Hospitals Smack Insurers: You Shouldn’t Reclassify Administrative Costs As Medical Expenses To Inflate MLR

On Tuesday, the National Association of Insurance Commissioners — which has already issued a series of interim reports — officially notified the Department of Health and Human Services that it would not meet the agency’s deadline for submitting recommendations for the new medical loss ratio (MLR) requirements and promised to “complete this project as soon as possible.”

The new health care law tasks the NAIC with establishing “uniform definitions and standardized methodologies for calculating the medical loss ratio and rebates outlined in the law,” subject to the Secretary’s certification. It also “permits health insurers to add their costs for “activities that improve health care quality” to their costs for “reimbursement for clinical services provided to enrollees” for purposes of calculating their MLR under the PPACA.”

During the open comment period, the health insurers asked for fairly broad provisions that would allow insurers to reclassify certain costs as “activities that improve health care quality”, thus inflating insurers’ medical loss ratio percentage without improving efficiency. Now, the American Hospital Association is using the delay to its advantage and urging the NAIC to issue recommendations that would prevent insurers from counting past administrative expenses as medical costs. In a letter to the group, the lobby argued that “costs and expenses that are classified as activities that improve health care quality need to meet specific criteria“:

We would caution that the addition of the health care quality component should not be construed to permit health insurers to reclassify as health care quality costs that the insurers historically considered to be the administrative costs of doing business.

The MLR regulations must clearly define which activities do and do not improve health care quality and restrict the ability of health insurers to subjectively make such a determination. The AHA recommends that resulting regulations require that the activity be performed by a professional licensed to perform the service or activity, and employ a decision tree analysis to distinguish between an activity that is intended to limit services or reduce expenditures (e.g., utilization management) or to improve health (e.g., a diabetes management program, care coordination or shared-savings programs).

Before health care reform became law, insurers had every incentive to limit the growth of their medical loss ratio, which is closely monitored by Wall Street investors as an indicator of profitability. In other words, insurers used to keep strict definition s of medical expenses to deflate their MLR and please investors. Now, they’re looking to shift the gameby announcing to Wall Street, ‘our MLR is going to go up by a couple of points but don’t worry we’re shoving administrative costs into it.’