How The Health Reform Bill’s Mandate on the MLR Could Force the Closure of Care Management & Prevention Programs
by jaansidorov
Develop a wellness program that saves money: close the program. Deliver disease management and reduce costs: close that program too. Develop support for a network of patient centered medical homes and watch your insurance claims drop: close it - gone!
How can that be, you ask?
Read on.
A section of the Senate’s health reform bill addresses the issue of low ‘medical loss ratios’ (MLRs) with a mandate that requires that commercial insurers ‘rebate’ any excess profitability - defined as (depending on the type of insurance) having an MLR that is below 80% to 85%. If that survives the House-Senate Conference, it will become the law of the land.
Recall the MLR is a fraction made up of the a) the amount of money spent on medical services on top (or the numerator) and the b) the total amount of money collected in the form of payments for the insurance or ‘premium’ on the bottom (or the denominator). By mandating a MLR of 80% to 85%, the Senate is saying insurers must spend at least 80 to 85 cents of every dollar they collect on medical care. That means the insurer get to ‘keep’ the other 20 to 15 cents. That leftover is supposed to pay for administrative expenses and to generate a profit.
At first glance, a large MLR suggests that a large fraction of the total premium is being spent on medical services. If 90 cents of every dollar is being spent on doctors and hospitals, that sounds good, since only 10 cents is being spent elsewhere, right? Alternatively, however, if only 75 cents out of every dollar is being spent for medical care, that suggests that 25 cents not going to the patients. ‘Bad,’ you say?
While a low MLR may sound like the work of the Devil’s spawn, health care is far more complicated. It general, it’s not necessarily bad for health insurers to spend money on administrative services (for example, customer service or anti-fraud activities) and it’s not necessarily good for insurers to pay for all sometimes questionable stuff that doctors and hospitals want, do or sell - including inflated CEO salaries, cancer-producing CAT scanners, invasive cardiac procedures and referring debtor patients to collection agencies.
But it can get even more twisted. The language in the Senate bill identifies the National Association of Insurance Commissioners (NAIC) as the body that defines exactly how a MLR is calculated. While the NAIC has considerable expertise, the one thing that the NAIC has not done well is to clarify if the costs of wellness, prevention, care management or PCMH support programs should be assigned to the medical costs that make up the MLR or if they are administrative costs.
In addition, if an insurer is lucky enough to have a low MLR, that doesn’t necessarily mean that there is unused money sitting in a bank somewhere. The proposed legislation doesn’t recognize the role of the surplus in a) acting as a cushion against unforeseen losses or b) enabling an insurance company to grow. As a result, if there is any rebating to be done, insurers are more likely to have to decide if they want to rebate some of their surplus or immediately cut their administrative costs. I suspect it will be easier for insurers to cut administrative costs. If medical costs go down by (for example) 10%, the easiest way to meet a MLR ratio is to also decrease the other costs by a matching amount.
Worst case scenario? If a care management program that is in NAIC’s administrative costs column is successful in reducing health care costs - there are fewer hospitalizations, emergency room visits and encounters with specialist physicians - the MLR will decrease. Insurers will then have to decide if administration or other ‘non-medical’ costs can be cut to make the MLR mathematically go up. Those cuts could include the very care management programs that contribute to the low MLR in the first place.
I’ve personally been down this road. Not too long ago, a customer realized its administrative costs had grown out of proportion to its medical costs. There were dozens of care management nurses on the payroll, and they were targeted in an effort to trim costs. While I was able to talk the CFO out of that move, I doubt any logic will stand up to the potentially arbitrary and capricious language currently in the U.S. Senate Manager’s Amendment.
That needs to be changed. Hopefully, the Conference process will address it.
Two other points:
1) The language defining a ‘proper’ MLR was inserted into the Senate Bill at the last minute, without being vetted in the usual fashion in open committee with adequate discussion from all interested stakeholders. Uh, have we really thought this through?
2) This could lead to what George Will described (I’m paraphrasing) as the ‘Latin Americanization’ of U.S law and regulations, where more laws and regulations are needed to make up for the unintended consequences of hopelessly complex and poorly thought out laws and regulations.
