CMS Releases Final Medical Loss Ratio Rule

The Centers for Medicare & Medicaid Services (CMS) issued its final medical loss ratio (MLR) rule on December 2. The MLR provision (Section 2718 of the ACA) requires health insurers to spend 80% or 85% of all premium dollars on medical care or activities that improve health care quality. Insurers that fail to meet the MLR targets must provide their customers with rebates for the difference between actual expenditures and the target.

The final rule addresses the following notable provisions:

• MLR notice – The final rule includes a new notice requirement. Insurers must provide information on the amount of their rebate or MLR, regardless of whether there is a rebate.
• MLR calculation – Under the final rule, MLR calculation includes the following changes:
  • ICD-10 conversion expenses – ICD-10 conversion costs up to 0.3% of an insurer’s earned premium are considered quality improvement activities for the 2012 and 2013 reporting years.
  • Community benefit expenditures – The definition of community benefit expenditures was not expanded in the final rule. However, an insurer may deduct either the amount it paid in state premium taxes or the amount of its community benefit expenditures up to a maximum of the highest state premium tax rate, whichever is greater.
  • Fraud reduction expenses – Fraud prevention activities continue to be excluded from the definition of quality improvement activities.
• Distribution of rebates in group markets – The final rule establishes separate standards for ERISA-covered group health plans and plans that are neither covered by ERISA nor are governmental plans. The final rule also directs insurers to provide rebates to the group policyholder (usually the employer) through lower premiums or other non-taxable methods.
• Mini-med and expatriate policies – The final rule reduces the adjustment and applies a graduated adjustment for mini-med plans – 1.75 in 2012, 1.5 in 2013, and 1.25 in 2014. A multiplier of 2 will be applied to expatriate policies.

The final rule is effective January 1, 2012. For more information, the CMS Center for Consumer Information & Oversight Fact Sheet is available here.