Medical Loss Ratio – What You Need to Know

There is broad recognition that health care costs are rising at an unsustainable rate.  But the data are very clear that soaring medical costs – not health plans’ administrative costs – are driving health care cost growth.  According to federal government data, 96 percent of the increase in premiums over the past five years was due to increased spending on health care services.  The MLR completely ignores the real driver of premium increases.  (Check out AHIP’s new iPad app to learn more about the factors driving rising health care costs.)

In addition, despite what some have said, the MLR is not simply a cap on health plans’ profits, salaries, and marketing costs.  The MLR caps any expense that does not go directly to pay for medical care or is not included on a pre-approved list of “activities that improve health care quality.”  As a result, this regulation places an arbitrary cap on what health plans can spend on a variety of programs and services that improve the quality and safety of patient care, help patients navigate a complicated delivery system, and help control soaring medical costs.  These include:

  • Initiatives to prevent and deter fraud and abuse in the health care system;
  • Developing partnerships with providers, such as Accountable Care Organizations, to reward quality, value, and better health outcomes;
  • Credentialing health care providers to ensure that in-network doctors and hospitals provide safe, high-quality care;
  • Providing patients with online and mobile access to their claims history and Personal Health Records;
  • Sending notices to physicians and pharmacists about potential harmful drug interactions;
  • Providing information to providers in real-time about what treatments work best; and
  • Providing individuals and small businesses with access to agents and brokers to help find the coverage that is right for them.

Penalizing health plans for investing in these types of initiatives is the wrong approach.  All participants in the health care system should be incentivized to continually innovate and develop new ways to improve care for patients and lower health care costs.

Despite the challenges created by the MLR, health plans will continue to lead the way on delivery system reform and quality improvement.  Health plans are partnering with hospitals and doctors all across the country to change payment models to reward quality and better health outcomes, and they have pioneered innovative programs and services to coordinate care for patients with multiple chronic conditions, help patients manage chronic disease, and promote prevention and wellness. These initiatives have demonstrated results in better health outcomes, improved patient safety, fewer preventable hospital readmissions and lower healthcare costs.  In fact, policymakers are now trying to get Medicare and Medicaid to adopt many of the programs that have proven to work in the private sector. 

It is also important to keep in mind the overall impact of the health care reform law on the cost of health care coverage.  Major provision of the reform law will cause premium increases that far exceed the value of prospective rebates, including:

  • A new $100 billion premium tax;
  • Age rating restrictions that will cause significant premium increases for younger individuals; and
  • New benefit mandates that will force millions of consumers and employer to purchase coverage that is more comprehensive – and more expensive – than they have today. 

The health care reform law expands coverage to millions of Americans, a goal health plans have long supported, but this goal can only be sustained if health care coverage is affordable.  To create a sustainable health care system, there needs to be a much greater focus on the soaring cost of medical care and provisions in the health care reform law that will add to the cost of health care coverage. 

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