Insurance Industry May Reclassify Costs As ‘Medical Care’ To Maintain Profits And Meet Reform’s Requirements

Draft guidelines issued by the National Association of Insurance Commissioners (NAIC) suggest that health insurers may attempt to game the medical-loss ratio (MLR) requirements in the new health care law by re-classifying certain administrative expenses as medical costs and “deducting taxes and regulatory fees from the premium expense insurers must report.”

The new health care requires insurance companies to spend at least 80% of customers’ premiums on medical care in the individual insurance market, and 85% in the employer/group market until 2014; insurers who can’t meet these minimum standards will have to issue rebates to their customers. But the draft guidelines posted on the NAIC’s website say that insurers may try to “spend more” on medical care without sacrificing profits by expanding the definition of medical service. From the draft:

The denominator (premiums) in the PPACA MLR is reduced by federal and state taxes and licensing or regulatory fees and the numerator (claims) is increased by expenses for activities that improve health care quality. Both of these adjustments will result in a higher MLR than one calculated as incurred claims divided by earned premiums with no adjustment. As discussed below (question B.1.c), PPACA could be read to also include loss adjustment expenses in the numerator, which would further increase the result. In either case, we believe current MLR’s for most issuers in the small group and large group markets, when calculated with the PPACA adjustments, would be higher than the PPACA minimums. The situation is less clear in the individual market. Some issuers would likely have MLR’s below 80% even after the adjustments, while others would be well above the minimum.

The health care law tasks the NAIC — a private body not subject to federal transparency rules and largely funded by the insurance company — with defining the standard definitions, “subject to the certification of the Secretary.” As Judy Dugan, Research Director at Consumer Watchdog, told me during a phone interview, “Previously, having a low MLR was beneficial for a company because Wall Street liked a low MLR, so insurance would be very strict just doing direct medical costs in MLR.” “Now they want to shift the game” by 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.”


According to page 19 of the health law, administrative costs simply have to meet the new broad definition of “activities that improve health care quality” to be added to the company’s medical loss ratio percentage. “This is how WellPoint has already increased their MLR average by two percentage points,” Dugan said, referring to the company’s recent call with investors. “They just unilaterally announced that they are shifting a number of functions that were previously considered administration into MLR category.”

A recent report from the Senate Committee on Commerce, Science, and Transportation also noted that health care industry analysts predict “companies will review their current spending and attempt to shift as many expenses as possible from administrative to medical,” concluding that “a key to the insurance industry’s profitability over the next several years will be ‘how much MLR recharacterizaiton the HHS Secretary allows.’” Consumer advocates believe that the NAIC’s central role in defining MLR categories and insurers’ ability to reclassify costs as “activities that improve health care quality” category will keep ensure the “industry’s profitability.”