The EBSA Request for Comments Regarding Section 2718 of the Public Health Service Act (Medical Loss Ratios), as added by the Patient Protection and Affordable Care Act (”PPACA”) has been published in the April 14 issue of the Federal Register and can be viewed here.    Comments are to be submitted by May 14, 2010.

Section 2718 of the PHS Act (among other provisions), requires health insurance issuers offering individual or group coverage to:

  • submit annual reports to the Secretary on the percentages of premiums that the coverage spends on reimbursement for clinical services and activities that improve health care quality, and
  • to provide rebates to enrollees if this spending does not meet minimum standards for a given plan year.

Under the PHS amendments, the National Association of Insurance Commissioners (”NAIC”) will establish (subject to approval by HHS) uniform definitions of the activities being reported and standardized methodologies for calculating measures of these activities no later than December 31, 2010.

The law imposes a crude and complex control mechanism based on medical loss ratios that is enforced by rebate requirements, taxes and penalties.  In a nutshell, the amount expended on medical services and “quality” must be at least 85% of premium revenue (as defined) for large group plans and 80% for small plans and individual plans.

Ironically, the concept of assessing value through MLR’s appears to have made its way into the law despite serious deficiencies in its usefulness as a metric of quality or efficiency. From “Use And Abuse Of The Medical Loss Ratio To Measure Health Plan Performance”, Health Affairs (July/August 1997), by James C Robinson:

The medical loss ratio is not a straightforward indicator of either medical or administrative expenditures. It certainly is not a measure of clinical quality or social contribution. The medical loss ratio is an accounting monstrosity, a convolution of data from myriad products, distribution channels, and geographic regions that enthralls the unsophisticated observer and distorts the policy discourse.

Given the short comment period, the rapidly approaching effective date and the lack of regulatory guidance, the MLR feature of health care reform will undoubtedly create substantial confusion for health plan insurers. The “accounting monstrosity” fails to recognize the blended features of claims payment, administrative and profit functions in the contemporary health insurance industry.

In short, the MLR requirement’s greatest defect lies in its failure to constitute a useful metric of what it purports to measure.

Note: Section 1004(a) of the PPACA provides that the provisions of Section 2718 of the PHS Act shall become effective for plan years beginning on or after the date that is 6 months after the date of enactment of PPACA. (The date of enactment of PPACA is March 23, 2010).