Private Health Insurance
Early Indicators Show That Most Insurers Would Have Met or Exceeded New Medical Loss Ratio Standards Gao ID: GAO-12-90R October 31, 2011To help ensure that millions of Americans who rely on private insurance for health care coverage receive value for their premium dollars, the Patient Protection and Affordable Care Act (PPACA) established minimum "medical loss ratio" (MLR) standards for insurers. The MLR is a basic financial indicator, traditionally referring to the percentage of insurance premium revenues health insurers spent on their enrollees' medical claims. The MLR definition specified in the PPACA provision-- referred to as the PPACA MLR in this report--differs from the traditional MLR definition. Key differences are that the PPACA MLR allows insurers to include in their expenses spending on activities to improve health care quality and to deduct from their revenues certain tax payments and fees, and these differences will generally increase insurers' MLRs. Beginning in 2011, PPACA required insurers to meet minimum PPACA MLR standards of 85 percent in the large group market and 80 percent in the small group and individual markets or pay rebates to their enrollees. In implementing these MLR requirements, the Department of Health and Human Services (HHS) includes an adjustment for certain insurers to help address the disproportionate impact of claims variability on smaller health plans. PPACA MLRs for insurers that cover at least 1,000 but less than 75,000 life years (partially credible insurers) will be upwardly adjusted using a credibility adjustment. Insurers that cover 75,000 or more life years (fully credible insurers) will not receive this adjustment. The PPACA MLR requirements will primarily affect partially and fully credible insurers, which we collectively refer to throughout this report as credible insurers. HHS estimated that in 2011, the PPACA MLR requirements would apply to health insurance plans covering about 75 million insured Americans. The first set of data subject to the requirements will be for insurer experience for calendar year 2011, which are to be submitted to HHS in June 2012. In the interim, in April 2011, insurers submitted preliminary MLR data to the National Association of Insurance Commissioners (NAIC) based on their 2010 experience using the PPACA MLR definition. The 2010 MLR data are not subject to the PPACA MLR rebate requirements. In July 2011, we reported that the 2010 data should be considered transitional and may reflect best estimates that will become more precise with data reported for 2011 and future years. Although these data are transitional, there was interest in early indications of what can be learned from these data given that they are the first data insurers reported using the new PPACA MLR definitions. Congress asked us to conduct an analysis of insurers' 2010 MLR data. We addressed two questions: (1) What can be learned from the 2010 MLR data regarding how reported MLR data varied by different insurer characteristics? (2) To what extent did the credibility adjustment, PPACA MLR formula, and reporting requirements affect insurers' 2010 MLRs?
We found that most insurers in 2010 would have met or exceeded the 2011 PPACA MLR standards and the impact of various aspects of the PPACA provision varied by market. At least 64 percent of all credible insurers would have met or exceeded the 2011 PPACA MLR standards. A higher percentage of insurers in the large and small group markets met or exceeded the standards compared to those in the individual market. Insurers in the individual market averaged higher nonclaims expenses, including expenses for brokers' commissions and fees, than those in other markets. The combined effect of the credibility adjustment and the new components of the PPACA MLR formula resulted in greater increases in average adjusted PPACA MLRs for individual and small group market insurers compared to those in the large group market. The average adjusted PPACA MLRs for individual, small group, and large group market insurers in 2010 were 7.5, 6.5, and 4.8 percentage points higher, respectively, than the average MLRs for these markets calculated without the credibility adjustment and using the traditional MLR formula. In addition, PPACA required insurers to report MLRs by state, and we found a wide range of reported MLRs for multistate insurers. We provided a draft of this report to HHS and NAIC for comment, and they provided technical comments, which we incorporated as appropriate.
GAO-12-90R, Private Health Insurance: Early Indicators Show That Most Insurers Would Have Met or Exceeded New Medical Loss Ratio Standards
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GAO-12-90R:
United States Government Accountability Office:
Washington, DC 20548:
October 31, 2011:
The Honorable Robert E. Andrews:
Ranking Member:
Subcommittee on Health, Employment, Labor, and Pensions:
Committee on Education and the Workforce:
House of Representatives:
The Honorable John F. Tierney:
House of Representatives:
Subject: Private Health Insurance: Early Indicators Show That Most
Insurers Would Have Met or Exceeded New Medical Loss Ratio Standards:
To help ensure that millions of Americans who rely on private
insurance for health care coverage receive value for their premium
dollars, the Patient Protection and Affordable Care Act (PPACA)
established minimum "medical loss ratio" (MLR) standards for insurers.
[Footnote 1] The MLR is a basic financial indicator, traditionally
referring to the percentage of insurance premium revenues health
insurers spent on their enrollees' medical claims. The MLR definition
specified in the PPACA provision--referred to as the PPACA MLR in this
report--differs from the traditional MLR definition. Key differences
are that the PPACA MLR allows insurers to include in their expenses
spending on activities to improve health care quality and to deduct
from their revenues certain tax payments and fees, and these
differences will generally increase insurers' MLRs. Beginning in 2011,
PPACA required insurers to meet minimum PPACA MLR standards of 85
percent in the large group market and 80 percent in the small group
and individual markets or pay rebates to their enrollees.[Footnote 2],
[Footnote 3] In implementing these MLR requirements, the Department of
Health and Human Services (HHS) includes an adjustment for certain
insurers to help address the disproportionate impact of claims
variability on smaller health plans. PPACA MLRs for insurers that
cover at least 1,000 but less than 75,000 life years (partially
credible insurers) will be upwardly adjusted using a credibility
adjustment. Insurers that cover 75,000 or more life years (fully
credible insurers) will not receive this adjustment.[Footnote 4] The
PPACA MLR requirements will primarily affect partially and fully
credible insurers, which we collectively refer to throughout this
report as credible insurers. HHS estimated that in 2011, the PPACA MLR
requirements would apply to health insurance plans covering about 75
million insured Americans.
The first set of data subject to the requirements will be for insurer
experience for calendar year 2011, which are to be submitted to HHS in
June 2012. In the interim, in April 2011, insurers submitted
preliminary MLR data to the National Association of Insurance
Commissioners (NAIC) based on their 2010 experience using the PPACA
MLR definition.[Footnote 5] The 2010 MLR data are not subject to the
PPACA MLR rebate requirements. In July 2011, we reported that the 2010
data should be considered transitional and may reflect best estimates
that will become more precise with data reported for 2011 and future
years.[Footnote 6] Although these data are transitional, there was
interest in early indications of what can be learned from these data
given that they are the first data insurers reported using the new
PPACA MLR definitions.
You asked us to conduct an analysis of insurers' 2010 MLR data. We
addressed two questions: (1) What can be learned from the 2010 MLR
data regarding how reported MLR data varied by different insurer
characteristics? (2) To what extent did the credibility adjustment,
PPACA MLR formula, and reporting requirements affect insurers' 2010
MLRs?
To determine what can be learned regarding how 2010 MLR data varied by
insurer characteristics, we analyzed the data reported to NAIC. These
included insurers' MLRs that were based on the PPACA MLR formula, as
well as data on nonclaims expenses.[Footnote 7] Because noncredible
insurers were presumed to meet the standards, our analyses were
limited to credible insurers. We adjusted the PPACA MLRs to account
for the credibility adjustment--throughout this report we refer to
these as adjusted PPACA MLRs.[Footnote 8] We used the adjusted PPACA
MLRs to examine the percentage of insurers in 2010 that would have met
the 2011 PPACA MLR standards and how this varied by market. We
examined the data on nonclaims expenses to identify any differences in
these expenses by market. We also conducted interviews with insurers
as part of our July 2011 report and included information from those
interviews in this report. To determine the extent to which the
credibility adjustment, PPACA MLR formula, and reporting requirements
affected insurers' 2010 MLRs, we analyzed data reported to NAIC in
April 2011. The data we examined included premiums and claims,
expenses for activities to improve health care quality, and taxes and
other fees. We used these data to calculate traditional MLRs for each
insurer and then determined the effect that each component of the
PPACA MLR formula that differed from the traditional formula and the
credibility adjustment had on the adjusted PPACA MLRs. We also
examined how the requirement to report at the state level affected the
range of MLRs reported by insurers in each market. To assess the
reliability of these data, we reviewed relevant documentation,
conducted interviews with NAIC officials knowledgeable about the data,
and conducted electronic testing of the data to identify obvious
errors or outliers. We determined that the data were sufficiently
reliable for the purposes of this report.
We conducted this performance audit from August 2011 through October
2011 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
Results in Brief:
We found that most insurers in 2010 would have met or exceeded the
2011 PPACA MLR standards and the impact of various aspects of the
PPACA provision varied by market. At least 64 percent of all credible
insurers would have met or exceeded the 2011 PPACA MLR standards. A
higher percentage of insurers in the large and small group markets met
or exceeded the standards compared to those in the individual market.
Insurers in the individual market averaged higher nonclaims expenses,
including expenses for brokers' commissions and fees, than those in
other markets.
The combined effect of the credibility adjustment and the new
components of the PPACA MLR formula resulted in greater increases in
average adjusted PPACA MLRs for individual and small group market
insurers compared to those in the large group market. The average
adjusted PPACA MLRs for individual, small group, and large group
market insurers in 2010 were 7.5, 6.5, and 4.8 percentage points
higher, respectively, than the average MLRs for these markets
calculated without the credibility adjustment and using the
traditional MLR formula. In addition, PPACA required insurers to
report MLRs by state, and we found a wide range of reported MLRs for
multistate insurers.
We provided a draft of this report to HHS and NAIC for comment, and
they provided technical comments, which we incorporated as appropriate.
Background:
The MLR formula and reporting requirements specified in PPACA differ
from the way MLRs have traditionally been calculated and reported. The
traditional MLR is generally calculated by dividing an insurer's
medical care claims by premiums, whereas the PPACA MLR formula
includes additional components to the formula.[Footnote 9] (See fig.
1.) Additionally, PPACA included adjustments to the MLR formula and
new reporting requirements.
Figure 1: Key Components of Traditional and PPACA MLR Formulas:
[Refer to PDF for image: illustration]
Traditional MLR:
Medical care claims divided by Premiums.
PPACA MLR:
Medical care claims plus Expenses for activities that improve health
care quality divided by Premiums minus Federal and state taxes and
licensing or regulatory fees.
Source: GAO.
[End of figure]
Key components of the PPACA MLR formula, adjustments, and reporting
requirements include the following:
* Activities that improve health care quality. These include
activities designed to increase the likelihood of desired health
outcomes in ways that can be objectively measured, including related
health information technology costs.
* Federal and state taxes and licensing or regulatory fees. These
include all federal taxes and assessments, excluding taxes on
investment income and capital gains.
* Credibility adjustment. To help address the disproportionate impact
of claims variability on small health plans, an adjustment to the MLRs
is permitted for these plans. Specifically, MLRs for plans with:
- less than 1,000 life years will be considered "noncredible" and will
be presumed to meet the MLR requirements;
- 1,000 to less than 75,000 life years will be considered "partially
credible" and will receive a credibility adjustment, which is made up
of two factors--a base credibility adjustment factor based on the
number of life years and a deductible adjustment factor that further
increases the adjustment for plans with high deductibles; and:
- 75,000 life years or more will be considered "fully credible" and
will not receive an adjustment.
HHS estimates show that for 2011 a small fraction of insurers that
offer plans in the individual, small group, or large group markets
would be considered fully credible insurers, but these insurers
account for the majority of the total life years covered by these
types of plans. About half of the insurers that offer plans in the
small and large group markets, and a little less than a third of
insurers that offer plans in the individual market, would be partially
credible and would apply a credibility adjustment.
* Levels of aggregation for MLR reporting. Insurance companies are
required to report MLRs separately for their individual, small group,
and large group markets for each state in which they are licensed to
operate.[Footnote 10]
PPACA provided HHS with the authority to adjust the MLR standard for
the individual market in a state if it determines that the application
of the standard may destabilize the individual market in that state.
[Footnote 11] HHS's interim final rule implementing PPACA also
specified that agents' and brokers' commissions and fees be listed as
nonclaims expenses.[Footnote 12]
In our July 2011 report, we reported on insurers' early experiences in
implementing the new PPACA MLR requirements. In that report, we
analyzed historical traditional MLR data from NAIC from 2006 through
2009 and found that traditional MLRs on average generally exceeded
PPACA MLR standards but varied, particularly among individual market
and smaller insurers.[Footnote 13] We also interviewed a sample of
insurers, and they reported that they expected certain components of
the new PPACA MLR formula and reporting requirements to affect their
PPACA MLRs compared to traditional MLRs. In addition, insurers told us
their 2010 PPACA MLRs may be based in part on best estimates because
HHS's interim final rule on PPACA MLRs was published in late 2010, and
thus PPACA MLRs may become more precise for 2011 and future years' data.
Most Insurers in 2010 Would Have Met or Exceeded the 2011 PPACA MLR
Standards, and Group Market Insurers Had the Highest Average Adjusted
PPACA MLRs:
In 2010, at least 64 percent of all credible insurers, covering at
least 77 percent of lives, would have met or exceeded the 2011 PPACA
MLR standards (see table 1).[Footnote 14],[Footnote 15] At the market
level, a higher percentage of large and small group insurers met or
exceeded the 2011 standards compared to individual market insurers.
The percentage of insurers in the large and small group markets that
met or exceeded the standards were 77 and 70 percent, respectively,
compared to 43 percent in the individual market. Because more lives
were covered by large and small group market insurers, most covered
lives were associated with insurers that would have met or exceeded
the standards.
Table 1: Percentage of Credible Insurers and Covered Lives in 2010
That Would Have Been at or above the 2011 PPACA MLR Standards:
Market: Individual[B];
Total number of credible insurers: 553;
Total number of covered lives: 10,131,103;
Percentage of all covered lives: 15;
Percentage at or above the 2011 PPACA standards[A]:
Percentage of credible insurers: 43;
Percentage of covered lives: 48.
Market: Small group;
Total number of credible insurers: 601;
Total number of covered lives: 17,905,130;
Percentage of all covered lives: 27;
Percentage at or above the 2011 PPACA standards[A]:
Percentage of credible insurers: 70;
Percentage of covered lives: 76.
Market: Large group;
Total number of credible insurers: 642;
Total number of covered lives: 39,102,236;
Percentage of all covered lives: 58;
Percentage at or above the 2011 PPACA standards[A]:
Percentage of credible insurers: 77;
Percentage of covered lives: 85.
Market: Total[C];
Total number of credible insurers: 1,796;
Total number of covered lives: 67,138,469;
Percentage of all covered lives: 100;
Percentage at or above the 2011 PPACA standards[A]:
Percentage of credible insurers: 64;
Percentage of covered lives: 77.
Source: GAO analysis of NAIC data.
Notes: Data are reported at the state level for each insurer in each
market and have been adjusted based on credibility status. The data
exclude insurers that were noncredible or for which life years could
not be determined to assign credibility status, and insurers that
reported negative values for premiums, claims, or number of covered
lives. Life years refers to the total number of months of coverage for
enrollees divided by 12.
[A] All noncredible insurers are presumed to meet the MLR standards.
Including noncredible insurers in this analysis, 84 percent of all
insurers, covering 77 percent of lives, would have met or exceeded the
standards. In 2010, there were 2,081 noncredible insurers that covered
438,826 lives.
[B] The percentage at or above the 2011 PPACA standards for the
individual market accounts for the lower PPACA MLR standards HHS has
approved for five states by using the approved minimum 2011 standard
for each of these states.
[C] Some insurers operate in multiple markets and multiple states. A
separate MLR is reported for each insurer, market, and state
combination. The total treats each insurer, market, and state
combination as a separate insurer.
[End of table]
Average adjusted PPACA MLRs were higher in the group markets than in
the individual market and were more varied among individual market and
smaller insurers. The average adjusted PPACA MLR was 89.5 percent in
the large group market, 85.0 percent in the small group market, and
78.8 percent in the individual market. Excluding data for the five
states that have been approved for a lower MLR standard in 2011 for
the individual market only slightly affected the average adjusted
PPACA MLR for this market, increasing it to 79.1 percent. Consistent
with our findings in our prior report on traditional MLR data,
adjusted PPACA MLRs also varied widely among insurers in 2010. This
variation was particularly wide among those in the individual market
and among smaller, partially credible insurers (see figs. 2 and 3).
Figure 2: Range of Adjusted PPACA MLRs Reported in the Individual,
Small Group, and Large Group Markets, 2010:
[Refer to PDF for image: vertical bar graph]
Percentage of insurers:
Wider distribution[A]: Less than 60% to 100% or more.
PPACA MLR range: Less than 60%;
Individual market: 13.4%;
Small group market: 2.7%;
Large group market: 2%.
PPACA MLR range: 60-69.9%;
Individual market: 21.5%;
Small group market: 3.7%;
Large group market: 1.9%.
PPACA MLR range: 70-79.9%;
Individual market: 23.5%;
Small group market: 23.8%;
Large group market: 5.3%.
PPACA MLR range: 80-89.9%;
Individual market: 19%;
Small group market: 42.1%;
Large group market: 41%.
PPACA MLR range: 90-99.9%;
Individual market: 10.7%;
Small group market: 19.5%;
Large group market: 38.5%.
PPACA MLR range: 100% or more[B];
Individual market: 11.9%;
Small group market: 8.3%;
Large group market: 11.4%.
Source: GAO analysis of NAIC data.
Notes: Data are reported at the state level for each insurer in each
market and have been adjusted based on credibility status. The data
exclude insurers that were noncredible or for which life years could
not be determined to assign credibility status, and insurers that
reported negative values for premiums, claims, or number of covered
lives. Life years refers to the total number of months of coverage for
enrollees divided by 12.
[A] The adjusted PPACA MLRs in the individual market were more widely
distributed than those in the small and large group markets. The range
of one standard deviation below to one standard deviation above the
mean adjusted PPACA MLRs was 56.5 to 101.1 percent in the individual
market, compared to 71.7 to 98.3 percent in the small group market and
77.6 to 101.4 percent in the large group market.
[B] Some insurers reported traditional MLRs above 100 percent
indicating that the insurers' claims were greater than the premiums
they collected for that year. For example, if an insurer had a small
number of enrollees and one enrollee had an extremely large claim then
the result could be an MLR over 100 percent.
[End of figure]
Figure 3: Range of Adjusted PPACA MLRs Reported in the Individual,
Small Group, and Large Group Markets, by Credibility Status, 2010:
[Refer PDF for image: 2 vertical bar graphs]
Individual market:
Range of PPACA MLRs reported by insurer size, 2010:
Percentage of insurers:
Wider distribution[A]: Less than 60% to 100% or more.
PPACA MLR range: Less than 60%;
Partially credible: 14.1%;
Fully credible: 0%.
PPACA MLR range: 60-69.9%;
Partially credible: 21.9%;
Fully credible: 14.3%.
PPACA MLR range: 70-79.9%;
Partially credible: 22.7%;
Fully credible: 39.3%.
PPACA MLR range: 80-89.9%;
Partially credible: 18.7%;
Fully credible: 25%.
PPACA MLR range: 90-99.9%;
Partially credible: 10.1%;
Fully credible: 21.4%.
PPACA MLR range: 100% or more[B];
Partially credible: 12.6%;
Fully credible: 0%.
Small group market:
Range of PPACA MLRs reported by insurer size, 2010:
Percentage of insurers:
Wider distribution[A]: 70-79.9% to 90-99.9%.
PPACA MLR range: Less than 60%;
Partially credible: 14.1%;
Fully credible: 0%.
PPACA MLR range: 60-69.9%;
Partially credible: 21.9%;
Fully credible: 14.3%.
PPACA MLR range: 70-79.9%;
Partially credible: 22.7%;
Fully credible: 39.3%.
PPACA MLR range: 80-89.9%;
Partially credible: 18.7%;
Fully credible: 25%.
PPACA MLR range: 90-99.9%;
Partially credible: 10.1%;
Fully credible: 21.4%.
PPACA MLR range: 100% or more[B];
Partially credible: 12.6%;
Fully credible: 0%.
Large group market:
Range of PPACA MLRs reported by insurer size, 2010:
Percentage of insurers:
Wider distribution[A]: 70-79.9% to 90-99.9%.
PPACA MLR range: Less than 60%;
Partially credible: 14.1%;
Fully credible: 0%.
PPACA MLR range: 60-69.9%;
Partially credible: 21.9%;
Fully credible: 14.3%.
PPACA MLR range: 70-79.9%;
Partially credible: 22.7%;
Fully credible: 39.3%.
PPACA MLR range: 80-89.9%;
Partially credible: 18.7%;
Fully credible: 25%.
PPACA MLR range: 90-99.9%;
Partially credible: 10.1%;
Fully credible: 21.4%.
PPACA MLR range: 100% or more[B];
Partially credible: 12.6%;
Fully credible: 0%.
Source: GAO analysis of NAIC data.
Notes: Data are reported at the state level for each insurer in each
market and have been adjusted based on credibility status. The data
exclude insurers that were noncredible or for which life years could
not be determined to assign credibility status, and insurers that
reported negative values for premiums, claims, or number of covered
lives. Life years refers to the total number of months of coverage for
enrollees divided by 12.
[A] The adjusted PPACA MLRs among partially credible insurers were
more widely distributed than larger insurers in all markets. In the
individual market, the range of one standard deviation below to one
standard deviation above the mean adjusted PPACA MLRs was 56.0 to
101.6 percent for insurers that would have been partially credible,
and 71.0 to 89.8 percent for insurers that would have been fully
credible. In the small group market, the range was 71.3 to 99.1
percent for partially credible insurers and 77.6 to 89.4 percent for
fully credible insurers. In the large group market, the range was 76.4
to 102.6 for partially credible insurers and 84.4 to 94.8 percent for
fully credible insurers.
[B] Some insurers reported traditional MLRs above 100 percent
indicating that the insurers' claims were greater than the premiums
they collected for that year. For example, if an insurer had a small
number of enrollees and one enrollee had an extremely large claim then
the result could be an MLR over 100 percent.
[End of figure]
One factor that might contribute to higher average adjusted PPACA MLRs
in the group markets is that these insurers spent less on nonclaims
expenses than insurers in the individual market.[Footnote 16] On
average, total nonclaims expenses represented 13 percent and 16
percent of premiums earned in the large and small group markets,
respectively, compared to 23 percent in the individual market. Within
the nonclaims expenses, insurers in the large and small group markets
averaged lower expenses for brokers' fees and commissions as a
percentage of premiums earned (3 and 5 percent respectively) than
insurers in the individual market (7 percent).
The 2010 data for insurers are transitional and may not be fully
reflective of the data that will be reported in 2011. For example,
almost 11 percent of insurers in all three markets combined did not
report any expenses to improve health care quality. However, the
absence of these data does not necessarily mean that the insurers did
not incur these expenses. One insurer that we interviewed told us that
while they had expenses for quality improvement for the individual
market, they did not have enough information to report these expenses
for 2010 since this was a new reporting requirement. This insurer said
that they will collect and report this information for 2011.[Footnote
17] Other factors that may affect data reported in 2011 are
differences in how the 2010 NAIC data were reported compared to how
they will be reported to HHS for 2011 under PPACA. Some of these
differences include adjustments to federal income tax deductions as a
result of any rebates owed for not meeting the PPACA MLR standards and
the inclusion of claims runoff (claims incurred in the reporting year
but not paid up until March 31 of the following year). It is unclear
what the net impact of these differences will be on PPACA MLRs in 2011
and beyond.
The Adjustment and the PPACA MLR Formula Most Affected Individual and
Small Group Insurers; Using the New Reporting Requirements, Multistate
Insurers Reported a Wide Range of MLRs:
The combined effect of the credibility adjustment and the new
components of the PPACA MLR formula resulted in greater increases in
average adjusted PPACA MLRs for individual and small group market
insurers compared to those for insurers in the large group market. The
average adjusted PPACA MLRs for individual and small group market
insurers in 2010 were 7.5 and 6.5 percentage points higher,
respectively, than the average MLRs for these markets calculated
without the credibility adjustment and using the traditional MLR
formula. For the large group market, the percentage point increase was
4.8. (See table 2.) For each market, the credibility adjustment--which
is applied only to insurers that are considered partially credible--
accounted for the largest percentage point increase on the average
adjusted PPACA MLRs. The percentage point increases for this
adjustment ranged from 4.2 in the individual market to 2.7 in the
large group market.
Table 2: Effect of the Credibility Adjustment and New Components of
the PPACA MLR Formula on Average Adjusted PPACA MLRs by Market, 2010:
Credibility adjustment and PPACA MLR components: Credibility
adjustment;
Percentage point increase:
Individual market: 4.2%;
Small group market: 3.3%;
Large group market: 2.7%.
Credibility adjustment and PPACA MLR components: Total of components
of formula;
Percentage point increase:
Individual market: 3.3%;
Small group market: 3.2%;
Large group market: 2.2%.
Credibility adjustment and PPACA MLR components: Federal and state
taxes and regulatory fees;
Percentage point increase:
Individual market: 2.6%;
Small group market: 2.3%;
Large group market: 1.3%.
Credibility adjustment and PPACA MLR components: Expenses to improve
health care quality;
Percentage point increase:
Individual market: 0.5%;
Small group market: 0.7%;
Large group market: 0.8%.
Credibility adjustment and PPACA MLR components: All other
components[A];
Percentage point increase:
Individual market: 0.2%;
Small group market: 0.1%;
Large group market: 0.1%.
Credibility adjustment and PPACA MLR components: Total of credibility
adjustment and components;
Percentage point increase:
Individual market: 7.5%;
Small group market: 6.5%;
Large group market: 4.8%.
Source: GAO analysis of NAIC data.
Notes: Data are reported at the state level for each insurer in each
market and have been adjusted based on credibility status. The data
exclude insurers that were noncredible or for which life years could
not be determined to assign credibility status, and insurers that
reported negative values for premiums, claims, or number of covered
lives. Life years refers to the total number of months of coverage for
enrollees divided by 12. Percentage points may not add to totals
because of rounding.
[A] All other components included federal and state high-risk pools
and fraud and abuse detection and recovery expenses.
[End of table]
Among the new components included in the PPACA MLR formula, the
deduction of taxes and fees in the denominator accounted for the
largest increase in all markets. The deduction of taxes and fees
resulted in percentage point increases in the average adjusted PPACA
MLRs of 2.6 in the individual market, 2.3 in the small group market,
and 1.3 in the large group market. The addition of expenses to improve
health care quality in the numerator of the PPACA MLR formula had the
next largest effect on insurers' 2010 MLRs. The average increases that
were due to components of the PPACA MLR formula are consistent with
what insurers told us.[Footnote 18] Other components in the PPACA MLR
formula, including fraud and abuse detection and recovery expenses,
had less of an effect on insurers' 2010 average adjusted PPACA MLRs.
Using the new PPACA MLR reporting requirements, many of the insurers
that operated in multiple states in 2010 reported a wide range of
adjusted PPACA MLRs across states. For example, one insurer that
operated in over 20 states in the individual market had adjusted PPACA
MLRs in that market ranging from 50 percent to 94 percent. However,
when aggregated by all of the states in which this insurer operated,
as the historical traditional MLR was generally reported, this insurer
had an adjusted PPACA MLR for the individual market of 72 percent.
Wide ranges of adjusted PPACA MLRs also existed for many insurers that
only operated in two states. For example, one insurer in the small
group market had an adjusted PPACA MLR of 66 percent in one state and
103 percent in the other state, with an adjusted PPACA MLR of 84
percent for both states combined. This is consistent with what
insurers told us, that the PPACA MLR requirements to report MLRs by
market and by each state in which insurers operate would result in
variation in their MLRs.
Agency and Third-Party Comments:
We obtained written comments from HHS, which are reprinted in
enclosure I. HHS commented that the PPACA MLR provision will make the
insurance marketplace more transparent and make it easier for
consumers to determine which plans provide better value for their
money. HHS also provided technical comments, which we incorporated as
appropriate.
Additionally, we provided a draft of this report to NAIC for comment.
NAIC provided technical comments, which we incorporated as appropriate.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies to the
Secretary of Health and Human Services, the Administrator of the
Centers for Medicare & Medicaid Services, and appropriate
congressional committees. In addition, the report will be available at
no charge on the GAO website at [hyperlink, http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact me at (202) 512-7114 or dickenj@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made key contributions
to this report are listed in enclosure II.
Signed by:
John E. Dicken:
Director, Health Care:
Enclosures - 2:
[End of section]
Enclosure I: Comments from the Department of Health and Human Services:
Department Of Health & Human Services:
Office Of The Secretary:
Assistant Secretary for Legislation:
Washington, DC 20201:
October 11, 2011:
John Dicken, Director:
Health Care:
U.S. Government Accountability Office:
441 G Street NW:
Washington, DC 20548:
Dear Mr. Dicken:
Attached are comments on the U.S. Government Accountability Office's
(GAO) draft report entitled, "Private Health Insurance: Early
Indicators Show that Most Insurers Would Have Met or Exceeded New
Medical Loss Ratio Standards" (GAO-12-90).
The Department appreciates the opportunity to review this report
before its publication.
Sincerely,
Signed by:
Jim R. Esquea:
Assistant Secretary for Legislation:
Attachment:
[End of letter]
General Comments Of The Department Of Health And Human Services (HHS)
On The Government Accountability Office's (GAO) Draft Report Entitled,
"Private Health Insurance: Early Indicators Show That Most Insurers
Would Have Met Or Exceeded New Medical Loss Ratio Standards" (GAO-12-
90):
The Department appreciates the opportunity to review and comment on
this draft report.
The medical loss ratio provisions are one of the key changes included
in the Affordable Care Act that will make the insurance marketplace
more transparent and make it easier for consumers to determine which
plans provide better value for their money. Prior to these changes,
many insurance companies spent a substantial portion of consumers'
premium dollars on administrative costs and profits, including
executive salaries, overhead, and marketing. The medical loss ratio
regulations will help ensure that consumers receive more value for
their premium dollar because insurance companies will be required to
spend 80 or 85 percent of premium dollars on direct medical care and
quality improvement, rather than on administrative costs. Insurance
companies spending less than this will be required to provide a rebate
to their customers starting in 2012. The medical loss ratio rules also
ensure that the health insurance marketplace is more transparent to
consumers. Starting in 2012, insurance companies will begin reporting
premium and expenditure information in each state in which they do
business. This information will be publicly available so consumers
will be able to evaluate the value of their insurance plan and see how
it compares to other plans offered in their area.
[End of section]
Enclosure II: GAO Contact and Staff Acknowledgments:
GAO Contact:
John E. Dicken, (202) 512-7114 or dickenj@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Gerardine Brennan, Assistant
Director; George Bogart; Julianne Flowers; Drew Long; Lisa A. Lusk;
and Janet L. Sparks made key contributions to this report.
[End of section]
Footnotes:
[1] Pub. L. No. 111-148, §§ 1001(5), 10101(f), 124 Stat. 119, 130, 885
(2010) (inserting and amending a new section 2718 in the Public Health
Service Act (PHSA)).
[2] Generally, small and large group markets refer to coverage sold to
a "small employer" or a "large employer." PPACA generally defines a
small employer as having employed an average of 1 to 100 employees and
a large employer as having employed an average of 101 or more
employees during the preceding calendar year. Until 2016, a state has
the option to define small employers as having employed an average of
1 to 50 employees during the preceding calendar year and a large
employer as having employed an average of at least 51 employees during
the preceding calendar year, in which case that definition will apply
in calculating the applicable PPACA MLR standard. See Pub. L. No. 111-
148, § 1304(b), 124 Stat. 172.
[3] Rebates are refunds issued by the insurer to the individual or
entity that paid the premium either in the form of a lump sum payment
or credit toward premiums.
[4] Insurers that cover less than 1,000 life years are considered
noncredible and presumed to meet the PPACA MLR standards. Life years
refers to the total number of months of coverage for all enrollees
divided by 12. See 45 C.F.R. § 158.230 (as added by HHS Interim Final
Rule, 75 Fed. Reg. 74864, 74927 (Dec. 1, 2010)).
[5] NAIC is the organization of insurance commissioners from the 50
states, the District of Columbia, and the five U.S. territories who
regulate the conduct of insurance companies in their respective state
or territory. All insurers, with some exceptions, report annual
financial statements to NAIC that include data for all health
insurance markets offered by an insurer, including MLR data.
[6] GAO, Private Health Insurance: Early Experiences Implementing New
Medical Loss Ratio Requirements, [hyperlink,
http://www.gao.gov/products/GAO-11-711] (Washington, D.C.: July 29,
2011).
[7] Some insurers operate in multiple markets and multiple states, and
a separate PPACA MLR was reported for each insurer, market, and state
combination. For the purposes of this report, we use "insurer" to
refer to each insurer, market, and state combination.
[8] The credibility adjustment is based on two factors: the size of an
insured population and plan deductibles. Because insurers did not
report data for deductibles in 2010, our methodology applied a 1.0
multiplier for the deductible adjustment factor for the credibility
adjustment. This methodology was based on the assumption that few
insurers would have had plans with deductibles greater than $2,500,
the amount at which an insurer would be eligible for a deductible
adjustment factor greater than 1, and is consistent with NAIC's
approach in a recent report it issued.
[9] For the purposes of this report, medical care claims is broadly
defined as payments made or anticipated to be made for medical care
expenses. For example, medical care claims would include medical care
expenses paid, medical care expenses incurred but not yet paid, as
well as changes in an insurer's contract reserves. Contract reserves
are funds set aside to pay certain claims expected to be incurred in
the future.
[10] Prior to PPACA, insurers did not report traditional MLRs to NAIC
by state.
[11] See PHSA § 2718(b)(1)(A)(ii) (as added by Pub. L. No. 111-148, §§
1001(5), 10101(f), 124 Stat. 119,130, 885, 886). As of September 13,
2011, 16 states and 1 territory had applied to HHS for adjustments to
lower the PPACA MLR standard for their individual market insurers, and
HHS had granted adjustments to 5 of these states, had denied an
adjustment to 2 states, advised that in the territory all insurers
were noncredible and thus presumed to meet or exceed the statutory
standard, and was in the process of reviewing the remaining
applications. The 5 states with approved adjustments are Iowa,
Kentucky, Maine, New Hampshire, and Nevada, and the approved minimum
2011 PPACA MLR standards for these states ranged from 65 percent to 75
percent.
[12] See 45 C.F.R. § 158.160.
[13] Our prior report did not include an analysis of insurers' 2010
MLR data because at the time of our study, NAIC was in the process of
validating insurers' reported data and the data were not fully
complete. Additionally, the data included in our prior report were
aggregated for each insurer across all of the states in which the
insurer operated and reported by market. Beginning in 2010, insurers
reported MLR data by market and by state, and throughout this report
we use "insurer" to refer to each insurer, market, and state
combination. Therefore, the average adjusted PPACA MLRs for 2010
included in this report are not comparable to the average MLRs
included in the earlier report.
[14] Covered lives refers to the number of lives insured by a health
insurance plan--including the enrollee and any family members also
covered by the plan.
[15] In addition, all noncredible insurers were presumed to meet the
standard.
[16] Nonclaims expenses are those that are not related to medical care
or expenses to improve health care quality. Examples include sales
expenses, brokers' fees and commissions, cost containment expenses,
and other general and administrative expenses.
[17] Insurers also said that their 2010 MLR data will not be as
precise as their MLR data for 2011 and beyond when MLRs are subject to
the PPACA MLR requirements. For example, some insurers said that they
used their best estimates to report their expenses to improve health
care quality for 2010.
[18] The insurers we interviewed said their PPACA MLRs will be
affected by changes in the MLR formula, primarily due to the deduction
of taxes and fees in the denominator, and to a lesser extent, the
addition of expenses for activities to improve health care quality in
the numerator.
[End of section]
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