On December 2, 2011, the Department of Health and Human Services (HHS) issued a final rule regarding the Medical Loss Ratio (MLR), implementing changes required under the Patient Protection and Affordable Care Act (ACA). The final rule addresses a number of issues, including “mini-med” and “expatriate” policies, ICD-10 conversion costs, fraud reduction expenses, community benefit expenditures, and the distribution of rebates in group insurance markets.¹ .A significant change in industry oversight, the rule considers insurance broker and agent fees as administrative costs for purposes of a MLR calculation, which has received praise from consumer advocacy groups and criticism from the insurance industry.²

Historically, insurance companies have spent a substantial percentage of premiums paid by beneficiaries on administrative costs and profits, such as executive salaries, overhead, and marketing. MLR refers to the proportion of insurance premium revenues spent on clinical services and quality improvement and other non-administrative activities.³  The ACA, signed into law on March 23, 2010, limits the amount that insurance companies can spend on activities that do not directly benefit beneficiaries (i.e., administrative costs) and requires HHS to provide regulation of MLRs on a State by State basis.⁴

The final rule requires insurance companies to spend 80 percent of insurance premiums on medical care and healthcare quality improvement in the individual and small group markets, and 85 percent of premiums on these components in the large group markets, exclusive of administrative costs.⁵  Beginning in 2011, insurance companies have been required to report their MLR data to HHS annually, in an effort to allow consumers to evaluate available health plans based on value they provide. Starting in 2012, insurers who fail to meet MLR requirements must provide a rebate to their customers.⁶ The final rule allows the Secretary of HHS, through The Center for Consumer Information and Insurance Oversight (CCIIO), to adjust the MLR standard in states where it is determined that meeting the 80 percent MLR standard might destabilize the individual market. In order to qualify, a state must demonstrate that requiring its insurers to meet this standard would decrease the availability of insurance plan choices for consumers.⁷

To date, more than a dozen states have applied for an adjustment to the MLR standard.⁸ While a majority of states (i.e., Oklahoma, Michigan, Indiana, Delaware, Kansas, Louisiana, North Dakota, and Florida - 57 percent of with complete applications) were denied an MLR adjustment, CCIIMO has allowed various models of leniency regarding the MLR standard for those approved.⁹ Maine is the only state that received an overall downwards adjustment to the MLR standard, lowered to 65 percent.¹⁰  In New Hampshire, Kentucky, Georgia, and Iowa, CCIIO implemented a gradual adjustment requiring the full 80 percent MLR standard by 2013.¹¹ Nevada was given a one year adjusted MLR standard of 75 percent, and the option to reapply in the next reporting year.¹² To date, three states are undergoing review of their requested adjustments. Although a majority of states have not applied for an adjustment to the MLR standard, HHS’s interim rule on rebate penalties for exceeding the MLR requirement has received contradicting reviews.¹³

On the same day the MLR final rule was announced, HHS also filed an interim final rule regarding the MLR rebate requirements for non-federal governmental plans. The interim final rule streamlines the rebate issuance process by allowing plans to issue rebates to the group policyholder in a lump sum, rather than to individual enrollees. The rule gives policyholders the option of using the subscriber portion of the rebate in one of the following three ways: (1) reduce subscribers’ annual premium for all subscribers covered under all policies offered; (2) reduce subscribers’ annual premium only for the policy on which the rebate was based; or, (3) provide a cash refund to subscribers covered by the policy on which the rebate is based. Each option would result in consumer savings, either through premium reduction or cash refunds.¹⁴

The main critics of the HHS rebate are insurance companies, as only 36 percent of all insurers were expected to be under the MLR standard in 2011, with the remaining 64 percent of companies required to provide consumer rebates.¹⁵  Specifically, the inclusion of insurance broker and agent fees as administrative costs has created concerns, with the insurance industry claiming such activities are necessary services for consumers that will likely be hindered by the new regulations.¹⁶ Recently, the National Association of Insurance Commissioners reversed their initial support of the HHS rule, instead requesting HHS and Congress to amend the ACA. While the insurance industry claims the MLR rule will create a “desperate economic situation,” consumer groups support the inclusion of insurance broker and agent fees as administrative costs, calling the rule, “a great victory for consumers … maintain[ing] the integrity of incredibly important consumer protections that hold the insurance industry accountable.” HHS will accept comments on the interim final rule until February 6, 2012.¹⁷