Arkansas has proposed using Medicaid expansion dollars to provide subsidies so that eligible individuals can purchase health insurance through the exchange. The U.S. Department of Health and Human Services has indicated that it will consider approving such proposals.
The Arkansas proposal has various financial implications, especially with regard to provider reimbursement levels and various aspects of the Patient Protection and Affordable Care Act (ACA), including the minimum medical loss ratio requirement and the “3Rs” (reinsurance, risk corridors, and risk adjustment). This healthcare reform briefing paper by Rob Damler, “Considerations for Medicaid expansion through health insurance exchange coverage,” examines these key considerations for a state contemplating this approach.
Continuing with our “Ten strategic considerations of the Supreme Court upholding PPACA” blog series, we weigh in on minimum loss ratio (MLR) requirements.
While the minimum loss ratio requirement—the idea that 80-85 cents of every healthcare dollar should go toward medical care—sounds good, it is out of step with the financial realities many insurers face. Claims do not always move in a predictable way, meaning that medical costs can be volatile. Previously, an insurer’s lower claim cost years could help balance out the higher claim cost years. However, under the MLR rules, insurers need to pay out rebates during lower claim cost years as opposed to building up reserves for higher claim cost years. This dynamic will be amplified if the individual mandate is ineffective and adverse selection ensues.
The MLR rules, as written, also present challenges to high-deductible health plans (HDHPs), because the MLR calculation only includes plan expenses, not patient expenses. These plans give consumers greater skin in the game, thereby encouraging more judicious use of care. Expenses to administer these plans are typically higher as a percentage of premium than they are for richer benefit plans. To the extent that the MLR requirement takes these plans off the table, it could also remove a possible cost-reducing concept from the mix.
The MLR rules challenge smaller insurers, which are more susceptible to the underwriting cycle because they lack the volume to absorb down years or to spread risk across multiple business lines. The MLR rules also do not allow smaller health plans to pool large claims across states, creating a significant issue for small multi-state plans.
Efforts are afoot to tweak the MLR rules and fix these problems, but that doesn’t change the reality that this rule is hard on insurers. The difficulty is exacerbated by new rating rules. Insurers face a low ceiling and a high floor, without much room to stand up.
This Healthcare Reform Briefing Paper discusses how to manage the volatility of the underwriting cycle in light of the MLR rule. Also, we recommend reading Milliman’s Consumer-Driven Impact Study for more on HDHPs.
Milliman today released analysis of the Supreme Court’s 5-4 decision upholding the Patient Protection and Affordable Care Act (PPACA). With the court effectively ruling the individual mandate and other elements of the law constitutional—with the notable and complex exception of certain aspects of Medicaid expansion—healthcare stakeholders can turn their attention to implementing healthcare reform.
“Since 2009, Milliman has been working with its clients to prepare for and implement the healthcare reform law,” said Clark Slipher, Milliman Health Practice Director. “With the law’s constitutionality bound up in court, it’s been an uncertain time for our clients, which include insurers, employers, providers, and state and federal governments. This ruling clarifies the road ahead for American healthcare, and while it is reassuring to know where we are going, healthcare stakeholders face many strategic challenges that will require innovation and sound financial planning in the years ahead.”
Strategic considerations facing healthcare stakeholders include:
- Adverse selection may still be a challenge. Even with the individual mandate in place, the success of many insurers under PPACA will depend on their ability to minimize adverse selection.
- Medicaid expansion just became a far more complex and variable proposition. The court’s decision to allow states to opt out of Medicaid expansion creates dynamic changes across the healthcare system.
- Employers grapple with new options and plan requirements. While reports of the demise of employer-sponsored insurance coverage are premature, these plans still face many potential changes.
- What is the effect on early retirees? The role of the employer in covering those between 55 and 65 may change under PPACA.
- Rate review scrutiny and no risk selection: Something’s got to give. Keeping rate increases under 10% may become more challenging with many of the traditional cost-control mechanisms no longer available to insurers.
- Which states will get on the exchange bandwagon? With the Court decision minimizing uncertainty, there may be increased incentive for states to fast-track exchange planning.
- Minimum loss ratios (MLR) pose an ongoing challenge for insurers. Insurers have struggled to comply with the MLR requirements, and increased volatility in medical costs potentially brought on by adverse selection may compound the difficulty for insurers.
- Risk adjustment is essential. A new reform calculus is required with traditional risk selection techniques such as medical underwriting no longer allowed.
- Will cost shifting hold steady, increase, or decrease? Subsidies, rating restrictions, and an effort to achieve universal coverage all introduce new cost dynamics for insurers, providers, and policyholders.
- The cost problem persists. What can be done about it? Certain aspects of PPACA have the potential to affect costs, but this potential needs to be actualized in order to moderate annual cost increases that regularly exceed other consumer spending.
For more detail on each of these strategic considerations, see the full article. To receive regular updates on Milliman’s healthcare perspective, visit our healthcare reform library or follow us on Twitter.
A new article looks at the strategic implications for insurers in the coming year as they grapple with near-term healthcare reform (HCR) requirements. The first consideration: The creation of new minimum medical loss ratio (MLR) requirements. Here’s the deal:
The obvious question about the new MLR requirements—80% for individual and small group plans and 85% for large groups—is: Can health plans meet them?
The short answer is: It depends. Meeting the new requirement will probably be most difficult for insurers in the individual market and least difficult (although generally not easy) for certain types of companies in the large group market. Insurers that can significantly lower administrative and marketing costs, as well as those that are able to shift some risk to healthcare providers, will have an edge on those that cannot.
The Patient Protection and Affordable Care Act (PPACA) requires health insurance carriers to meet medical loss ratio (MLR) requirements on a state-by-state basis starting in 2011 (we have blogged about this before). This leaves insurers with a fairly short time frame in which to learn the intricacies of MLR calculations. Because specifications and interpretations are also likely to evolve over time, health plans will need to keep abreast of any regulatory changes and should consider performing annual operational audits that document their compliance efforts.
Read more in a recent healthcare reform briefing paper by John Phelan and Patty Jones.