’s health insurance marketplace. A leading provider of outsourcing solutions to insurers in the individual, small business, association and union trust markets, HPS has a solid track record of providing cost-effective distribution, administration and retention services through proven technology and internal expertise refined over more than 40 years.
HPS, which covers more than 2 million members for more than 25 health plans, has achieved significant efficiencies and scale, as well as proven business processes that meet or exceed industry best practice, all of which can be leveraged in future implementations. Partnering with HPS frees internal resources to focus instead on such mission-critical mandates as the transition to ICD-10 and ANSI 5010, adoption of electronic health record (EHR) systems and the secure exchange of patient and billing data.
HPS provides carriers with advanced technology, domain expertise and agility, which allows them to be aggressively proactive in developing and deploying the strategies and processes that will enable them to achieve compliance and remain financially sound.