By  Patience SAGHANA
Act establishing Minimum Loss Ratios (MLRs) for health insurers will commence from January 1, 2011.
By the Patient Protection and Affordable Care Act (HR 3590), now public law 111-148, signed by President Barack Obama on March 23, 2010, insurers are required to spend at least 80 cents of every premium dollar paid by individuals and small groups, and no less than 85 cents of premiums collected from large groups, on direct medical care expenses. Insurers that do not meet these thresholds will be required to rebate the difference to policyholders or deduct it from the subsequent year’s premiums.

In anticipation of this change, some health insurers are shifting some cost-containment activities to the medical expense column from the administrative expense column on their ledgers.

Senator John D. Rockefeller IV,  chairman of the U.S. Senate Commerce, Science and Transportation Committee noted in a report that Indianapolis-based WellPoint Inc. recently reclassified several activities such as nurse hot lines and health and wellness activities, including disease management and medical management, increasing the insurer’s 2010 MLR by 170 basis points, or 1.7%.
The report which criticized the move, asserted that “boosting medical loss ratios through creative accounting will not fulfill the new law’s goal of helping consumers realize the full value of their health insurance payments.”

In a memo prepared for the National Association of Insurance Commissioners (NAIC), actuary Rick Diamond said that determining whether health insurers’ current MLs are within or near compliance with the new minimum standards is difficult because the new law defines MLRs differently than NAIC and various states. Despite these uncertainties, Mr. Diamond believes most insurers in small-group and large-group markets currently operate under MLRs higher than the newly enacted minimums.

“The situation is less clear in the individual market,” Mr. Diamond continued. “Some issuers would likely have MLRs below 80%…while others would be well above the minimum.”

Insurers have been working with regulators to determine how the new MLR rules will affect them. On April 27, 2010, an actuary representing 39 members of the Blue Cross Blue Shield (BCBS) foundation sent a letter to Steve Ostlund, chair of the NAIC Accident & Working Group, attempting to clarify which insurance products are subject to the new MLR requirements and which data elements will be used in calculations of the ratios.

In the letter, Shari Westerfield, FSA, MAAA, actuarial services, wrote that based on the language of the law, there appear to be multiple potential interpretations that regulators might reasonably consider in calculating MLRs. She made the case for one possible interpretation of the regulations governing which data elements will be included in MLR calculations, but conceded that the BCBS companies “certainly appreciate that the language of the law is not entirely clear and that other reasonable interpretations may exist, while the timeline to reach conclusions and develop the recommendations is very brief.”

Although NAIC accounting rules define medical loss as the value of medical claims an insurer has actually paid (incurred claims), plus the amount of money the insurer sets aside to pay future claims (contract reserves), the new law will potentially allow insurers to classify a broader set of expenditures as medical.

Under the new law, insurers will be able to consider expenditures on “activities that improve healthcare quality” as medical expenses for the purpose of calculating MLRs. The new law also