NAIC Adopts Final Medical Loss Ratio Regulations

During a joint session the Executive and Plenary committees of the National Association of Insurance Commissioners (NAIC) voted to adopt a model regulation containing the definitions and methodologies for calculating medical loss ratios as required by the Patient Protection and Affordable Care Act (PPACA). The model will be delivered to Health and Human Services (HHS) for certification by Secretary Kathleen Sebelius. The vote took place during the fall NAIC meeting in Orlando.

The PPACA signed into law on March 23, 2010, requires that beginning in 2011, insurance companies meet new medical loss ratio requirements designed to ensure premium dollars go to health care. The law requires that the NAIC provide recommendations for the definitions and calculations of these ratios to HHS by December 31, 2010.

"I commend the work of our regulators and staff as we considered a number of very challenging issues as it moved through the committee process. The committee model regulation on MLR passed with only technical amendments, which is a testament to our inclusive and transparent process," said Jane L. Cline, NAIC President and West Virginia Insurance Commissioner. "It is with a great deal of pride we present these recommendations to the Secretary."

The law also tasks the NAIC with a number of additional provisions to consider, including rate review and consumer information. The Health Insurance and Managed Care Exchanges subgroup has already begun work on their recommendations to HHS. They have been tasked with creating guidelines and recommendations to facilitate the implementation of health exchanges, due to be operational in the states by January 2014.

The work of staff continued prior to the vote during the October 17 meeting with the Life and Health Actuarial Task Force when it met to consider redefining the methodology to include contract reserves in the MLR rebate calculation.
The request was made to send the issue back from the “B” Committee to LHATF, to consider the issue and then report back to commissioners so that the decision could be included in the final joint vote.

Bill Weller, representing America’s Health Insurance Plans, Washington, said that in the individual major medical market, said that expected loss ratios are met over time and that there are factors such as how that market is used that needs to be considered. The individual market is used by those between jobs who terminate as soon as they find work and are insured under group coverage, according to Weller. So, the expectation is that premiums increase consistent but to costs, but not necessarily matching them, he added. That has to be considered in the rebate calculation, according to Weller. It is important for the purposes of a rebate calculation that a net level methodology consistent with pricing assumptions be used, according to Weller.

Minnesota regulator Julia Philips, who had worked on the development of the MLR guidance, said that regulators were concerned with gaming and the elimination of rebates. She said that she wanted a reference to the NAIC’s Accounting Practices and Procedures Manual so that this would not happen.

Frank Horn, a New York regulator said that there needs to be consistency with the way the regulation is calculated because there seems to be ways in which the MLR can be artificially raised.

The intent was to avoid any gaming or opportunity for gaming, according to Steve Ostlund, an Alabama regulator, who added that he believed that the regulation did say that statutory accounting should be used.

Tim Yost, an NAIC funded consumer, said that it was his understanding that reserves claimed for MLR purposes would be the same as those in the annual statement. He expressed concern over gaming. The annual statement requires certification under oath by an actuary and if a company decides to use different MLRs, there is concern over how they will be calculated, he said.

Yost also expressed concern that the packet of IRDs put together by the subgroup is sound and now changes are being proposed to the regulation. He noted proposals on national aggregation experience for large groups, proposed changes to credibility levels and now the proposal for contract reserves. “None of these proposals favor consumers,” Yost asserted. The goal here is just to reduce MLR rebates, he continued. It should be to increase efficiency and the amount spent on quality improvements and these proposals are undoing that, he added.

Rowen Bell, representing the American Academy of Actuaries, Washington, said that the Academy had sent a lengthy letter explaining why it was important to decouple contract reserves associated with the MLR from statutory reporting in order to avoid gaming. He noted the tremendous diversity among companies and even within entities. The Academy was offering a way to calculate MLR regardless of how statutory reporting is done so that all entities can be treated fairly.

Barbara Yondorf, an NAIC consumer representative and former Colorado insurance regulator, said that the issue of gaming is going to be a recurring theme and will surface again when exchanges are discussed. She expressed reservations about altering agreed upon language because when you have something that is delicately put together and you start pulling at threads, there is a real question of how it will fit together.

Lou Felice, a New York regulator, said that any decision on MLRs needed to include an accounting as well as an actuarial viewpoint and that no changes should be made unless both are considered.

Ostlund made a motion that LHATF support the subgroup’s proposal regarding contract reserves. Minnesota’s Philips said that contract reserves are really defined in a general sense and does not say that it needs to match the financial statement.
AHIP’s Weller said that he considers what is being voted up to executive/plenary as significantly different from what he considered it to be.
Ostlund’s motion carried 9-2.

During the NAIC meeting, it was also announced that Ostlund and Felice had been awarded the Robert Dineen award for advancing the work of state regulations for their work on PPACA.