HHS Issues Medical Loss Ratio Interim Final Rule

Regulations require insurers to spend premium dollars on care, or pay rebates

By Stephen Miller December 20, 2010


In December 2011, the U.S. Department of Health and Human Services (HHS) issued a final rule and an interim final rule, along with a related fact sheet,revising medical loss ratio (MLR) requirements for health insurance issuers under the Patient Protection and Affordable Care Act (PPACA). Both new rules are effective Jan. 1, 2012, and were published in the Dec. 7, 2011, Federal Register.

The new final and interim rules update the medical loss ratio (MLR) rule that HHS issued almost exactly a year earlier (see article below).

The Department of Labor simultaneously issued a technical release giving direction to employer-sponsored health plans governed by the Employee Retirement Income Security Act (ERISA) as to how to handle rebates provided by insurers who fail to meet the targets established under the MLR rule.

See the SHRM Online article "HHS Issues Final and Interim Rules on Medical Loss Ratio Requirement."

Health insurers must spend at least 80 percent of consumers’ premiums on direct care for patients and efforts to improve care quality under an interim final rule issued by the Department of Health and Human Services (HHS) and published in the Federal Register on Dec. 1, 2010. The regulation, known as the “medical loss ratio” provision of the Patient Protection and Affordable Care Act (PPACA), also is intended to make the insurance marketplace more transparent.

Self-Insurance: More or Less Appealing?

Self-insured plans are not a health insurance issuer, as defined by section 2791(b)(2) of the Public Health Service Act, and thus are not subject to this interim final regulation.

With the new requirement limiting what insurance companies can spend on administrative expenses, some self-insured mid-size employers with 5,000 or fewer employees might find fully insured health plans to be more attractive financially than in the past, noted Dean Hatfield, senior vice president and national health practice leader with Sibson Consulting in New York. 

But others believe the medical loss ratio rules could drive employers away from fully insured arrangements and persuade them to sponsor self-funded plans (see "Medical Loss Ratio Rules Could Boost Self-Insuring").

In addition, self-insuring avoids other mandates that are imposed on fully insured plans (to learn more, see the SHRM Online article "Navigating Health Reform's Ambiguities and Unclear Mandates").

New Requirements

Many insurance companies have spent a substantial portion of consumers’ premium dollars on administrative costs and profits, including executive salaries, overhead and marketing. Beginning Jan. 1, 2011, health insurance issuers offering group or individual health insurance coverage must spend 80 to 85 percent of the premiums they collect on medical care and quality improvement activities. In addition, they must publicly report how they spend their premium dollars.

Insurance companies that are not meeting the medical loss ratio standard will be required to provide rebates to their consumers starting in 2012.

The medical loss ratio regulation outlines disclosure and reporting requirements, how insurance companies will calculate their medical loss ratio and provide rebates, and how adjustments could be made to the medical loss ratio standard to guard against market destabilization. The PPACA required the National Association of Insurance Commissioners (NAIC) to develop uniform definitions and methodologies for calculating insurance companies’ medical loss ratios.

Insurer Reporting Requirements

Beginning in 2011, insurers that issue policies to individuals, small employers, and large employers will have to report the following information in each state where they do business:

Total earned premiums.

Total reimbursement for clinical services.

Total spending on activities to improve quality.

Total spending on all other non-claims costs excluding federal and state taxes and fees.

These reports will be posted publicly by HHS.

An insurer will report aggregate premium and expenditure data for each market, except for so-called “expatriate” plans (health insurance provided to U.S. citizens who are living or working abroad) and “mini-med” plans (insurance products with very low annual dollar limits and low premiums). For these plans, insurers will be allowed to report their experience separately.

Activities That Improve Health Care Quality

Following NAIC recommendations, the regulation specifies a comprehensive set of “quality improving activities” that allows for future innovations and may be counted toward the 80 or 85 percent standard. Quality improving activities must be grounded in evidence-based practices, take into account the specific needs of patients and be designed to increase the likelihood of desired health outcomes in ways that can be objectively measured.

To maintain incentives for innovation, insurers will not be required to present initial evidence in order to designate an activity as “quality improving” when they first begin implementing it. However, to ensure value, the insurer will have to show measurable results stemming from the quality improvement activity in order to continue claiming that it does in fact improve quality.

Timing of Reporting and Rebates

The regulation generally requires health insurance companies to report to the HHS Secretary by June 1 of each year. The first report, containing calendar year 2011 data, will be due in 2012, prior to which insurers must make necessary reporting adjustments. Insurers will be required to make the first round of rebates to consumers by August 2012 based on their 2011 medical loss ratio. Under the regulation, expatriate and mini-med plans that report separately will be required to report data to the HHS Secretary on an accelerated basis.

Treatment of Taxes in the Rebate Calculation

Consistent with NAIC recommendations, the regulation will allow insurers to deduct federal and state taxes that apply to health insurance coverage from an insurer’s premium revenue when calculating its medical loss ratio. As NAIC recommended, taxes assessed on investment income and capital gains will not be deducted from premium revenue. In the case of non-profit plans, assessments they are required to pay in lieu of taxes may be deducted.

Continued Access to Coverage

To guard against market destabilization, the PPACA stipulates that the reporting requirements and methodologies for calculating the medical loss ratio “be designed to take into account the special circumstances of small plans, different types of plans and new plans.”

Plan size.Consistent with NAIC recommendations, the regulation allows insurers to add to their medical loss ratio a “credibility adjustment” when the insurer’s medical loss ratio for a market within a state is based on less than 75,000 people enrolled for an entire calendar year. The credibility adjustment recommended by the NAIC and adopted in the regulation addresses the statistical unreliability of experience based on a small number of people covered. Specifically:

An insurer that has less than 1,000 people enrolled for an entire calendar year lacks sufficient experience to calculate a reliable or meaningful medical loss ratio. The experience of these very small insurers cannot sufficiently confirm that they have or have not met the medical loss ratio standard, and as a result those insurers are deemed non-credible and will not be required to provide rebates.

An insurer with 1,000 to 75,000 people enrolled for an entire calendar year is considered to have “partially credible” experience, and, accordingly, the regulation adds a “credibility adjustment” to its medical loss ratio.

An insurer with 75,000 or more people enrolled in a plan for an entire calendar year is considered to have “fully credible” experience and will pay rebates based on its actual medical loss ratio without any credibility adjustment.

The NAIC commissioned an extensive analysis by a well-known national actuarial consulting firm, and relied on these findings to develop its credibility adjustment calculation. In developing its recommendations, the NAIC noted that the credibility adjustment methods and factors should be monitored and re-evaluated in light of developing experience. The administration stated it will monitor the effects and suitability of the regulation’s initial approach to credibility adjustment over the next three years.

Newer plans.Consistent with NAIC recommendations, certain insurers that have newly joined the insurance market may be able to delay reporting their medical loss ratio until the next year. When 50 percent or more of an insurer’s premium income accounts for policies that have not been effective for an entire calendar, they are eligible to delay reporting until the following year.

This means that more than half of an issuer’s overall premium revenue within a particular market in a state would have to be from policies that are newly issued policies after January 1 of the year. In this instance, the issuer’s MLR for the following year will include the deferred experience, as well as the current MLR reporting year experience.

Allowing insurance companies to defer reporting newer business reduces barriers to market entry by reducing the risk of failing to meet the MLR standard and having to pay a rebate.

Mini-med and expatriate plans. To address the special circumstances of mini-med and expatriate plans, HHS will apply a methodological adjustment to the way the medical loss ratio is calculated for those plans. The methodological adjustment will address the unusual expense and premium structures of mini-med and expatriate plans, and enable their issuers to apply for an adjustment to reported medical claims and quality improvement expenses.

Because limited data are available to inform such an adjustment, this regulation requires accelerated reporting by issuers of mini-med and expatriate plans so that HHS may receive and review data on their expense structures and profitability.

These changes to the methodology for reporting and rebates apply only in calendar year 2011, and as noted above, such plans are required to provide early reporting to the HHS Secretary if they claim such an adjustment. To improve transparency and ensure consumers are aware of the product they are purchasing, HHS will require insurers that sell mini-med policies to provide prominent notice regarding the benefits and coverage provided by the policy.

Accommodations to Avoid Market Destabilization

In the individual market, the PPACA allows the HHS Secretary to adjust the medical loss ratio standard for a state if it is determined that meeting the 80 percent medical loss ratio standard may destabilize the individual market. Consistent with NAIC recommendations, the regulation establishes a process for states to request such an adjustment for up to three years—an effective state-based transition.

In order to qualify for this adjustment, a state must demonstrate that requiring insurers in its individual market to meet the 80 percent MLR has a likelihood of destabilizing the individual market and could result in fewer choices for consumers.

The approach taken in the regulation is designed to give states and other interested parties full opportunity to present relevant information that the Secretary needs to make a timely determination about whether an adjustment to the statutory medical loss ratio standard is justified for insurers in that particular individual market. It is consistent with the recommendations in the NAIC letter dated Oct. 13, 2010.


The PPACA gives the HHS Secretary direct enforcement authority for the medical loss ratio requirements. However, HHS recognizes states’ capacity to assist in enforcement and will accept the findings of a state audit of MLR compliance if they are based on the medical loss ratio requirements set forth in federal law and regulations.

The regulation also requires insurers to retain documentation that relates to the data they reported and to provide access to those data and their facilities to HHS, so compliance with reporting and rebate requirements can be verified.

Finally, the regulation imposes civil monetary penalties if an insurer fails to comply with the reporting and rebate requirements set forth in the regulation, and it details the criteria and process for determining whether and in what amount such penalties should be imposed.

Although the law allows HHS to develop separate monetary penalties for medical loss ratio non-compliance, HHS has adopted the HIPAA penalties in this regulation. The regulation’s penalty for each violation is $100 per entity, per day, per individual affected by the violation.

Stephen Miller is an online editor/manager for SHRM.​​

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