Private Health Insurance
Early Experiences Implementing New Medical Loss Ratio Requirements Gao ID: GAO-11-711 July 29, 2011To help ensure that Americans receive value for their premium dollars, the Patient Protection and Affordable Care Act (PPACA) established minimum "medical loss ratio" (MLR) standards for health insurers. The MLR is a basic financial indicator, traditionally referring to the percentage of premiums spent on medical claims. The PPACA MLR is defined differently from the traditional MLR. Beginning in 2011, insurers must meet minimum MLR requirements or pay rebates to enrollees. While insurers' first set of data subject to the MLR requirements will be for 2011, and is not due until June 2012, insurers prepared preliminary PPACA MLR data for 2010. GAO examined: (1) what can be learned from the traditional MLR data reported by health insurers prior to PPACA; (2) what factors might affect the MLRs that insurers will report under PPACA; and (3) what changes in business practices, if any, have insurers made or planned to make in response to the PPACA MLR requirements. GAO analyzed premiums, claims, and traditional MLR data for nearly all insurers for 2006- 2009 and interviewed a judgmental sample of seven insurers--selected to provide a range based on their size, profit status, and the number of states in which they operated--about their experiences using the PPACA MLR definition.
From 2006 through 2009, traditional MLRs on average generally exceeded PPACA MLR standards. This is even without the additional components in the new PPACA MLR that will generally increase MLRs. However, traditional MLRs also varied among insurers. Traditional MLRs within the individual market varied more than those within the small and large group markets, and a larger proportion of individual market insurers generally had lower MLRs. Additionally, traditional MLRs varied more among smaller insurers than among larger insurers in all three markets. Some components of the PPACA MLR requirements may mitigate the implications of some of these variations. The insurers GAO interviewed said their PPACA MLRs will be affected by changes in the MLR formula and their ability to provide more precise data in 2011 and beyond. Most of these insurers reported that the deduction of taxes and fees in the PPACA MLR formula would contribute to the largest change in their 2010 MLRs. Including expenses for activities to improve health care quality was also cited as a factor affecting insurers' MLRs but to a lesser extent. In addition, because insurers had limited time to respond to HHS's interim final rule on PPACA MLRs, which was published in late 2010, they said that their 2010 MLRs were based in part on best estimates. Insurers said they expect their ability to provide more precise PPACA MLR data will improve in 2011 and beyond. Most of the insurers GAO interviewed were reducing brokers' commissions and making adjustments to premiums, as well as making changes to other business practices, in response to the PPACA MLR requirements. Almost all of the insurers said they had decreased or planned to decrease commissions to brokers in an effort to increase their MLRs. Insurers varied on how the PPACA MLR requirements might affect their decisions to implement activities to improve health care quality. While one insurer said that their decision to implement new activities would be affected by whether or not an activity could be included as a quality improvement activity in the PPACA MLR formula, other insurers said that the PPACA MLR requirements are not a factor in such decisions. Insurers also differed on how the PPACA MLR requirement may affect where they do business. One insurer said that they have considered exiting the individual market in some states in which they did not expect to meet the PPACA MLR requirements, while several other insurers said that the PPACA MLR requirements will not affect where they do business. In commenting on a draft of this report, the Department of Health and Human Services (HHS) said that the MLR provision will increase transparency in the insurance market and value for consumers' premiums.
GAO-11-711, Private Health Insurance: Early Experiences Implementing New Medical Loss Ratio Requirements
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United States Government Accountability Office:
GAO:
Report to Congressional Requesters:
July 2011:
Private Health Insurance:
Early Experiences Implementing New Medical Loss Ratio Requirements:
GAO-11-711:
GAO Highlights:
Highlights of GAO-11-711, a report to congressional requesters.
Why GAO Did This Study:
To help ensure that Americans receive value for their premium dollars,
the Patient Protection and Affordable Care Act (PPACA) established
minimum ’medical loss ratio“ (MLR) standards for health insurers. The
MLR is a basic financial indicator, traditionally referring to the
percentage of premiums spent on medical claims. The PPACA MLR is
defined differently from the traditional MLR (see figure). Beginning
in 2011, insurers must meet minimum MLR requirements or pay rebates to
enrollees. While insurers‘ first set of data subject to the MLR
requirements will be for 2011, and is not due until June 2012,
insurers prepared preliminary PPACA MLR data for 2010. GAO examined:
(1) what can be learned from the traditional MLR data reported by
health insurers prior to PPACA; (2) what factors might affect the MLRs
that insurers will report under PPACA; and (3) what changes in
business practices, if any, have insurers made or planned to make in
response to the PPACA MLR requirements. GAO analyzed premiums, claims,
and traditional MLR data for nearly all insurers for 2006–2009 and
interviewed a judgmental sample of seven insurers-”selected to provide
a range based on their size, profit status, and the number of states
in which they operated”-about their experiences using the PPACA MLR
definition.
In commenting on a draft of this report, the Department of Health and
Human Services (HHS) said that the MLR provision will increase
transparency in the insurance market and value for consumers‘ premiums.
What GAO Found:
From 2006 through 2009, traditional MLRs on average generally exceeded
PPACA MLR standards. This is even without the additional components in
the new PPACA MLR that will generally increase MLRs. However,
traditional MLRs also varied among insurers. Traditional MLRs within
the individual market varied more than those within the small and
large group markets, and a larger proportion of individual market
insurers generally had lower MLRs. Additionally, traditional MLRs
varied more among smaller insurers than among larger insurers in all
three markets. Some components of the PPACA MLR requirements may
mitigate the implications of some of these variations.
The insurers GAO interviewed said their PPACA MLRs will be affected by
changes in the MLR formula and their ability to provide more precise
data in 2011 and beyond. Most of these insurers reported that the
deduction of taxes and fees in the PPACA MLR formula would contribute
to the largest change in their 2010 MLRs. Including expenses for
activities to improve health care quality was also cited as a factor
affecting insurers‘ MLRs but to a lesser extent. In addition, because
insurers had limited time to respond to HHS‘s interim final rule on
PPACA MLRs, which was published in late 2010, they said that their
2010 MLRs were based in part on best estimates. Insurers said they
expect their ability to provide more precise PPACA MLR data will
improve in 2011 and beyond.
Most of the insurers GAO interviewed were reducing brokers‘
commissions and making adjustments to premiums, as well as making
changes to other business practices, in response to the PPACA MLR
requirements. Almost all of the insurers said they had decreased or
planned to decrease commissions to brokers in an effort to increase
their MLRs. Insurers varied on how the PPACA MLR requirements might
affect their decisions to implement activities to improve health care
quality. While one insurer said that their decision to implement new
activities would be affected by whether or not an activity could be
included as a quality improvement activity in the PPACA MLR formula,
other insurers said that the PPACA MLR requirements are not a factor
in such decisions. Insurers also differed on how the PPACA MLR
requirement may affect where they do business. One insurer said that
they have considered exiting the individual market in some states in
which they did not expect to meet the PPACA MLR requirements, while
several other insurers said that the PPACA MLR requirements will not
affect where they do business.
Figure: Key Components of Traditional and PPACA MLR Formulas:
[Refer to PDF for image: illustration]
Traditional MLR:
equals:
Medical care claims divided by Premiums.
PPACA MLR:
equals:
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]
View [hyperlink, http://www.gao.gov/products/GAO-11-711] or key
components. For more information, contact John E. Dicken at (202) 512-
7114 or dickenj@gao.gov.
[End of section]
Contents:
Letter:
Background:
Traditional MLRs on Average Generally Exceeded PPACA MLR Standards,
but Varied, Particularly among Individual Market and Smaller Insurers:
PPACA MLRs Will Be Affected by Changes in the MLR Calculation and
Insurers' Ability to Provide More Precise Data in 2011 and Beyond:
Insurers Reported That They Are Making or Considering Changes to
Brokers' Commissions and Premiums, and to Other Business Practices:
Agency and Third-Party Comments:
Appendix I: Comments from the Department of Health and Human Services:
Appendix II: GAO Contact and Staff Acknowledgments:
Table:
Table 1: Average Traditional MLRs by Market for Insurers, 2006-2009:
Figures:
Figure 1: Key Components of Traditional and PPACA MLR Formulas:
Figure 2: Range of Traditional MLRs Reported in the Individual, Small
Group, and Large Group Markets, 2009:
Figure 3: Range of Traditional MLRs Reported in the Individual, Small
Group, and Large Group Markets, by Insurer Size, 2009:
Abbreviations:
HHS: Department of Health and Human Services:
IT: information technology:
MLR: medical loss ratio:
NAIC: National Association of Insurance Commissioners:
PHSA: Public Health Service Act:
PPACA: Patient Protection and Affordable Care Act:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
July 29, 2011:
[End of section]
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:
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 it 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. PPACA requires insurers
offering coverage in the large group market to meet minimum PPACA MLRs
of 85 percent, and in the small group and individual markets to meet
minimum PPACA MLRs of 80 percent, or pay rebates to their enrollees.
[Footnote 2],[Footnote 3] The Department of Health and Human Services
(HHS) estimated that in 2011, the PPACA MLR requirements will apply to
health insurance plans covering about 75 million insured Americans.
HHS is responsible for implementing the PPACA MLR provision, including
certifying the definitions and methodologies used for calculating MLRs
developed by the National Association of Insurance Commissioners
(NAIC).[Footnote 4] The first set of data subject to the requirements
will be for insurers' expenditures 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 NAIC based on their 2010
expenditures using the PPACA MLR definition.[Footnote 5]
There has been much debate among Congress and other stakeholders on
the potential impact of the PPACA MLR requirements. For example,
consumer advocates have asserted that the requirements will help
ensure that consumers receive value for their premium dollars, and
have cited what they believe are excessive industry profits as
evidence that minimum MLR requirements are needed. Insurance industry
representatives have expressed concern about the potential for the
requirements to affect the stability of certain insurance markets, and
ultimately consumer choice in those markets.
You asked us to examine issues related to the MLR requirements in
PPACA. This report addresses: (1) what can be learned from traditional
MLR data reported by health insurers prior to the PPACA MLR
requirements; (2) what factors might affect the MLRs that insurers
will report under the PPACA MLR requirements; and (3) what changes in
business practices, if any, insurers have made or plan to make in
response to the PPACA MLR requirements.
To determine what can be learned from traditional MLR data reported
prior to PPACA, we analyzed premiums, claims, and MLR data insurers
reported to NAIC on their annual statements for 2006 through 2009.
[Footnote 6] We used these data to analyze the averages and ranges of
traditional MLRs by year, and by insurance market and insurer size. 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. To determine
what factors might affect the MLRs that insurers will report under the
PPACA MLR requirements, and what changes in business practices, if
any, insurers have made or plan to make in response to the PPACA MLR
requirements, we interviewed a judgmental sample of seven insurers to
learn about their experiences reporting 2010 MLRs using the PPACA MLR
definition, as well as their expectations related to future reporting
of data that will be subject to the PPACA MLR requirements.[Footnote
7] We selected our sample to reflect a variety of insurers based on
certain characteristics, including insurer size as determined by the
number of enrollees; the number of insurance companies within the
insurance groups; profit status; whether the insurer was publicly
traded or privately held; and the number of states in which the
insurer operated. We also interviewed a group of officials from seven
state insurance commissioners' offices and NAIC officials, which was
convened by NAIC at our request, to obtain their perspectives on
issues related to the transition of the new PPACA MLR requirements for
2011 and beyond.
We conducted this performance audit from December 2010 through July
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.
Background:
PPACA established minimum MLR standards for insurers offering group or
individual health insurance coverage using a new MLR formula that
differs from the way MLRs have traditionally been calculated. To
implement the PPACA MLR provisions, HHS issued an interim final rule
that provided specific definitions and methodologies to be used in
calculating the new MLRs, and that addressed other areas, including
adjustments to the MLRs to address the circumstances of certain types
of plans, and oversight and enforcement.[Footnote 8] Insurers will
begin reporting PPACA MLRs to HHS in June 2012.
Traditional and PPACA MLR Formulas:
In the private health insurance industry, the MLR is a commonly used
indicator, measuring the proportion of premium dollars an insurer used
for medical claims, as opposed to other functions, such as marketing,
actuarial activities, or profit. While many states have minimum MLR
standards or MLR reporting requirements, PPACA established federally
required minimum MLRs for insurers operating in the individual and
group insurance markets.[Footnote 9]
The MLR formula specified in PPACA differs from the way MLRs have
traditionally been defined. The traditional MLR is generally
calculated by dividing an insurer's medical care claims by
premiums.[Footnote 10] In the PPACA MLR formula, the numerator
includes insurers' expenses for activities that improve health care
quality--such as patient-centered education and counseling, care
coordination, and wellness assessments--in addition to claims.
Further, the denominator of the PPACA MLR subtracts from insurers'
premiums all federal taxes and state taxes and licensing or regulatory
fees (see figure 1).
Figure 1: Key Components of Traditional and PPACA MLR Formulas:
[Refer to PDF for image: illustration]
Traditional MLR:
equals:
Medical care claims divided by Premiums.
PPACA MLR:
equals:
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]
Implementation of PPACA MLR Requirements:
In addition to establishing the new MLR formula, PPACA directed NAIC
to establish recommended definitions and methodologies for calculating
MLRs, subject to certification by the Secretary of HHS.[Footnote 11]
NAIC submitted its recommendations to HHS on October 27, 2010, and HHS
issued its interim final rule implementing the PPACA MLR requirements
in PPACA on December 1, 2010, with an effective date of January 1,
2011. According to HHS, the interim final rule adopted NAIC's
recommendations in full, and included the following key areas.
* 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. The activities must
be primarily designed to: (1) improve health outcomes; (2) prevent
hospital readmissions; (3) improve patient safety; (4) implement,
promote, and increase wellness and health activities; and (5) enhance
the use of health care data to improve quality, transparency, and
outcomes. Insurers are also allowed to include health information
technology (IT) expenses needed to accomplish activities that improve
health care quality. Also specified were certain activities that do
not qualify as those that improve health care quality, such as
provider credentialing.
* Federal and state taxes and licensing or regulatory fees. These
include all federal taxes and assessments, excluding taxes on
investment income and capital gains.
* 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 12]
* Credibility adjustments. All insurers experience some random
variability in their claims, where actual claims experience varies
from expected experience. The impact of these deviations is less for
health plans with a larger customer base. To help address the
disproportionate impact of claims variability on small health plans,
adjustments to MLRs are 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;[Footnote 13]
- 1,000 to less than 75,000 life years will be considered "partially
credible" and may receive an upward adjustment ranging from 1.2 to 8.3
percentage points, depending on size, and a further adjustment if they
have high deductibles;[Footnote 14] 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, but these insurers account for the
majority of the total life years covered by these types of plans.
[Footnote 15] About half of 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
could apply a credibility adjustment.
* Years of data to include in calculating the MLR. Beginning in 2013,
insurers' MLRs will be calculated based on a 3-year period of the
accumulated experience for the current reporting year and the 2
preceding years. Because insurers will not have 3 years of MLR data
for 2011 and 2012, MLRs for these years will be calculated as follows:
(1) MLRs for 2011 will be calculated on their experience for 2011, (2)
MLRs for plans that are fully credible in 2012 will be calculated
based on their experience for 2012, and (3) MLRs for plans that are
partially or noncredible in 2012 will be calculated based on
accumulated experience from 2011 and 2012.
HHS's interim final rule also addressed areas that NAIC did not
specifically include in its recommendations, which focused primarily
on the definitions and methodologies used for calculating the MLR.
Some key areas are summarized below.
* Treatment of agents' and brokers' commissions and fees. HHS
explicitly listed agents' and brokers' commissions and fees as
nonclaims expenses. NAIC did not include any special treatment of
these expenses in its recommendation to HHS, but raised concerns about
the potential impact of the MLR requirements on the ability of these
professionals to continue assisting consumers. HHS officials have
continued to discuss this issue with NAIC. Legislation has also since
been introduced to deduct agents' and brokers' fees from premiums in
the MLR calculation.[Footnote 16]
* Adjustment to the standard for a state's individual market. In
addition to providing for credibility adjustments, 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
17] Although NAIC's recommendations to HHS did not specifically
address adjustments to the MLR standard for the individual market,
NAIC did raise concerns about the ability of many insurers to readily
achieve an MLR of 80 percent. In the interim final rule, HHS
established a process for states to apply for an adjustment to the MLR
standard for the individual market in that state that included the
information states must provide in their applications and the criteria
HHS would use to assess the applications.[Footnote 18] As of July 25,
2011, 12 states and 1 territory had applied to HHS for an adjustment;
HHS had granted an adjustment of the MLR in 5 states, did not grant an
adjustment in 1 state, and was in the process of reviewing the
remaining applications.[Footnote 19]
* Oversight. HHS is responsible for direct enforcement of the
reporting and rebate provisions of the MLR requirements, including
that the reports are submitted timely, that the data comply with the
definitions in the regulations, and that rebates are paid timely and
accurately. The interim final rule provides a framework through which
HHS may conduct audits to determine insurers' compliance with the
provisions and provides that HHS may, in its discretion, accept the
findings of audits that state regulators may conduct of an insurer's
MLR reporting and rebate obligations, as long as specified conditions
are met. The interim final rule also provides for the imposition of
civil monetary penalties if insurers fail to comply with the
requirements.
HHS received public comments on the interim final rule from
representatives of the insurance industry, consumers, state
regulators, and others, covering a wide range of topics, such as the
treatment of agents' and brokers' fees, the methodology for
determining credibility adjustments, and the treatment of taxes.
According to HHS officials, HHS has not determined when it will issue
a final rule.
MLR Reporting:
PPACA MLRs will be reported to HHS every June and will reflect
insurers' experiences from the previous calendar year. The first set
of these data will be submitted to HHS in June 2012, reflecting
insurers' experiences from 2011.[Footnote 20] In April 2011, insurers
reported MLRs to NAIC using the PPACA MLR definition based on their
2010 experience. These data are not subject to the PPACA MLR
provisions and will not be adjusted to account for credibility or
other issues addressed in the provisions.
Traditional MLRs on Average Generally Exceeded PPACA MLR Standards,
but Varied, Particularly among Individual Market and Smaller Insurers:
Traditional MLR averages generally exceeded the PPACA MLR standards in
each market, even without the changes in the new PPACA MLR formula
that will generally further increase MLRs. However, traditional MLRs
also varied among insurers, particularly among those in the individual
market and smaller insurers. Since traditional MLRs were calculated
differently than they will be under the PPACA requirements, it is
difficult to predict, based on these data, what insurers' MLRs would
have been using the PPACA formula, or to predict the MLRs that
insurers' will report in the future.
Traditional MLR Averages:
From 2006 through 2009, insurers' traditional MLR averages generally
exceeded the PPACA MLR standards--80 percent for the individual and
small group markets and 85 percent for the large group market. This is
even without the new PPACA MLR formula definitions or credibility
adjustments that will generally further increase MLRs reported under
the PPACA requirements. The average traditional MLRs reported for 2006
through 2009 were also relatively stable for all markets (see table
1). Since traditional MLRs were calculated differently than they will
be under the PPACA requirements, it is difficult to predict, based on
these data, what insurers' MLRs would have been using the PPACA
formula, or to predict the MLRs that insurers' will report in the
future.
Table 1: Average Traditional MLRs by Market for Insurers, 2006-2009:
Year: 2006;
Individual market: (N): 180;
Individual market: Mean: 84.3;
Small group market: (N): 281;
Small group market: Mean: 79.5;
Large group market: (N): 316;
Large group market: Mean: 84.9.
Year: 2007;
Individual market: (N): 186;
Individual market: Mean: 83.3;
Small group market: (N): 290;
Small group market: Mean: 81;
Large group market: (N): 319;
Large group market: Mean: 87.3.
Year: 2008;
Individual market: (N): 194;
Individual market: Mean: 81.2;
Small group market: (N): 287;
Small group market: Mean: 80.6;
Large group market: (N): 311;
Large group market: Mean: 87.3.
Year: 2009;
Individual market: (N): 197;
Individual market: Mean: 84.7;
Small group market: (N): 312;
Small group market: Mean: 83.1;
Large group market: (N): 340;
Large group market: Mean: 88.8.
Source: GAO analysis of NAIC data.
Notes: Excludes insurers with less than 1,000 life years in a market
or where life years could not be determined, 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. Large group market includes plans
participating in the Federal Employees Health Benefits Program.
[End of table]
Variation in Traditional MLRs:
While traditional MLRs on average generally exceeded the PPACA MLR
standards from 2006 through 2009, they varied, particularly in the
individual market. For example, figure 2 shows that in 2009
traditional MLRs in the individual market were more widely distributed
than those in the small and large group markets.[Footnote 21] Within
this variation in the individual market, a larger proportion of
insurers generally had lower MLRs; that is, they spent a lower
percentage of their premiums on medical claims, as compared to
insurers in the small and large group markets.[Footnote 22] Under
PPACA, states may request adjustments to the MLR standard for the
individual market if application of the standard may destabilize that
market, for example, by causing insurers to exit the market, such that
insurance options are limited in the state.
Figure 2: Range of Traditional MLRs Reported in the Individual, Small
Group, and Large Group Markets, 2009:
[Refer to PDF for image: vertical bar graph]
Traditional MLR range: Less than 60%;
Individual market: 7.6%;
Small group market: 4.2%;
Large group market: 0.
Traditional MLR range: 60-69.9%;
Individual market: 9.1%;
Small group market: 3.5%;
Large group market: 1.8%.
Traditional MLR range: 70-79.9%;
Individual market: 28%;
Small group market: 29%;
Large group market: 7.4%.
Traditional MLR range: 80-89.9%;
Individual market: 24%;
Small group market: 43%;
Large group market: 54%.
Traditional MLR range: 90-99.9%;
Individual market: 15%;
Small group market: 16%;
Large group market: 32%.
Traditional MLR range: 100% or more;
Individual market: 16%;
Small group market: 5.1%;
Large group market: 5%.
Individual market Distribution[A]: 60-100% or more;
Small group market Distribution: 70-99.9%;
Large group market Distribution: 80-99.9%;
Source: GAO analysis of NAIC data.
Notes: Excludes insurers with less than 1,000 life years in a market
or where life years could not be determined, and insurers that
reported negative values for premiums, claims, or number of covered
lives. Life years refer to the total number of months of coverage for
enrollees divided by 12. Large group includes plans participating in
the Federal Employees Health Benefits Program.
[A] The traditional MLRs in the individual market were more widely
distributed than those in the small and large group markets. MLRs
within one standard deviation above and below the mean ranged from
64.4-105 percent in the individual market, compared to 69.4-96.8
percent in the small group market, and 79-97.9 percent in the large
group market. The standard deviation is a measure of the amount of
variation in the data from the mean--a larger standard deviation
indicates more variability.
[End of figure]
Annual fluctuations in insurers' traditional MLRs were also greater
for insurers in the individual market. For example, 70 percent of
insurers in the individual market experienced an average annual change
in their traditional MLRs of more than 5 percentage points from 2006
through 2009, compared to 46 percent in the small group market and 39
percent in the large group market. Almost 12 percent of insurers in
the individual market averaged annual changes greater than 20
percentage points, compared with about 4 percent of insurers in both
the small group and large group markets. Beginning in 2013, insurers
will calculate their PPACA MLRs based on 3 years of data, which could
partially mitigate the impact of variations often experienced by
insurers from year to year.
Traditional MLRs were also more varied for smaller insurers in all
three markets from 2006 through 2009. For example, figure 3 shows that
in 2009 traditional MLRs for smaller insurers were more widely
distributed than those for larger insurers, with a higher percentage
of smaller insurers generally reporting lower MLRs. The credibility
adjustments in PPACA allow smaller insurers to upwardly adjust their
MLRs. Data for figure 3 are aggregated across all states that an
insurer operates in. However, since insurers are required to report
their PPACA MLRs at the state level, it is likely that in 2011 and
beyond, more insurers will have less than 75,000 life years in a
market at the state level and will be eligible for a credibility
adjustment.
Figure 3: Range of Traditional MLRs Reported in the Individual, Small
Group, and Large Group Markets, by Insurer Size, 2009:
[Refer to PDF for image: 3 vertical bar graphs]
Individual market:
Range of traditional MLRs reported by insurer size, 2009:
Traditional MLR range: Less than 60%;
Less than 75,000 life years: 9%;
75,000 or more life years: 0.
Traditional MLR range: 60-69.9%;
Less than 75,000 life years: 8.4%;
75,000 or more life years: 13%.
Traditional MLR range: 70-79.9%;
Less than 75,000 life years: 23%;
75,000 or more life years: 52%.
Traditional MLR range: 80-89.9%;
Less than 75,000 life years: 26%;
75,000 or more life years: 16%.
Traditional MLR range: 90-99.9%;
Less than 75,000 life years: 16%;
75,000 or more life years: 13%.
Traditional MLR range: 100% or more;
Less than 75,000 life years: 17%;
75,000 or more life years: 6.5%.
Distribution:
Less than 75,000 life years[A]: 60-100% or more;
75,000 or more life years: 70-99.9%.
Small group market:
Range of traditional MLRs reported by insurer size, 2009:
Traditional MLR range: Less than 60%;
Less than 75,000 life years: 4.4%;
75,000 or more life years: 3.2%.
Traditional MLR range: 60-69.9%;
Less than 75,000 life years: 4%;
75,000 or more life years: 1.6%.
Traditional MLR range: 70-79.9%;
Less than 75,000 life years: 28%;
75,000 or more life years: 31%.
Traditional MLR range: 80-89.9%;
Less than 75,000 life years: 42%;
75,000 or more life years: 47%.
Traditional MLR range: 90-99.9%;
Less than 75,000 life years: 16%;
75,000 or more life years: 18%.
Traditional MLR range: 100% or more;
Less than 75,000 life years: 6.4%;
75,000 or more life years: 0.
Distribution:
Less than 75,000 life years[A]: 70-99.9%;
75,000 or more life years: 70-90%.
Large group market:
Range of traditional MLRs reported by insurer size, 2009:
Traditional MLR range: Less than 60%;
Less than 75,000 life years: 0;
75,000 or more life years: 0.
Traditional MLR range: 60-69.9%;
Less than 75,000 life years: 2.6%;
75,000 or more life years: 0.
Traditional MLR range: 70-79.9%;
Less than 75,000 life years: 11%;
75,000 or more life years: 0.9%.
Traditional MLR range: 80-89.9%;
Less than 75,000 life years: 49%;
75,000 or more life years: 63%.
Traditional MLR range: 90-99.9%;
Less than 75,000 life years: 30%;
75,000 or more life years: 36%.
Traditional MLR range: 100% or more;
Less than 75,000 life years: 7.5%;
75,000 or more life years: 0.
Distribution:
Less than 75,000 life years[A]: 80-99.9%;
75,000 or more life years: 85-90%.
Source: GAO analysis of NAIC data.
Notes: Excludes insurers with less than 1,000 life years in a market
or where life years could not be determined, 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. Large group includes plans participating in
the Federal Employees Health Benefits Program.
[A] The traditional MLRs among smaller insurers were more widely
distributed than larger insurers in all markets. In the individual
market, MLRs within one standard deviation above and below the mean
ranged from 64-107.2 percent for smaller insurers, and 69.2-90.2
percent for larger insurers. In the small group market, the range was
68.5-97.9 percent for smaller insurers and 73.9-91.5 percent for
larger insurers. In the large group market the range was 78.1-99.5
percent for smaller insurers and 84.7-92.9 percent for larger
insurers. The standard deviation is a measure of the amount of
variation from the average--a larger standard deviation indicates more
variability.
[End of figure]
PPACA MLRs Will Be Affected by Changes in the MLR Calculation and
Insurers' Ability to Provide More Precise Data in 2011 and Beyond:
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. Insurers also said that the PPACA MLR requirement to report
MLRs by state will affect their PPACA MLRs. Insurers said they expect
the precision of their PPACA MLR data to improve in 2011 and beyond,
in part because their 2010 MLRs were based on best estimates.
Insurers Reported That Changes in the Way MLRs Are Calculated Will
Affect Their PPACA MLRs:
Most of the insurers we interviewed reported that the deduction of
taxes and fees in the denominator of the PPACA MLR formula would
contribute to the largest change in 2010 MLRs compared to the
traditional MLR formula, but some insurers said the effect of the
deductions vary by state and may vary in 2011 and beyond. One insurer
told us that the effect of deducting taxes and fees for their 2010
MLRs was more than double the effect of including their expenses for
activities to improve health care quality in the numerator. Another
insurer told us that the effect of taxes and fees would vary by state
because state taxes, such as premium taxes and other state
assessments, can vary. Further, one insurer said that while the
deduction of taxes and fees was the largest component that affected
their 2010 MLRs, and resulted in increased MLRs, if the insurer were
to experience a loss in profits in a future year, and therefore a
reduction in its income taxes, the effect of this deduction could
result in a decrease in MLRs. Regulators from several state insurance
commissioners' offices also told us that they believed the deduction
of taxes and fees in the PPACA MLR formula would likely have the
largest impact on MLRs reported by insurers in 2010.
Most of the insurers we interviewed also said including expenses in
the numerator of the PPACA formula for activities to improve health
care quality contributed to changes in the 2010 MLRs compared to what
they would have been under the traditional formula. However, including
these expenses had less of an effect on their MLRs than the deduction
of taxes and fees. One insurer estimated that the inclusion of these
expenses in the PPACA MLR formula would increase their MLRs by 0.5
percentage points, but this was a fraction of the total estimated 2.0-
2.5 percentage point increase in their MLR overall, which the insurer
said was primarily due to the deduction of taxes and fees. Another
insurer estimated that the impact of including their expenses for
quality improvement activities would be less than 2 percentage points,
but the deduction of taxes represented the largest component driving
the increase in their 2010 MLRs. In addition, two insurers said that
including quality improvement expenses would have very little impact
on their PPACA MLRs. Examples of activities that improve health care
quality that insurers included in their PPACA MLR were disease
management programs, wellness activities, 24-hour nurse phone lines,
and care coordination.
Insurers that issue insurance plans in more than one state said that
disaggregating MLRs by state will likely result in some variation in
their MLRs across states. For example, one insurer said that a higher
proportion of their premium dollars are spent on administrative
expenses in one of their states because they tend to sell lower
benefit plans, which they said have high administrative costs relative
to premiums, in this state. While this insurer historically reported a
single MLR combining data across two states, they said the
disaggregation by state required for the PPACA MLR resulted in lower
MLRs in the state with lower benefit plans compared to the other
state. For example, MLRs in this state were 1.5 percentage points
lower in the individual market and 4.5 percentage points lower in the
small group market than the MLRs in the other state. Another insurer
said that prior to the PPACA MLR requirements they priced insurance
plans for the small group market to employers located in two states as
a single market. When they calculated the PPACA MLRs separately for
each state they noted variations between the two MLRs because medical
costs were different in each state.
Insurers' Ability to Provide More Precise Data Will Affect PPACA MLRs
Reported in 2011 and Beyond:
All of the insurers we spoke with said that their PPACA MLRs for 2011
and beyond will be more precise than the 2010 MLRs reported to NAIC
for several reasons. Because HHS's interim final rule on PPACA MLRs
was published in late 2010, insurers told us that they used their best
estimates to apply the PPACA definition to experiences incurred
earlier in the year. They said their PPACA MLRs for 2011 and beyond
will be more precise because they will not be based on estimates and
they will have a full year of data that they collected according to
the new PPACA MLR categories. A regulator from one state insurance
commissioner's office described 2010 as a "test" year and said it will
help insurers better prepare to report their 2011 MLRs. The regulators
also agreed that the 2010 MLR data would not be a clear indicator of
insurers' expenses for quality improvement activities because
insurers' may vary in how precisely they report these expenses. In
addition, some insurers told us they had never reported MLRs both by
state and by insurance market prior to the PPACA MLR requirements, and
were having challenges developing reasonable bases for allocating
expenses across states and insurance markets for their 2010 reporting.
However, they expected these issues to be resolved for 2011. For
example, one insurer told us that their medical quality activities are
centralized and apply to all markets, but they must now apportion
their expenses for these activities by market, then to each of their
insurance companies, and then by state. This insurer said that they
implemented a new timekeeping system late in 2010 to better account
for the time that their staff spend on these activities to address
these allocation issues and expect to produce more precise data for
their 2011 MLRs and beyond.
Most of the insurers we interviewed also told us that their 2010 MLR
data may be less precise than data reported in future years because of
challenges they had in identifying and allocating health IT expenses.
For example, one insurer told us that their health IT is a centralized
function that is also used for other lines of insurance business, such
as Medicare and Medicaid, which they said are not subject to PPACA MLR
requirements. Another insurer said that determining their health IT
expenses was less clear relative to the other subcategories of
activities to improve health care quality in that it was hard to
identify how much of their internal IT system infrastructure uniquely
supported the other eligible quality activities. In addition, one
insurer that only operates in a single state said that identifying
expenses for health IT was challenging when factors such as facilities
and employees' salaries had to be considered. However, all of these
insurers anticipated that these issues would be largely resolved when
they report their 2011 PPACA MLRs.
Insurers Reported That They Are Making or Considering Changes to
Brokers' Commissions and Premiums, and to Other Business Practices:
Almost all of the insurers we interviewed were reducing brokers'
commissions and making adjustments to premiums in response to the
PPACA MLR requirements. These insurers said that they have decreased
or plan to decrease commissions to brokers in an effort to increase
their MLRs. One insurer said they started making reductions to their
brokers' commissions in the fourth quarter of 2010 for their
individual and small group plans to increase their 2011 PPACA MLRs in
these markets and, as a result, premiums were not as high as they
otherwise would have been. This insurer said these reductions will
take effect gradually because they are only being applied to new sales
or when groups renew annually. Another insurer lowered commissions to
their brokers in the individual market in the first quarter of 2011,
such that premiums were increased less than they otherwise would have
been, which they expect to result in an increase in their PPACA MLRs
for 2011. In addition, one insurer said they are considering reducing
premiums in 2012 partly in response to the PPACA MLR requirements and
also in conjunction with a reduction in the number of in-network
physicians--the combined strategy would help to lower enrollee
premiums and increase their MLRs. A regulator from one state insurance
commissioner's office said that some insurers in that state have not
applied for premium increases and are making adjustments to lower
premiums as a strategy to increase their MLRs, and commented that
reducing premiums is the best strategy for insurers to improve value
for consumers.
Insurers we interviewed varied on how the PPACA MLR requirements might
affect their decisions on activities to improve health care quality.
One insurer said that they may reduce their expenses on activities
that HHS does not consider quality improvement activities in the PPACA
MLR formula, such as retrospective utilization review (a review of a
patient's records after the medical treatment has occurred) and
increase expenses for activities that qualify, such as prospective
utilization review. Another insurer said that they are no longer
focusing as much on preauthorization for inpatient admissions because
this is not an eligible quality improvement activity in the PPACA MLR
formula. This insurer also said the PPACA MLR requirements provide an
incentive to spend more money on quality improvement activities, which
will affect their decisions on implementing new activities in the
future. Conversely, five other insurers told us that the PPACA MLR
requirements are not a factor in decisions about their activities to
improve health care quality.
Insurers we interviewed also varied on how the PPACA MLR requirements
may affect where they do business. For example, one large insurer that
operates in multiple states said that they have exited the individual
market in one state where they did not have a large market share, in
part, because of the MLR requirements, and they are evaluating whether
to exit this market in other states where it might be difficult to
meet the PPACA MLR requirements. One for-profit insurer told us that
they plan to exit or stop issuing new business in the individual
market in multiple states as well as consolidating some of their
insurance companies in some states in which they did not think they
would meet PPACA MLR requirements. Several other insurers said that
the PPACA MLR requirements will not affect decisions on where they do
business. For example, one not-for-profit insurer said that serving
the communities where they operate is part of their mission and,
therefore, they will not be exiting any markets in the states they
serve. Another insurer is considering eliminating some of their high
and mid-level deductible plans, but not exiting any markets.
Agency and Third-Party Comments:
We obtained written comments from HHS which are reprinted in appendix
I. HHS commented that the PPACA MLR provision will increase
transparency in the health insurance marketplace and the value
consumers receive for their premium dollar. HHS also provided
technical comments, which we incorporated as appropriate.
Additionally, we provided a draft of this report to NAIC for comment.
NAIC responded that the report was fair, factual, and helpful and
provided technical comments, which we incorporated as appropriate.
As arranged 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 Web site 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 at 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 appendix II.
Signed by:
John E. Dicken:
Director, Health Care:
[End of section]
Appendix 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:
July 15, 2011:
John Dicken:
Director, Health Care:
U.S. Government Accountability Office:
441 G Street N.W.
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
Experiences Implementing New Medical Loss Ratio Requirements" (GAO 11-
711).
The Department appreciates the opportunity to review this report prior
to 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 Experiences Implementing New Medical
Loss Ratio Requirements" (GAO-11-711):
The Department appreciates the opportunity to review and comment on
this draft report.
The "Medical Loss Ratio" provision of the Affordable Care Act requires
insurers to spend most of consumers' premiums on direct care for
patients and efforts to improve care quality. This will make the
insurance marketplace more transparent and make it easier for
consumers to purchase plans that provide better value for their money.
Before the Affordable Care Act was passed, many insurance companies
spent a substantial portion of consumers' premium dollars on
administrative costs and profits, including executive salaries,
overhead, and marketing. Thanks to the Affordable Care Act, consumers
will receive more value for their premium dollar because insurance
companies are required to spend a substantial portion of each premium
dollar on medical care and health care quality improvement, rather
than on administrative costs. If they don't, the insurance companies
are required to provide a rebate to their customers starting in 2012.
This year, the new rules will protect up to 74.8 million insured
Americans and estimates indicate that up to 9 million Americans could
be eligible for rebates starting in 2012 worth up to $1.4 billion.
This provision, combined with the many consumer protections in the
Affordable Care Act, will help build a consumer-centric health
insurance marketplace for the American people.
[End of section]
Appendix 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;
Linda McIver; Jessica C. Smith; 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. 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 towards current premiums.
[4] 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.
[5] This study does not include an analysis of insurers' 2010 MLR
data. At the time of our study, NAIC was in the process of validating
insurers' reported data and the data were not fully complete.
[6] All insurers, with some exceptions, report annual financial
statements to NAIC that include data for all health insurance markets
offered by an insurer, including individual, small group, and large
group markets. The largest exceptions to the NAIC reporting
requirements are insurers that are regulated by the California
Department of Managed Health Care which report directly to that
department. HHS estimates that 9 percent of health insurers subject to
the PPACA MLR requirements do not report to NAIC. Our analysis was
based on data filed on NAIC's annual Accident and Health Policy
Experience Exhibit, which is the form on which the MLR was reported
for the years 2006 through 2009.
[7] Our sample of insurers included six insurance groups that operated
one or more insurance companies and one insurance company that was not
part of a larger insurance group. Many, but not all, insurance
companies are a part of larger insurance groups.
[8] 75 Fed. Reg. 74864, 74921 (Dec. 1, 2010) (to be codified at 45
C.F.R. pt. 158); 75 Fed. Reg. 82277, 82278 (Dec. 30, 2010) (to be
codified at 45 C.F.R. pt. 158) (providing corrections for technical
and typographical errors in the Dec. 1, 2010 interim final rule).
[9] An analysis prepared by one insurance industry trade group
identified 34 states that, as of April 2010, had established MLR
guidelines or requirements for certain markets, required the
submission of MLR information in rate filings to state regulators, or
imposed limitations on administrative expenses. Many of these states
used their MLR guidelines to determine whether the benefits of a
policy were reasonable relative to premiums. A small number of states
required insurers to issue a dividend, credit, or refund to
policyholders if the MLR standard was not met. See America's Health
Insurance Plans, State Mandatory Medical Loss Ratio (MLR) Requirements
for Comprehensive, Major Medical Coverage: Summary of State Laws and
Regulations (Apr. 15, 2010).
[10] 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.
[11] Pub. L. No. 111-148, § 10101(f), 124 Stat. 885, 887 (inserting a
new § 2718(c) in the PHSA). HHS is responsible for implementing the
MLR provisions in PPACA. The department has delegated this
responsibility to the Center for Consumer Information and Insurance
Oversight, a new office within the Centers for Medicare & Medicaid
Services.
[12] Prior to PPACA, insurers did not report traditional MLRs to NAIC
by state.
[13] Life years refers to the total number of months of coverage for
all enrollees divided by 12.
[14] NAIC concluded, based on analysis conducted by an independent
consulting firm, that claims experience tends to be more variable for
health insurance plans with high deductibles compared with policies
with lower deductibles. To address this, the interim final rule
specifies that for partially credible plans, the adjustment for the
number of life years--referred to as the base credibility factor--can
be further multiplied by a deductible factor ranging from 1.0 to
1.736, depending on the average deductible of all policies whose
experience is included in the reported MLR.
[15] HHS's estimates were based on insurance companies' experience
disaggregated by state.
[16] H.R. 1206. The bill was introduced in the House of
Representatives and referred to the Subcommittee on Health in the
Committee on Energy and Commerce.
[17] Pub. L. No. 111-148, § 10101(f), 124 Stat. 885, 886 (inserting a
new § 2718(b)(1)(A)(ii) in the PHSA).
[18] States requesting an adjustment to the MLR standard for the
individual market must provide information about how the individual
market is organized and functions, including the state's current MLR
standard for this market, if any; any requirements placed on insurers
seeking to withdraw from the individual market; and operational and
financial information about each insurer offering coverage in the
individual market in the state. The state must also include its
proposal for an alternative MLR standard. HHS specified several
criteria it may consider in assessing state applications, including:
the number of insurers reasonably likely to exit the market without an
adjustment to the 80 percent MLR standard; the number of enrollees
covered by these insurers; alternate coverage options available for
these enrollees; whether consumers may be unable to access insurance
agents or brokers absent an adjustment to the MLR standard; and the
impact on premiums, benefits, and cost-sharing provided to consumers
by insurers remaining in the market if one or more insurers withdraw.
[19] HHS adjusted the MLR standard for the individual market for 2011
in Maine, Nevada, New Hampshire, Kentucky, and Iowa. It did not grant
North Dakota's request for an adjustment of the MLR standard and was
in the process of reviewing applications submitted by Florida,
Georgia, Louisiana, Kansas, Delaware, Indiana, and Guam.
[20] In June 2011, HHS also began collecting quarterly MLR data on
certain plans--specifically, limited benefit plans that have a total
annual limit of $250,000 or less and expatriate plans--to inform what
adjustments to the MLR standards may be appropriate to address the
special circumstances of these plans. Limited benefit plans cover the
same types of medical services as comprehensive major medical plans
but have unusually low annual benefit limits. Expatriate plans
generally cover employees working outside their country of
citizenship, employees working outside their country of citizenship
and their employer's country of domicile, and non-U.S. citizens
working in their home country.
[21] Our analysis was based on data insurers reported that were an
aggregate across all states they operated in. Under PPACA, insurers
will have to meet minimum MLR standards within each state in which
they operate.
[22] Also, some insurers reported traditional MLRs above 100 percent
indicating that the insurer's claims were greater than the premiums it
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 section]
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