The final medical loss ratio (MLR) rule issued by HHS Dec. 2 (HRW E-Alert, 12/2/11) represents a mixed bag for health insurers — and for consumer advocates contesting much of what the carriers were seeking. Insurers, perhaps unexpectedly, won the right to include a significant portion of their expenses in converting to ICD-10 coding in the quality-improvement numerator in MLR calculations. They also got a partial victory in the final rule’s phase-down rather than an immediate end of adjustments for so-called “mini-med” plans. But insurers and sales agents and brokers lost when the final rule did not make any adjustment in the classification of producer compensation as administrative costs in calculating MLRs.

Not surprisingly, therefore, the rule got a mixed reaction from both insurers and consumer advocates and triggered disappointment from the major trade groups for producers, which now must hope that Congress changes the classification of their compensation. And that isn’t likely to happen anytime soon.

Separately, at HRW press time, HHS as expected denied Florida’s request for a three-year waiver from the 80% minimum medical loss ratio requirement under the reform law. The department said it found the state’s individual market to be “competitive,” with more than 20 sizable companies operating in it, seven of them at MLRs above 80%, and no exits in 2011.

Of the changes from the original “interim final” rule (see table, p. 4), which was released in November 2010 (HRW 12/6/10, p. 1), probably the biggest surprise was the allowance for some ICD-10 coding conversion costs in the medical-expense category. Insurers had pushed for this since the beginning, but the National Association of Insurance Commissioners (NAIC) had just begun subgroup hearings on it last month (HRW 11/7/11, p. 1) after not including ICD-10 in its initial recommendations that HHS adopted last year. HHS indicated it based the ICD-10 inclusion largely on comments it received in response to the interim final rule.

The provision in the final rule limits what insurers can claim for ICD-10 conversion to 0.3% of their total premiums in applicable states for 2012 and 2013, which HHS regards as the primary years during which the conversion will take place. The move will help insurers meet the minimum MLRs in those years of 80% in the individual and small-group markets (except for those states that have received individual-market waivers from HHS) and 85% in the large-group market. But HHS notes that ICD-10 maintenance costs will continue to be considered as administrative and thus won’t help meet MLR standards.

Tim Jost, a Washington and Lee University law professor who is a consumer representative for NAIC, tells HRW he is “disappointed” by the HHS decision on ICD-10 costs, particularly since a CMS official indicated at the NAIC subgroup session last month that the use of ICD-10 was about as much for reimbursement as for quality purposes. Jost says adoption of ICD-10 will help insurers in utilization review and other non-quality-related functions. The 0.3% of premium limit adopted by HHS, he adds in a blog on the Health Affairs website, “effectively allows most insurers to claim most of their conversion costs as quality rather than administrative, and thus to spend less on health care.” Asked how he determined 0.3% of premiums would cover most ICD-10 costs, Jost responds that the figure amounts to “considerably in excess” of what insurers have reported spending on ICD-10 this year.

Securities analyst Christine Arnold of Cowen & Co., who termed the ICD-10 provision an “upside surprise” in a Dec. 5 research note, says the precise impact will depend on such yet-to-be-clarified aspects as to what degree capitalized as opposed to immediately expensed costs may be included in the 0.3% figure.

Arnold’s estimates indicate the benefit of the provision for industry giant UnitedHealth Group in 2012 could be $125 million (or 8 cents a share), although that figure includes capitalized costs and does not take into account state-by-state variation.

In deciding to phase down the aid that limited-benefit “mini-med” plans get in meeting the MLR requirement, HHS said it opted for an “adjustment” that “should minimize market withdrawal” while preparing for 2014, when “we expect that these mini-med policies will cease to exist.” That’s because, according to HHS, the insurance exchanges starting then will offer “affordable coverage…without annual coverage limits.” To ease the transition, HHS opted to taper the 2.0 multiplier mini-med plans can apply to their medical-expense numerator for 2011 to multipliers of 1.75 for 2012, 1.5 for 2013 and 1.25 for 2014, when annual benefit limits become banned.

Jost concedes that it doesn’t make sense to get rid of mini-meds — which are defined as plans carrying maximum annual benefits of $250,000 or less — now since HHS has granted many requests for waivers from having to meet the cap on annual benefits. He adds, however, that he wishes “we had more of the data available” on mini-med plan performance that the plans were required to report to HHS this year.

Overall, he contends, the multipliers for limited- benefit plans chosen by HHS in the final rule “are too high. They could have pushed them [i.e., the mini-meds] a little harder.” HHS, though, is requiring the mini-meds to post their MLRs publicly in spring 2012 so that consumers can better judge whether to have such coverage.

Among publicly owned insurers with substantial mini-med business, Aetna Inc. stands to have no rebate responsibility related to those products through 2014 based on the new multipliers and its current MLR on them of 70%, according to Arnold. She figures that Cigna Corp. might owe $20 million pretax in 2014 on mini-meds based on its current MLR on the products of 60%.

HHS Keeps Adjustment For Expatriate Plans

By contrast, the HHS decision in the final rule to continue the 2.0 multiplier on plans for expatriates is a clear victory for those plan sponsors. Aetna and Cigna also are major players in these products, Arnold notes, and now should have no MLR rebates resulting from that business.

The decision by CMS not to allow treatment of broker and agent compensation as other than administrative costs, despite a last-minute resolution adopted by NAIC calling on HHS to grant such relief (HRW 12/5/11, p. 1), came as no surprise to several observers.

Jost says he is “very pleased” that HHS didn’t grant such relief, but he didn’t expect any since “HHS doesn’t have the authority” in the reform law and rules to do so. This was clear to some insurance commissioners who voted for the NAIC resolution, he tells HRW, but they opted to vote for it anyway for “political” purposes. In his blog, Jost notes that HHS’s new MLR regulations “do not even discuss this issue.”

The National Association of Health Underwriters and the National Association of Insurance and Financial Advisors (NAIFA), both of which represent insurance agents and brokers, said they were disappointed by the inaction of HHS on the relief request. NAIFA President Robert Miller told The Wall Street Journal that his group now will focus on persuading Congress to take legislative action to offset the MLR provisions’ impact in reducing the compensation of NAIFA members.

Among other provisions, the final MLR rule also:

• Specifies that MLR rebates in the group market will not be taxable, and details the process of paying rebates to assure this. Rebates will go to the group policyholder (generally the employer) through lower premiums or other nontaxable means, and that entity must ensure the rebate is used “for the benefit of subscribers,” HHS explained. Jost says this could be difficult to assure in the case of self-insured plans, but he notes HHS also said that it will make sure employees get notice that they are entitled to rebates.

• Clarifies that insurers can deduct from earned premiums in the denominator the higher of either the amount paid in state premium tax or “actual community benefit expenditures up to the highest premium tax rate in the state.”

• Keeps the interim rule’s provision that antifraud expenses may be included in medical costs only to the extent of fraudulent claims recovered. Insurers had sought to have all antifraud expenses eligible for inclusion.

“We believe health plans’ programs to prevent and combat health care fraud should be given similar consideration” to those the rule allows for ICD-10 conversion expenses, commented America’s Health Insurance Plans President and CEO Karen Ignagni in a prepared statement following release of the final rule. But Ignagni also said “HHS has conducted a thorough and balanced process in crafting this final regulation. Today’s announcement takes important steps to make the regulation more workable.”

View the final MLR rule’s rebate provisions at http://federalregister.gov/a/2011-31291 and the fact sheet on the full final rule at http://cciio.cms.gov/resources/factsheets/mlrfinalrule.html.

How the Final MLR Rule Differs From the Proposed Rule

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