“Mega Reg” rule mandates MLRs for Medicaid managed care programs

The Medicaid “Mega Reg” final rule now makes medical loss ratios (MLRs) a requirement for Medicaid managed care programs in every state. While the Medicaid MLR formula largely follows the commercial and Medicare Advantage formula, there are some key differences between the three. In this report, Milliman consultants discuss several issues that state agencies and managed care organizations need to consider in the development and completion of MLR reporting.

Regulatory roundup

More healthcare-related regulatory news for plan sponsors, including links to detailed information.

ACA filings permitted after June deadline
The Internal Revenue Service (IRS) has announced that Patient Protection and Affordable Care Act (ACA) filings may continue to be filed after June 30, 2016. The deadline for applicable large employer, self-insured employer, or other health coverage provider to electronically file ACA information returns with the IRS is midnight Eastern Time on June 30, 2016. The ACA Information Returns (AIR) system will remain up and running after the deadline. Providers can complete the filing of their returns after the deadline.

For more information, click here.

IRS Chief Counsel memo on Medicare eligibility and employer shared responsibility penalties
The IRS’s Office of the Chief Counsel released Memorandum 2016-0030, regarding the effect of Medicare eligibility on employer shared responsibility penalties. The memo states that “for purposes of section 4980H(b), an employee could potentially average 30 or more hours of service for a month and still not trigger (or increase the amount of) employer liability, provided that the employee does not purchase coverage on the Marketplace and receive the premium tax credit. An employee such as the taxpayer who is covered by Medicare is ineligible to receive the premium tax credit, and therefore generally would not lead to any employer liability under section 4980H(b). However, a full-time employee who is eligible for Medicare could potentially trigger or increase the amount of an employer’s liability for an assessable payment under section 4980H(a).”

To read the entire memo, click here.

IRS Chief Counsel memo on retirement plan distribution and health insurance premium tax credit
The IRS’s Office of the Chief Counsel released Memorandum 2016-0035, regarding the effect of a retirement plan distribution on the health insurance premium tax credit. According to the memo, a taxpayer took a distribution from a retirement account and the income from the distribution required the participant to repay all of the advance credit payments made on behalf of the participant. The distribution was not included in the estimated household income used to compute the advance credit payments. Therefore, the advance credit payments were more than the premium tax credit the participant was allowed. The memorandum concludes that the estimated household income used to compute advance credit payments is not used to determine a taxpayer’s premium tax credit.

To read the entire memo, click here.

Development and implementation of functional-based risk adjustment for Medicaid Managed Long Term Services and Supports

As the number of Medicaid Managed Long Term Services and Supports (MLTSS) programs increases, significant momentum is also building around the development of tools to adjust managed care organization (MCO) payments using the functional, medical, and behavioral needs of their members. These tools match payment to risk and align MCO and MLTSS program incentives more effectively. While the planning, development, and implementation needs of a functional-based risk adjustment (FBRA) mechanism are significant, the improvements realized in MLTSS programs are worth the effort.

Milliman actuary Michael Cook provides perspective in his article “Functional-based risk adjustment for Medicaid Managed Long Term Services and Supports: Part 2.” This article is the second in a two-part series on functional-based risk adjustment (FBRA). To read part one, click here.

Does risk adjustment affect ACA profit volatility?

Risk adjustment may influence insurers’ profitability in the health insurance marketplace, and the volatility of profit results may be highly linked to insurers’ plan size. In this analysis, Milliman consultants examine how risk adjustment might influence profitability patterns and whether those patterns change with the size of a health plan. The authors also address main concepts behind two sets of proposals that have emerged to improve the risk adjustment program, with the aim of reducing financial volatility.

Milliman releases analysis of Medicaid managed care administrative costs

Pettit_T_ChristopherMilliman today announced the second iteration of its research into the administrative expenses associated with Medicaid managed care plans. This research complements the analysis of Medicaid managed care financial results report that was released on June 6, 2016. The information has considerable value, given the Centers for Medicare and Medicaid Services (CMS) Medicaid managed care rule (CMS-2390-F), published on April 25, 2016, and historical CMS Medicaid capitation rate-setting guidance. These regulations require greater documentation of administrative costs included in the capitation rates and this information can be useful in providing greater transparency of the rate-setting process.

The additional analysis on administrative expenses is critical in helping understand the true expenses incurred by Medicaid managed care organizations. The recent approval of the Medicaid managed care rule highlights the focus placed on each component of the managed care capitation rates. We believe that this research can become as familiar in the industry as our financial analysis report to help establish benchmarks for use in rate setting.

Key findings from the analysis include:
• The average administrative loss ratio (ALR) for Medicaid-focused plans is 8.8% after removing the impact of taxes and fees
• Calendar year (CY) 2014 and 2015 ALR values, net of taxes and fees, are considerably lower than in previous years
• The administrative per member per month (PMPM) value continues to climb as average premium levels increase

This is the second year the administrative expenses report has been produced, with expectation of providing future annual updates consistent with the Medicaid managed care organization financial results report.

To see the Medicaid administrative expenses report, click here.

Regulatory roundup

More healthcare-related regulatory news for plan sponsors, including links to detailed information.

House panel advances health bills
The House Ways and Means Committee approved seven healthcare bills recently, including the following that would apply to employer-sponsored plans:

• H.R.5445 (the “Health Care Security Act”), which would increase the annual contribution limits for health savings accounts (HSAs), allow for catch-up contributions by both spouses to a single account, and permit the payment of expenses incurred 60 days before an account is established.
• H.R.5447 (the “Small Business Health Care Relief Act”), which would permit qualified small employers that do not offer a group health plan to reimburse up to $5,130 annually/employee ($10,260/family) for the cost of buying health insurance.
• H.R.210 (the “Student Worker Exemption Act”), which would exclude full-time students who are employed by an institution of higher education from being counted as full-time employees in calculating the institution’s shared responsibility coverage requirement under the Patient Protection and Affordable Care Act (ACA).
• H.R.3080 (the “Tribal Employment and Jobs Protection Act”), which would eliminate the ACA’s employer mandate for businesses owned by Indian tribes.

House panel approves mental health bill with group health plan implications
The House Energy and Commerce Committee voted 53-0 to approve a substitute mental health bill (H.R.2646) called the “Helping Families in Mental Health Crisis Act.” The full House is not expected to act on the measure until sometime in September.

The bill generally calls for improving oversight of certain mental health and substance abuse programs. There are, however, some provisions that affect employer-sponsored plans, including a directive for the Departments of Health and Human Services, Labor, and Treasury to coordinate and issue a “compliance program guidance” document relating to mental health parity that provides examples/illustrations of informative disclosures and nonquantitative treatment limitations, as well as descriptions of the violations uncovered during the course of compliance investigations.

In addition, if a group health plan or group insurance provides coverage for eating disorder benefits, then the plan/insurance, under the bill, must provide such benefits consistent with the mental health/substance use disorder benefits parity requirements.

Milliman Medical Index: Components of cost

Girod_ChrisEvery year the Milliman Medical Index (MMI) examines the cost of healthcare for the typical American family of four under five separate categories of services:

• Inpatient facility care
• Outpatient facility care
• Professional services
• Pharmacy
• Other services

MMI2016_figure8As shown in Figure 8 in the study, for the MMI family of four, total facility care comprised 50% of total spending, with 31% being inpatient and 19% being outpatient. Another 30% of spending is for professional services, which includes services provided by doctors, physician assistants, nurse practitioners, chiropractors, hearing and speech therapists, physical therapists, and other clinicians. Pharmacy constitutes 17% of the healthcare spending pie, and the remaining 4% is for “Other” services, which includes miscellaneous other items and services such as durable medical equipment, prosthetics, medical supplies, ambulance, and home health. Figure 9 in the study shows how the dollar amounts of these components have been changing over time.


At $7,965 in 2016, inpatient facility costs grew by 4.2% (see Figure 10), the lowest annual increase in the past 15 years. Inpatient facility utilization changes continue to be very close to zero. Utilization is typically measured in terms of the number of inpatient days per year. That number of days results from a number of admissions, and the number of days each patient stays in the hospital. In recent years, admissions have declined, which sometimes increases average length of stay because it is the less intensive cases that tend to be avoided. The net result is that total inpatient days have changed very little. The admission reductions and length of stay increases may have resulted partly from hospitals’ renewed emphasis on avoiding unnecessary readmissions, and partly by discharging patients at an optimal point in their care when they are healthy enough and logistics are in place such that they can recover and thrive without being in the hospital.


Outpatient facility spending also grew at a historically low rate, increasing by 5.5% to $4,922 in 2016. Part of the low growth rate may be attributable to pent-up demand and “crowd out,” as people newly insured by the Patient Protection and Affordable Care Act (ACA)—especially in states that expanded Medicaid—consume limited hospital resources and produce treatment delays for other populations. Elective surgeries are one type of service subject to such delays resulting from capacity constraints.

The professional services slice of the healthcare spending pie has shrunk slightly, to 30% of the total in 2016. Professional services costs increased from 2015 to 2016, but at a lower rate than other services. The slow growth is primarily due to relatively low increases in physician payment rates for a given basket of services. When a physician treats patients having employer group insurance, like the MMI family of four, the physician usually gets paid according to a fee schedule that has been negotiated between the health plan and the physician. Today, those fee schedules are often based on the fee schedule Medicare uses. Over the past 10 years or more, that Medicare fee schedule has increased only at very low rates, at or near 0% in many years. Consequently, physicians often receive little or no payment rate increases for their Medicare patients, and also for their patients who have employer group insurance.

Prescription drugs costs are still the fastest-growing slice of the healthcare cost pie, increasing to $4,270, or 17% of the total, in 2016. Drug spending increased by 9.1% from 2015 to 2016, down from the previous year’s increase of 13.6%. Although the lower rate of increase was encouraging, it is still much higher than the 3.8% growth rate for all other healthcare costs. Much of the prescription drug cost growth is driven by specialty drugs. While there is no universally accepted definition of specialty drugs, they are generally very high-cost drugs. Medicare defines specialty drugs as those costing more than $600 per script in 2016. For the MMI family of four, specialty drugs now constitute nearly 6% of all healthcare spending, which is approximately $1,550 for the family in 2016.

This content first appeared in the 2016 Milliman Medical Index.

Webinar: Medical loss ratios in the Medicaid mega reg

Medical loss ratios (MLRs) will become a required part of financial reporting and prospective rate setting for Medicaid managed care programs in every state, effective for managed care contracts beginning on or after July 1, 2017. The creation of minimum MLR standards for Medicaid managed care follows the precedents set by the commercial health insurance market in 2011 and the Medicare Advantage (MA) market in 2014.

Join Milliman’s Ian McCulla, Scott Jones, and Jill Brostowitz for the webinar “Medical loss ratios in the Medicaid mega reg” on Friday, June 24, at 12 p.m. EST. They will discuss the release of the final Medicaid and Children’s Health Insurance Program (CHIP) managed care rule (final rule). To register, click here.

Regulatory roundup

More healthcare-related regulatory news for plan sponsors, including links to detailed information.

Treasury, DOL, HHS issue proposed rule on expatriate health plans
The Departments of Treasury, Labor (DOL), and Health and Human Services (HHS) have released a proposed regulation on the rules for expatriate health plans, expatriate health plan issuers, and qualified expatriates under the Expatriate Health Coverage Clarification Act of 2014 (EHCCA).

The proposed rule affects expatriates with health coverage under expatriate health plans and sponsors, issuers and administrators of expatriate health plans, individuals with and plan sponsors of travel insurance and supplemental health insurance coverage, and individuals with short-term, limited-duration insurance.

For more information, click here.