Sunday, December 27, 2009

Mandate a Medical Loss Ratio. Close a Disease Management Care Program or Patient Centered Medical Home Support. How It Could Happen

Develop a wellness program that saves money: close the program. Deliver disease management and reduce costs: close that program too. Develop support for a network of patient centered medical homes and watch your insurance claims drop: close it - gone!

How can that be, you ask?

Read on.

In a prior post, the Disease Management Care Blog reviewed a section of the U.S. Senate's health reform bill (the actual language is on page 9) dealing with the 'medical loss ratio' (MLR). In a fit of populism, the World's Most Deliberative Body has proposed a mandate that required commercial insurers 'rebate' any excess profitability - defined as (depending on the type of insurance) having an MLR that is below 80% to 85%. If that survives the House-Senate Conference, it will become the law of the land.

Recall the MLR is a fraction made up of the a) the amount of money spent on medical services on top (or the numerator) and the b) the total amount of money collected in the form of payments for the insurance or 'premium' on the bottom (or the denominator). By mandating a MLR of 80% to 85%, the Senate is saying insurers must spend at least 80 to 85 cents of every dollar they collect on medical care. That means they get to 'keep' the other 20 to 15 cents. That leftover is used to pay for administrative expenses and to generate a profit.

At first glance, a large MLR suggests that a large fraction of the total premium is being spent on medical services. If 90 cents of every dollar is being spent on doctors and hospitals, that sounds good, since only 10 cents is being spent elsewhere, right? Alternatively, however, if only 75 cents out of every dollar is being spent for medical care, that suggests that 25 cents not going to the patients. 'Bad,' you say?

To our expert political elite on an anti-health insurer bender, a low MLR may sound like the work of the Devil's spawn, but the sophisticated readers of the DMCB know that health care can be far more complicated. It's not necessarily bad for health insurers to also spend money on other 'stuff' (for some examples here, here and then there's this) and it's not necessarily good for insurers to pay for all the stuff that doctors and hospitals want, do or sell (for some interesting reports and telling examples, look here, here, here, here, here, and here)

But it can get even more twisted. As pointed out previously, the language in the Senate's Manager's Amendment identifies the National Association of Insurance Commissioners (NAIC) as the body that defines exactly how a MLR is calculated. While the DMCB suggested in its prior post that the NAIC is up to the task, the one thing that the NAIC has not done well is to clarify if the costs of wellness, prevention, care management or PCMH support programs are costs that are assigned to the medical costs that make up the MLR or if they are administrative costs.

In addition, if an insurer is lucky enough to have a low MLR, that doesn't necessarily mean that there is unused money sitting in a bank somewhere. As noted previously, the proposed legislation doesn't recognize the role of the surplus in a) acting as a cushion against unforeseen losses or b) enabling an insurance company to grow. As a result, if there is any rebating to be done, insurers are more likely to have to decide if they want to rebate some of their surplus or cut their administrative costs. The DMCB thinks it's easier for insurers to cut administrative costs. If medical costs go down by (for example) 10%, the easiest way to meet a MLR ratio is to also decrease the other costs by a matching amount.

Worst case scenario? If a care management program is successful in reducing health care costs - there are fewer hospitalizations, emergency room visits and encounters with specialist physicians - the MLR will decrease. Insurers have to decide if administration or other 'non-medical' costs can be cut to make the MLR go up. Those cuts could include the very care management programs that contribute to the low MLR in the first place.

The DMCB has been down this road. Not too long ago, a customer realized its administrative costs had grown out of proportion to its medical costs. There were dozens of care management nurses on the payroll, and they were targeted in an effort to trim costs. While the DMCB was able to talk the CFO out of that move, it doubts any logic will stand up to the potentially arbitrary and capricious language currently in the U.S. Senate Manager's Amendment.

That needs to be changed. Hopefully, the Conference process will address it.

Two other points:

1) It bears repeating: as far as the DMCB can tell, the language defining a 'proper' MLR was inserted into the Manager's Amendment at the last minute, without being vetted in the usual fashion in open committee with adequate discussion from all interested stakeholders. Uh, exsqueeze me, have we thought this through?

2) This could lead to what George Will described (and the DMCB is paraphrasing) as the Latin Americanization of U.S law and regulations, where more laws and regulations are needed to make up for the unintended consequences of hopelessly complex and poorly thought out laws and regulations.


Robert said...

This is an important topic and an excellent post. While NAIC may be up to the assigned task, they are, in part, the cause of the current confusion.

In the early days of DM, nearly all plans categorized DM expense as medical. That made sense from an accounting perspective since the it was that category to which the benefits of a succusful program inured. Then, somehow, NAIC got involved and decided that these expenses were really "administrative," at least for not-for-profit plans. We're not sure why or how this happened.

More recently, NAIC has indicated that it was not their intent to categorize caremanagement, prevention and wellness costs as administrative, but there has been little action to clarify the issue. Ahip, recognizing the contradicition that DMCB points out about effective programs reducing MLR, is not excited about furthering such a definition.

There is, or was, a DMAA task force working on this issue and perhaps DMCB can get a status update from them. In the interim, the industry contiunes to be faced with about a 50-50 split as to the categorization of fees and the proposed language inthe Senate Bill, if it survives, is not likely to create an environment for a satisfactory, logical or transparent result.

bradleydean said...

Yes, another good post by DMCB. But, this legitimate and worthy attempt to micromanage private insurers merely underscores the need for a public option. Currently, private insurers represent a black box relative to efficiency - as they should; they're private companies and should be able to run their businesses as they see fit, and behind closed doors. From a public policy standpoint, in order to optimize healthcare economies (i.e., limited resources chasing limitless needs - with the shared understanding that healthcare represents an 'essential public utility,' similar to education, transportation, defense, etc.) our options are twofold: 1) External management of the black box through regulation, in hopes of engineering an efficient outcome (which typically leads to unintended consequences and suboptimization), or 2) Build and manage our own, via a public option (which, common sense dictates, should be an expansion of Medicare - an expansion to include Medicaid, as there's no efficiency argument to have two public insurers). The public insurer then needs competition from private insurers, or it will become a black box of its own, in the sense that there's no efficiency benchmark for comparison. A 'two sector solution' is the only solution that makes sense.

Jaan Sidorov said...

bradleydean makes a good point, but I'm sympathetic to the perspective that a public option will just turn out to be so powerful that the private insurers will simply go out of business. So the risk is that two sectors will equal one.

bradleydean said...

Jaan, Jaan, Jaan . . . think USPS, UPS, FedEx! (Don't UPS and FedEx keep USPS 'honest,' and vice versa?)

Jaan Sidorov said...

Jaan did in a prior post:

The Post Office has been used as an example of the kind of public-private competition that can bring credit to both parties. I'm not too sure the parallels work:

Insurance as a payor is a different business as a provider with a service. Pooling risk is not delivering packages. Requires completely different optics.

Insurance by mandates/regulations vs. Insurance with real overhead costs: guess who loses. The USPS, on the other hand, cannot hide its inefficiencies - it's costs are quite real.

In addition, in the Public Option, fees to the providers will be take it or leave it. The USPS doesn't work that way.

And yet, despite the USPS' inefficiencies (aided by a monopoly on First Class postage), it continues to exist thanks to the protection of the U.S. government, not because of any one or anything being kept honest.