Rebating When the Medical Loss Ratio Gets Too Low: What Are Some of the Possible Outcomes?

The Disease Management Care Blog has been thinking about the 'Manager's' Amendment that turned it around for the Senate Democrats.

There's an interesting provision that requires health insurers to ‘rebate’ their customers the difference if the medical loss ratio (MLR) is less than 85% in the large group market or 80% in the small group or individual market. It's supposed to go on a year-to-year basis effective January 1, 2011. Then, on January 1, 2014, the rebate will be based on a three year rolling average of the MLR. So, if an insurer collects, say $100 million in revenue from their policy holders and spends $75 million, that's (depending) $5 or $10 million in checks going out the door.

For the small and individual market, it’s up to the Secretary to ‘adjust’ the percentage if the 80% requirement ‘may destablize’ the insurance market; whats’ more, States can ‘seek to ensure' adequate participation, competition and consumer value. Just how the MLR is calculated will be up to the Ms. Sebelius' old stomping ground, the National Association of Insurance Commissioners (NAIC).

Thoughts from the non-expert DMCB:

Pseudo-mutuals: This fiat seems to transform commerical health insurers into lite version 'upside only' mutual insurance funds. These are insurance entities that are invested in and owned by the persons or entities that pool risk. They get to share in any profits, but are also responsible for their losses. In the Democrats' version, the insureds don't need to invest and get to benefit from the upside risk.

Tax? Rather than a 'rebate,' the U.S. government has other levers at its disposal. The DMCB is pleasantly surprised that the Feds didn't try to grab the money.

Capital shortage: Could this drive capital away from the insurance companies? Since their already anemic profitability would be effectively capped, it may make more sense for investors to put their money elsewhere.

Just what is an MLR? Take it from the DMCB: there are all kinds of tricks used by CFOs to squirrel away unused premium and protect it from the MLR. The Senate did a wise thing by a getting the NAIC involved, which knows how the MLR for any year should be calculated.

For example, what is a year? It can take time to adjudicate all claims; sometimes insurers don't get a claim for 'services rendered' for a whole year. Actuaries use a concept called 'incurred but not reported' or IBNR: will this be used to set a rebate amount?

What about the surplus? While the Senate has declared war on the MLR, another key factor in the 'health' of health insurers is the 'surplus,' or the cushion that's used in case claims reserves are inadequate. Having a good year enables some of that MLR to be added to the surplus which also enables business growth. If the MLR rebates 'starve' their surpluses, these companies may be unable to take on new customers.

Overreaction: When insurers start seeing their MLR headed south, they’ll respond by cutting their administrative costs first. Will customer service, claims payment timeliness and accuracy and detection of fraud be the babies thrown out with the bathwater?

Advantage to the large insurers: Small insurance companies, i.e. the regional insurers with 100 to 500K members, may have trouble thriving in a capped MLR environment. The DMCB wonders if they'll be swallowed up by the big boys.

Wither the employees? While the rebate goes back to the buyer of the insurance, what happens if that the buyer is a company that has transferred some of that premium expense to their employees through payroll deductions? Is the company obligated to give a fair portion back to their employees? Will they? If they do, is it taxable?

Wither the docs? The physicians have always maintained that low MLRs are off their backs because they're not being adequately reimbursed. Could this drive a political wedge between the health consumers and the physicians? The docs will now not only have to contend with another party, but it's also first in line. Think patients that are getting their rebates will feel sorry for the providers that are trying to increase their fees?

and....

This is democracy in action? Remember all the interminable Congressional Committee hearings on all the permutations of every form of Federal involvement in the commerical health insurance market? Everything seemed to have a full hearing with input from all sides. The DMCB wasn't playing close attention, but it doesn't think the 'rebate' option was fully aired during that time. While there is a lot that is good and bad about the rebate idea, there is also lots that is simply not known. So much for debate and transparency.