The Medical Loss Ratio MLR and Disease Management: Can the Notes Be Cut?

In the movie Amadeus, Emperor Joseph II criticizes young Wolfgang's "quality" music with the observation that "....there are simply too many notes, that's all. Just cut a few and it will be perfect!"

The same kind of logic has been applied by the same kind political class to the health insurers' medical loss ratio or "MLR." According to the Patient Protection and Affordability Care Act (PPACA), "standard" health plans must now, depending on the type of business line, have a MLR of at least 80% or 85%. This is interpreted to mean that of every dollar in insurance premiums collected by insurers, at least 80 or 85 cents has to be spent on medical care. The remainder (15 to 20 cents) goes to insurance functions, such as marketing, investing, actuarial activities, underwriting, claims processing, associated overhead and profit or surplus. A low MLR could suggest skimping on medical services, bloated administrative overhead or excessive shareholder returns. Therefore, a high MLR is good, right?

Not exactly. Check out this still timely and well written piece on the MLR by James Robinson appearing in a 1997 issue of Health Affairs. He points out that the line that separates money spent for medical services from the money spent for insurance services is very blurred. Insurers are increasingly using premium to administratively promote efficient and high quality medical care, while providers are assuming varieties of insurance-like risk-based arrangements such as capitation, upside shared savings and pay for performance.

Accordingly, says Dr. Robinson, it's easy for a MLR to become "skewed." Being in a market with small number of providers, a large amount of capitated arrangements, a limited number of insurance products, a lot of large customers or government contracts and little attention to quality all require less administrative support and will therefore have a higher MLR. On the other hand, health insurers with large networks that insure significant numbers individuals and small businesses, pay claims on a fee for service basis and have NCQA accreditation are likely to have a lower MLR.

What's more, the MLR is not necessarily a good gauge of insurer efficiency. The MLR was originally developed to help regulators and investors assess health insurer solvency, creditworthiness and profitability. That's because a rising MLR could herald a looming inability of an insurer to pay its debt obligations. The converse assumption - that the MLR measures health plan quality or waste - is more uncertain. In addition, there are no studies that have shown that there is a correlation between the MLR and a) the health status of or b) the total administrative expense per managed care enrollee.

These inconvenient truths haven't stopped a hostile Congress from piling on insurers even after PPACA was passed. Much like Emperor Joseph, Senator Rockefeller prefers that health insurers not have "too many notes" in their administrative expenses and simply solve the problem by eliminating some of them. The good news is that PPACA requires that the National Association of Insurance Commissioners (NAIC) figure out just what "notes" belong among the legitimate administrative expenses of a health insurer and which ones can be assigned to the MLR.

It won't be an easy task. For example, the U.S. Senate report linked above decries the expensing of nurse "hotlines, health and wellness, including disease management and medical management and clinical health policy” in the MLR and cites them as examples of insurer shenanigans aimed at putting profits over patients. Fortunately, the DMAA The Care Continuum Alliance has come out with a more common sense position that reflects the realities described in the Robinson paper linked above.

The DMCB recalls that it helped lead a disease management program that was, in an abundance of regulatory caution, 'expensed' as an health plan administrative cost. The nurses took care of patients. We worried about blood glucose control among persons with diabetes, made sure asthmatics used their inhalers properly and worked hard to keep patients with heart failure from being unnecessarily admitted to the hospital. Based on Robinson's insights about the MLR and a common sense interpretation of what's going on in the trenches of disease management, it's silly to categorize population-based care as an "administrative" function.

Back then, the expensing of population-based care was a local and minor issue. Thanks to this now being the subject of an inflexible, clumsy and one-size-fits-all act of Congress, it's become far more important. The DMCB hopes that the NAIC will recognize that disease management makes beautiful music and that notes cannot be simply cut.

(There's lots more on Accountable Care Organizations here)