What are MLR’s?

mlr_diagram

What are MLR’s?

So what are are Medical Loss Ratios and why should we care?

Medical Loss Ratio (MLR) – The minimum percentage of premium dollars a commercial insurance company must spend on the reimbursement of certain medical costs. The health reform law requires insurers in the large group market to have an MLR of 85% and insurers in the small group and individual markets to have an MLR of 80% (with some waivers granted to states to reduce the threshold for certain markets).

The MLR calculation is determined on a state-by-state basis by each insurer or  HMO. Rebates are calculated separately for the individual, small group and large  group markets in each state.

The final regulations issued onDecember 2, 2011:
• The rebate distribution processwassimplified to allowmostrebatesto be distributed to group policyholders rather than to each participantin a group plan.
• Employers can distribute rebatesin a variety ofwaysincluding future premiumreductions and benefit enhancementsthatwill allowrebatesto be tax-free to recipients.

This is arguably the most significant change in Health Care Reform. In short, this is a price control on health insurers regulating  profits ceilings.  Unlike many industries, however, insurers must maintain a high minimum in reserves.  After-all if Health Underwriters incorrectly predict  unknown future costs by pricing too low there is no recovery of losses.  Conversely if they priced policies too high they must return premiums to subscribers.  While this is altruistically great, in today’s  Oligopoly Business with an avg of 3-4 insurers in a NYC Metro Area the realities are little motivation to compete.  Furthermore, health insurers in NYS have higher MLR rates and must place rate filings a year in advance.  This complicates the ability of actuarial  to predict future costs thus asking for higher rate increase just in case.  The State then reacts by cutting increase in half which forces more insurers out of State and actually emboldens remaining health insurers to push for more aggressive cuts in benefits, challenging underwriting participation’s and limit an insurers will to go above and beyond minimum essential benefits requirements.

In full disclosure, the Benefit advisor (broker/consultant) commissions have been cut close to 50% as this cuts into insurers profits. See our interview in Crain’s regarding this https://360peo.com/p/crains-article-on-broker-commissions-cuts. Small Businesses and Sole Prop feel this the most as the resources needed to intelligently shop for benefits, reinsurance,  navigate state/federal laws,  employee annual open enrollments meetings have been defrayed by using a Broker.  In many cases, good Brokers have become the de-facto HR.

The Federal Gov has  already spent $2.2 Billion on State Exchanges. And this figures does not include remaining States as there are only 19 States working on an Exchange for 2014.  The Exchanges will be built up for 2 years and then must be fully independent by 2016.  If 88% of small groups coverage purchased by Brokers acc. to Boston’s Wakely Report in research study- Role of Producers and Other Third Party Assisters in New York’s Individual and SHOP Exchanges the distribution infrastructure is already there.  Access to care is not the difficulty in finding a plan its the very cost of the plan!  Why then does NYS decide to spend on building up new infrastructures? Agents/Brokers can easily outreach and council to uninsured as well.  In fact many small businesses such as construction, consulting services and dining have many uninsured that an Agent/Broker already has a relationship with.

So where is this going?  A weakened health insurer  market place with the new domination of powerful large Medical groups numbering in the thousands + mega Hospital chains dictating rates.  To be sure some the Hospital market is becoming close to an Oligopoly as well see:  http://www.nytimes.com/2012/03/08/health/hospital-groups-will-get-bigger-moodys-report-says.html?_r=0.  Still disagree? Hospital stocks have averaged 20-30%  increases while insurance stocks have remained net net stagnant and down after initial spike.  Ask yourself  why NYS had 10 – 15  private  health insurers 20 years ago while there are no rumors of new insurers or  returning insurers?

If additional changes aren’t made, there could be unintended consequences including less competition, a reduction in consumer choice and higher health insurance costs.  Oh I almost forgot,  most clients especially NY SMB were not entitled to a rebate check with a small minority receiving avg $120.