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Insurers Would Have Met or Exceeded New Medical Loss Ratio Standards' 
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GAO-12-90R: 

United States Government Accountability Office: 
Washington, DC 20548: 

October 31, 2011:

The Honorable Robert E. Andrews: 
Ranking Member: 
Subcommittee on Health, Employment, Labor, and Pensions: 
Committee on Education and the Workforce: 
House of Representatives: 

The Honorable John F. Tierney: 
House of Representatives: 

Subject: Private Health Insurance: Early Indicators Show That Most 
Insurers Would Have Met or Exceeded New Medical Loss Ratio Standards:

To help ensure that millions of Americans who rely on private 
insurance for health care coverage receive value for their premium 
dollars, the Patient Protection and Affordable Care Act (PPACA) 
established minimum "medical loss ratio" (MLR) standards for insurers. 
[Footnote 1] The MLR is a basic financial indicator, traditionally 
referring to the percentage of insurance premium revenues health 
insurers spent on their enrollees' medical claims. The MLR definition 
specified in the PPACA provision--referred to as the PPACA MLR in this 
report--differs from the traditional MLR definition. Key differences 
are that the PPACA MLR allows insurers to include in their expenses 
spending on activities to improve health care quality and to deduct 
from their revenues certain tax payments and fees, and these 
differences will generally increase insurers' MLRs. Beginning in 2011, 
PPACA required insurers to meet minimum PPACA MLR standards of 85 
percent in the large group market and 80 percent in the small group 
and individual markets or pay rebates to their enrollees.[Footnote 2], 
[Footnote 3] In implementing these MLR requirements, the Department of 
Health and Human Services (HHS) includes an adjustment for certain 
insurers to help address the disproportionate impact of claims 
variability on smaller health plans. PPACA MLRs for insurers that 
cover at least 1,000 but less than 75,000 life years (partially 
credible insurers) will be upwardly adjusted using a credibility 
adjustment. Insurers that cover 75,000 or more life years (fully 
credible insurers) will not receive this adjustment.[Footnote 4] The 
PPACA MLR requirements will primarily affect partially and fully 
credible insurers, which we collectively refer to throughout this 
report as credible insurers. HHS estimated that in 2011, the PPACA MLR 
requirements would apply to health insurance plans covering about 75 
million insured Americans.

The first set of data subject to the requirements will be for insurer 
experience for calendar year 2011, which are to be submitted to HHS in 
June 2012. In the interim, in April 2011, insurers submitted 
preliminary MLR data to the National Association of Insurance 
Commissioners (NAIC) based on their 2010 experience using the PPACA 
MLR definition.[Footnote 5] The 2010 MLR data are not subject to the 
PPACA MLR rebate requirements. In July 2011, we reported that the 2010 
data should be considered transitional and may reflect best estimates 
that will become more precise with data reported for 2011 and future 
years.[Footnote 6] Although these data are transitional, there was 
interest in early indications of what can be learned from these data 
given that they are the first data insurers reported using the new 
PPACA MLR definitions.

You asked us to conduct an analysis of insurers' 2010 MLR data. We 
addressed two questions: (1) What can be learned from the 2010 MLR 
data regarding how reported MLR data varied by different insurer 
characteristics? (2) To what extent did the credibility adjustment, 
PPACA MLR formula, and reporting requirements affect insurers' 2010 
MLRs?

To determine what can be learned regarding how 2010 MLR data varied by 
insurer characteristics, we analyzed the data reported to NAIC. These 
included insurers' MLRs that were based on the PPACA MLR formula, as 
well as data on nonclaims expenses.[Footnote 7] Because noncredible 
insurers were presumed to meet the standards, our analyses were 
limited to credible insurers. We adjusted the PPACA MLRs to account 
for the credibility adjustment--throughout this report we refer to 
these as adjusted PPACA MLRs.[Footnote 8] We used the adjusted PPACA 
MLRs to examine the percentage of insurers in 2010 that would have met 
the 2011 PPACA MLR standards and how this varied by market. We 
examined the data on nonclaims expenses to identify any differences in 
these expenses by market. We also conducted interviews with insurers 
as part of our July 2011 report and included information from those 
interviews in this report. To determine the extent to which the 
credibility adjustment, PPACA MLR formula, and reporting requirements 
affected insurers' 2010 MLRs, we analyzed data reported to NAIC in 
April 2011. The data we examined included premiums and claims, 
expenses for activities to improve health care quality, and taxes and 
other fees. We used these data to calculate traditional MLRs for each 
insurer and then determined the effect that each component of the 
PPACA MLR formula that differed from the traditional formula and the 
credibility adjustment had on the adjusted PPACA MLRs. We also 
examined how the requirement to report at the state level affected the 
range of MLRs reported by insurers in each market. To assess the 
reliability of these data, we reviewed relevant documentation, 
conducted interviews with NAIC officials knowledgeable about the data, 
and conducted electronic testing of the data to identify obvious 
errors or outliers. We determined that the data were sufficiently 
reliable for the purposes of this report.

We conducted this performance audit from August 2011 through October 
2011 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives.

Results in Brief:

We found that most insurers in 2010 would have met or exceeded the 
2011 PPACA MLR standards and the impact of various aspects of the 
PPACA provision varied by market. At least 64 percent of all credible 
insurers would have met or exceeded the 2011 PPACA MLR standards. A 
higher percentage of insurers in the large and small group markets met 
or exceeded the standards compared to those in the individual market. 
Insurers in the individual market averaged higher nonclaims expenses, 
including expenses for brokers' commissions and fees, than those in 
other markets.

The combined effect of the credibility adjustment and the new 
components of the PPACA MLR formula resulted in greater increases in 
average adjusted PPACA MLRs for individual and small group market 
insurers compared to those in the large group market. The average 
adjusted PPACA MLRs for individual, small group, and large group 
market insurers in 2010 were 7.5, 6.5, and 4.8 percentage points 
higher, respectively, than the average MLRs for these markets 
calculated without the credibility adjustment and using the 
traditional MLR formula. In addition, PPACA required insurers to 
report MLRs by state, and we found a wide range of reported MLRs for 
multistate insurers.

We provided a draft of this report to HHS and NAIC for comment, and 
they provided technical comments, which we incorporated as appropriate.

Background:

The MLR formula and reporting requirements specified in PPACA differ 
from the way MLRs have traditionally been calculated and reported. The 
traditional MLR is generally calculated by dividing an insurer's 
medical care claims by premiums, whereas the PPACA MLR formula 
includes additional components to the formula.[Footnote 9] (See fig. 
1.) Additionally, PPACA included adjustments to the MLR formula and 
new reporting requirements.

Figure 1: Key Components of Traditional and PPACA MLR Formulas:

[Refer to PDF for image: illustration] 

Traditional MLR: 
Medical care claims divided by Premiums. 

PPACA MLR: 
Medical care claims plus Expenses for activities that improve health 
care quality divided by Premiums minus Federal and state taxes and 
licensing or regulatory fees. 

Source: GAO. 

[End of figure]

Key components of the PPACA MLR formula, adjustments, and reporting 
requirements include the following:

* Activities that improve health care quality. These include 
activities designed to increase the likelihood of desired health 
outcomes in ways that can be objectively measured, including related 
health information technology costs.

* Federal and state taxes and licensing or regulatory fees. These 
include all federal taxes and assessments, excluding taxes on 
investment income and capital gains.

* Credibility adjustment. To help address the disproportionate impact 
of claims variability on small health plans, an adjustment to the MLRs 
is permitted for these plans. Specifically, MLRs for plans with:

- less than 1,000 life years will be considered "noncredible" and will 
be presumed to meet the MLR requirements;

- 1,000 to less than 75,000 life years will be considered "partially 
credible" and will receive a credibility adjustment, which is made up 
of two factors--a base credibility adjustment factor based on the 
number of life years and a deductible adjustment factor that further 
increases the adjustment for plans with high deductibles; and:

- 75,000 life years or more will be considered "fully credible" and 
will not receive an adjustment.

HHS estimates show that for 2011 a small fraction of insurers that 
offer plans in the individual, small group, or large group markets 
would be considered fully credible insurers, but these insurers 
account for the majority of the total life years covered by these 
types of plans. About half of the insurers that offer plans in the 
small and large group markets, and a little less than a third of 
insurers that offer plans in the individual market, would be partially 
credible and would apply a credibility adjustment.

* Levels of aggregation for MLR reporting. Insurance companies are 
required to report MLRs separately for their individual, small group, 
and large group markets for each state in which they are licensed to 
operate.[Footnote 10]

PPACA provided HHS with the authority to adjust the MLR standard for 
the individual market in a state if it determines that the application 
of the standard may destabilize the individual market in that state. 
[Footnote 11] HHS's interim final rule implementing PPACA also 
specified that agents' and brokers' commissions and fees be listed as 
nonclaims expenses.[Footnote 12]

In our July 2011 report, we reported on insurers' early experiences in 
implementing the new PPACA MLR requirements. In that report, we 
analyzed historical traditional MLR data from NAIC from 2006 through 
2009 and found that traditional MLRs on average generally exceeded 
PPACA MLR standards but varied, particularly among individual market 
and smaller insurers.[Footnote 13] We also interviewed a sample of 
insurers, and they reported that they expected certain components of 
the new PPACA MLR formula and reporting requirements to affect their 
PPACA MLRs compared to traditional MLRs. In addition, insurers told us 
their 2010 PPACA MLRs may be based in part on best estimates because 
HHS's interim final rule on PPACA MLRs was published in late 2010, and 
thus PPACA MLRs may become more precise for 2011 and future years' data.

Most Insurers in 2010 Would Have Met or Exceeded the 2011 PPACA MLR 
Standards, and Group Market Insurers Had the Highest Average Adjusted 
PPACA MLRs:

In 2010, at least 64 percent of all credible insurers, covering at 
least 77 percent of lives, would have met or exceeded the 2011 PPACA 
MLR standards (see table 1).[Footnote 14],[Footnote 15] At the market 
level, a higher percentage of large and small group insurers met or 
exceeded the 2011 standards compared to individual market insurers. 
The percentage of insurers in the large and small group markets that 
met or exceeded the standards were 77 and 70 percent, respectively, 
compared to 43 percent in the individual market. Because more lives 
were covered by large and small group market insurers, most covered 
lives were associated with insurers that would have met or exceeded 
the standards.

Table 1: Percentage of Credible Insurers and Covered Lives in 2010 
That Would Have Been at or above the 2011 PPACA MLR Standards:

Market: Individual[B]; 
Total number of credible insurers: 553; 
Total number of covered lives: 10,131,103; 
Percentage of all covered lives: 15; 
Percentage at or above the 2011 PPACA standards[A]: 
Percentage of credible insurers: 43; 
Percentage of covered lives: 48.

Market: Small group; 
Total number of credible insurers: 601; 
Total number of covered lives: 17,905,130; 
Percentage of all covered lives: 27; 
Percentage at or above the 2011 PPACA standards[A]: 
Percentage of credible insurers: 70; 
Percentage of covered lives: 76.

Market: Large group; 
Total number of credible insurers: 642; 
Total number of covered lives: 39,102,236; 
Percentage of all covered lives: 58; 
Percentage at or above the 2011 PPACA standards[A]: 
Percentage of credible insurers: 77; 
Percentage of covered lives: 85.

Market: Total[C]; 
Total number of credible insurers: 1,796; 
Total number of covered lives: 67,138,469; 
Percentage of all covered lives: 100; 
Percentage at or above the 2011 PPACA standards[A]: 
Percentage of credible insurers: 64; 
Percentage of covered lives: 77.

Source: GAO analysis of NAIC data.

Notes: Data are reported at the state level for each insurer in each 
market and have been adjusted based on credibility status. The data 
exclude insurers that were noncredible or for which life years could 
not be determined to assign credibility status, and insurers that 
reported negative values for premiums, claims, or number of covered 
lives. Life years refers to the total number of months of coverage for 
enrollees divided by 12.

[A] All noncredible insurers are presumed to meet the MLR standards. 
Including noncredible insurers in this analysis, 84 percent of all 
insurers, covering 77 percent of lives, would have met or exceeded the 
standards. In 2010, there were 2,081 noncredible insurers that covered 
438,826 lives.

[B] The percentage at or above the 2011 PPACA standards for the 
individual market accounts for the lower PPACA MLR standards HHS has 
approved for five states by using the approved minimum 2011 standard 
for each of these states.

[C] Some insurers operate in multiple markets and multiple states. A 
separate MLR is reported for each insurer, market, and state 
combination. The total treats each insurer, market, and state 
combination as a separate insurer. 

[End of table] 

Average adjusted PPACA MLRs were higher in the group markets than in 
the individual market and were more varied among individual market and 
smaller insurers. The average adjusted PPACA MLR was 89.5 percent in 
the large group market, 85.0 percent in the small group market, and 
78.8 percent in the individual market. Excluding data for the five 
states that have been approved for a lower MLR standard in 2011 for 
the individual market only slightly affected the average adjusted 
PPACA MLR for this market, increasing it to 79.1 percent. Consistent 
with our findings in our prior report on traditional MLR data, 
adjusted PPACA MLRs also varied widely among insurers in 2010. This 
variation was particularly wide among those in the individual market 
and among smaller, partially credible insurers (see figs. 2 and 3).

Figure 2: Range of Adjusted PPACA MLRs Reported in the Individual, 
Small Group, and Large Group Markets, 2010:

[Refer to PDF for image: vertical bar graph] 

Percentage of insurers: 

Wider distribution[A]: Less than 60% to 100% or more. 

PPACA MLR range: Less than 60%; 
Individual market: 13.4%; 
Small group market: 2.7%; 
Large group market: 2%. 

PPACA MLR range: 60-69.9%; 
Individual market: 21.5%; 
Small group market: 3.7%; 
Large group market: 1.9%. 

PPACA MLR range: 70-79.9%; 
Individual market: 23.5%; 
Small group market: 23.8%; 
Large group market: 5.3%. 

PPACA MLR range: 80-89.9%; 
Individual market: 19%; 
Small group market: 42.1%; 
Large group market: 41%. 

PPACA MLR range: 90-99.9%; 
Individual market: 10.7%; 
Small group market: 19.5%; 
Large group market: 38.5%. 

PPACA MLR range: 100% or more[B]; 
Individual market: 11.9%; 
Small group market: 8.3%; 
Large group market: 11.4%. 

Source: GAO analysis of NAIC data. 

Notes: Data are reported at the state level for each insurer in each 
market and have been adjusted based on credibility status. The data 
exclude insurers that were noncredible or for which life years could 
not be determined to assign credibility status, and insurers that 
reported negative values for premiums, claims, or number of covered 
lives. Life years refers to the total number of months of coverage for 
enrollees divided by 12.

[A] The adjusted PPACA MLRs in the individual market were more widely 
distributed than those in the small and large group markets. The range 
of one standard deviation below to one standard deviation above the 
mean adjusted PPACA MLRs was 56.5 to 101.1 percent in the individual 
market, compared to 71.7 to 98.3 percent in the small group market and 
77.6 to 101.4 percent in the large group market.

[B] Some insurers reported traditional MLRs above 100 percent 
indicating that the insurers' claims were greater than the premiums 
they collected for that year. For example, if an insurer had a small 
number of enrollees and one enrollee had an extremely large claim then 
the result could be an MLR over 100 percent. 

[End of figure] 

Figure 3: Range of Adjusted PPACA MLRs Reported in the Individual, 
Small Group, and Large Group Markets, by Credibility Status, 2010:

[Refer PDF for image: 2 vertical bar graphs] 

Individual market: 
Range of PPACA MLRs reported by insurer size, 2010: 

Percentage of insurers: 

Wider distribution[A]: Less than 60% to 100% or more. 

PPACA MLR range: Less than 60%; 
Partially credible: 14.1%; 
Fully credible: 0%. 

PPACA MLR range: 60-69.9%; 
Partially credible: 21.9%; 
Fully credible: 14.3%. 

PPACA MLR range: 70-79.9%; 
Partially credible: 22.7%; 
Fully credible: 39.3%. 

PPACA MLR range: 80-89.9%; 
Partially credible: 18.7%; 
Fully credible: 25%. 

PPACA MLR range: 90-99.9%; 
Partially credible: 10.1%; 
Fully credible: 21.4%. 

PPACA MLR range: 100% or more[B]; 
Partially credible: 12.6%; 
Fully credible: 0%. 

Small group market: 
Range of PPACA MLRs reported by insurer size, 2010: 

Percentage of insurers: 

Wider distribution[A]: 70-79.9% to 90-99.9%. 

PPACA MLR range: Less than 60%; 
Partially credible: 14.1%; 
Fully credible: 0%. 

PPACA MLR range: 60-69.9%; 
Partially credible: 21.9%; 
Fully credible: 14.3%. 

PPACA MLR range: 70-79.9%; 
Partially credible: 22.7%; 
Fully credible: 39.3%. 

PPACA MLR range: 80-89.9%; 
Partially credible: 18.7%; 
Fully credible: 25%. 

PPACA MLR range: 90-99.9%; 
Partially credible: 10.1%; 
Fully credible: 21.4%. 

PPACA MLR range: 100% or more[B]; 
Partially credible: 12.6%; 
Fully credible: 0%. 

Large group market:
Range of PPACA MLRs reported by insurer size, 2010: 

Percentage of insurers: 

Wider distribution[A]: 70-79.9% to 90-99.9%. 

PPACA MLR range: Less than 60%; 
Partially credible: 14.1%; 
Fully credible: 0%. 

PPACA MLR range: 60-69.9%; 
Partially credible: 21.9%; 
Fully credible: 14.3%. 

PPACA MLR range: 70-79.9%; 
Partially credible: 22.7%; 
Fully credible: 39.3%. 

PPACA MLR range: 80-89.9%; 
Partially credible: 18.7%; 
Fully credible: 25%. 

PPACA MLR range: 90-99.9%; 
Partially credible: 10.1%; 
Fully credible: 21.4%. 

PPACA MLR range: 100% or more[B]; 
Partially credible: 12.6%; 
Fully credible: 0%. 

Source: GAO analysis of NAIC data. 

Notes: Data are reported at the state level for each insurer in each 
market and have been adjusted based on credibility status. The data 
exclude insurers that were noncredible or for which life years could 
not be determined to assign credibility status, and insurers that 
reported negative values for premiums, claims, or number of covered 
lives. Life years refers to the total number of months of coverage for 
enrollees divided by 12.

[A] The adjusted PPACA MLRs among partially credible insurers were 
more widely distributed than larger insurers in all markets. In the 
individual market, the range of one standard deviation below to one 
standard deviation above the mean adjusted PPACA MLRs was 56.0 to 
101.6 percent for insurers that would have been partially credible, 
and 71.0 to 89.8 percent for insurers that would have been fully 
credible. In the small group market, the range was 71.3 to 99.1 
percent for partially credible insurers and 77.6 to 89.4 percent for 
fully credible insurers. In the large group market, the range was 76.4 
to 102.6 for partially credible insurers and 84.4 to 94.8 percent for 
fully credible insurers.

[B] Some insurers reported traditional MLRs above 100 percent 
indicating that the insurers' claims were greater than the premiums 
they collected for that year. For example, if an insurer had a small 
number of enrollees and one enrollee had an extremely large claim then 
the result could be an MLR over 100 percent. 

[End of figure] 

One factor that might contribute to higher average adjusted PPACA MLRs 
in the group markets is that these insurers spent less on nonclaims 
expenses than insurers in the individual market.[Footnote 16] On 
average, total nonclaims expenses represented 13 percent and 16 
percent of premiums earned in the large and small group markets, 
respectively, compared to 23 percent in the individual market. Within 
the nonclaims expenses, insurers in the large and small group markets 
averaged lower expenses for brokers' fees and commissions as a 
percentage of premiums earned (3 and 5 percent respectively) than 
insurers in the individual market (7 percent).

The 2010 data for insurers are transitional and may not be fully 
reflective of the data that will be reported in 2011. For example, 
almost 11 percent of insurers in all three markets combined did not 
report any expenses to improve health care quality. However, the 
absence of these data does not necessarily mean that the insurers did 
not incur these expenses. One insurer that we interviewed told us that 
while they had expenses for quality improvement for the individual 
market, they did not have enough information to report these expenses 
for 2010 since this was a new reporting requirement. This insurer said 
that they will collect and report this information for 2011.[Footnote 
17] Other factors that may affect data reported in 2011 are 
differences in how the 2010 NAIC data were reported compared to how 
they will be reported to HHS for 2011 under PPACA. Some of these 
differences include adjustments to federal income tax deductions as a 
result of any rebates owed for not meeting the PPACA MLR standards and 
the inclusion of claims runoff (claims incurred in the reporting year 
but not paid up until March 31 of the following year). It is unclear 
what the net impact of these differences will be on PPACA MLRs in 2011 
and beyond.

The Adjustment and the PPACA MLR Formula Most Affected Individual and 
Small Group Insurers; Using the New Reporting Requirements, Multistate 
Insurers Reported a Wide Range of MLRs:

The combined effect of the credibility adjustment and the new 
components of the PPACA MLR formula resulted in greater increases in 
average adjusted PPACA MLRs for individual and small group market 
insurers compared to those for insurers in the large group market. The 
average adjusted PPACA MLRs for individual and small group market 
insurers in 2010 were 7.5 and 6.5 percentage points higher, 
respectively, than the average MLRs for these markets calculated 
without the credibility adjustment and using the traditional MLR 
formula. For the large group market, the percentage point increase was 
4.8. (See table 2.) For each market, the credibility adjustment--which 
is applied only to insurers that are considered partially credible--
accounted for the largest percentage point increase on the average 
adjusted PPACA MLRs. The percentage point increases for this 
adjustment ranged from 4.2 in the individual market to 2.7 in the 
large group market.

Table 2: Effect of the Credibility Adjustment and New Components of 
the PPACA MLR Formula on Average Adjusted PPACA MLRs by Market, 2010:

Credibility adjustment and PPACA MLR components: Credibility 
adjustment; 
Percentage point increase: 
Individual market: 4.2%; 
Small group market: 3.3%; 
Large group market: 2.7%.

Credibility adjustment and PPACA MLR components: Total of components 
of formula; 
Percentage point increase: 
Individual market: 3.3%; 
Small group market: 3.2%; 
Large group market: 2.2%.

Credibility adjustment and PPACA MLR components: Federal and state 
taxes and regulatory fees; 
Percentage point increase: 
Individual market: 2.6%; 
Small group market: 2.3%; 
Large group market: 1.3%.

Credibility adjustment and PPACA MLR components: Expenses to improve 
health care quality; 
Percentage point increase: 
Individual market: 0.5%; 
Small group market: 0.7%; 
Large group market: 0.8%.

Credibility adjustment and PPACA MLR components: All other 
components[A]; 
Percentage point increase: 
Individual market: 0.2%; 
Small group market: 0.1%; 
Large group market: 0.1%.

Credibility adjustment and PPACA MLR components: Total of credibility 
adjustment and components; 
Percentage point increase: 
Individual market: 7.5%; 
Small group market: 6.5%; 
Large group market: 4.8%.

Source: GAO analysis of NAIC data.

Notes: Data are reported at the state level for each insurer in each 
market and have been adjusted based on credibility status. The data 
exclude insurers that were noncredible or for which life years could 
not be determined to assign credibility status, and insurers that 
reported negative values for premiums, claims, or number of covered 
lives. Life years refers to the total number of months of coverage for 
enrollees divided by 12. Percentage points may not add to totals 
because of rounding.

[A] All other components included federal and state high-risk pools 
and fraud and abuse detection and recovery expenses. 

[End of table] 

Among the new components included in the PPACA MLR formula, the 
deduction of taxes and fees in the denominator accounted for the 
largest increase in all markets. The deduction of taxes and fees 
resulted in percentage point increases in the average adjusted PPACA 
MLRs of 2.6 in the individual market, 2.3 in the small group market, 
and 1.3 in the large group market. The addition of expenses to improve 
health care quality in the numerator of the PPACA MLR formula had the 
next largest effect on insurers' 2010 MLRs. The average increases that 
were due to components of the PPACA MLR formula are consistent with 
what insurers told us.[Footnote 18] Other components in the PPACA MLR 
formula, including fraud and abuse detection and recovery expenses, 
had less of an effect on insurers' 2010 average adjusted PPACA MLRs.

Using the new PPACA MLR reporting requirements, many of the insurers 
that operated in multiple states in 2010 reported a wide range of 
adjusted PPACA MLRs across states. For example, one insurer that 
operated in over 20 states in the individual market had adjusted PPACA 
MLRs in that market ranging from 50 percent to 94 percent. However, 
when aggregated by all of the states in which this insurer operated, 
as the historical traditional MLR was generally reported, this insurer 
had an adjusted PPACA MLR for the individual market of 72 percent. 
Wide ranges of adjusted PPACA MLRs also existed for many insurers that 
only operated in two states. For example, one insurer in the small 
group market had an adjusted PPACA MLR of 66 percent in one state and 
103 percent in the other state, with an adjusted PPACA MLR of 84 
percent for both states combined. This is consistent with what 
insurers told us, that the PPACA MLR requirements to report MLRs by 
market and by each state in which insurers operate would result in 
variation in their MLRs.

Agency and Third-Party Comments:

We obtained written comments from HHS, which are reprinted in 
enclosure I. HHS commented that the PPACA MLR provision will make the 
insurance marketplace more transparent and make it easier for 
consumers to determine which plans provide better value for their 
money. HHS also provided technical comments, which we incorporated as 
appropriate.

Additionally, we provided a draft of this report to NAIC for comment. 
NAIC provided technical comments, which we incorporated as appropriate.

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies to the 
Secretary of Health and Human Services, the Administrator of the 
Centers for Medicare & Medicaid Services, and appropriate 
congressional committees. In addition, the report will be available at 
no charge on the GAO website at [hyperlink, http://www.gao.gov]. 

If you or your staffs have any questions about this report, please 
contact me at (202) 512-7114 or dickenj@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made key contributions 
to this report are listed in enclosure II. 

Signed by: 

John E. Dicken: 
Director, Health Care:

Enclosures - 2: 

[End of section] 

Enclosure I: Comments from the Department of Health and Human Services: 

Department Of Health & Human Services: 
Office Of The Secretary: 
Assistant Secretary for Legislation: 
Washington, DC 20201: 

October 11, 2011: 

John Dicken, Director: 
Health Care: 
U.S. Government Accountability Office: 
441 G Street NW: 
Washington, DC 20548: 

Dear Mr. Dicken: 

Attached are comments on the U.S. Government Accountability Office's 
(GAO) draft report entitled, "Private Health Insurance: Early 
Indicators Show that Most Insurers Would Have Met or Exceeded New 
Medical Loss Ratio Standards" (GAO-12-90). 

The Department appreciates the opportunity to review this report 
before its publication. 

Sincerely, 

Signed by: 

Jim R. Esquea: 
Assistant Secretary for Legislation: 

Attachment: 

[End of letter] 

General Comments Of The Department Of Health And Human Services (HHS) 
On The Government Accountability Office's (GAO) Draft Report Entitled, 
"Private Health Insurance: Early Indicators Show That Most Insurers 
Would Have Met Or Exceeded New Medical Loss Ratio Standards" (GAO-12-
90): 

The Department appreciates the opportunity to review and comment on 
this draft report. 

The medical loss ratio provisions are one of the key changes included 
in the Affordable Care Act that will make the insurance marketplace 
more transparent and make it easier for consumers to determine which 
plans provide better value for their money. Prior to these changes, 
many insurance companies spent a substantial portion of consumers' 
premium dollars on administrative costs and profits, including 
executive salaries, overhead, and marketing. The medical loss ratio 
regulations will help ensure that consumers receive more value for 
their premium dollar because insurance companies will be required to 
spend 80 or 85 percent of premium dollars on direct medical care and 
quality improvement, rather than on administrative costs. Insurance 
companies spending less than this will be required to provide a rebate 
to their customers starting in 2012. The medical loss ratio rules also 
ensure that the health insurance marketplace is more transparent to 
consumers. Starting in 2012, insurance companies will begin reporting 
premium and expenditure information in each state in which they do 
business. This information will be publicly available so consumers 
will be able to evaluate the value of their insurance plan and see how 
it compares to other plans offered in their area. 

[End of section] 

Enclosure II: GAO Contact and Staff Acknowledgments:

GAO Contact:

John E. Dicken, (202) 512-7114 or dickenj@gao.gov:

Staff Acknowledgments:

In addition to the contact named above, Gerardine Brennan, Assistant 
Director; George Bogart; Julianne Flowers; Drew Long; Lisa A. Lusk; 
and Janet L. Sparks made key contributions to this report.

[End of section] 

Footnotes: 

[1] Pub. L. No. 111-148,  1001(5), 10101(f), 124 Stat. 119, 130, 885 
(2010) (inserting and amending a new section 2718 in the Public Health 
Service Act (PHSA)).

[2] Generally, small and large group markets refer to coverage sold to 
a "small employer" or a "large employer." PPACA generally defines a 
small employer as having employed an average of 1 to 100 employees and 
a large employer as having employed an average of 101 or more 
employees during the preceding calendar year. Until 2016, a state has 
the option to define small employers as having employed an average of 
1 to 50 employees during the preceding calendar year and a large 
employer as having employed an average of at least 51 employees during 
the preceding calendar year, in which case that definition will apply 
in calculating the applicable PPACA MLR standard. See Pub. L. No. 111-
148,  1304(b), 124 Stat. 172.

[3] Rebates are refunds issued by the insurer to the individual or 
entity that paid the premium either in the form of a lump sum payment 
or credit toward premiums.

[4] Insurers that cover less than 1,000 life years are considered 
noncredible and presumed to meet the PPACA MLR standards. Life years 
refers to the total number of months of coverage for all enrollees 
divided by 12. See 45 C.F.R.  158.230 (as added by HHS Interim Final 
Rule, 75 Fed. Reg. 74864, 74927 (Dec. 1, 2010)).

[5] NAIC is the organization of insurance commissioners from the 50 
states, the District of Columbia, and the five U.S. territories who 
regulate the conduct of insurance companies in their respective state 
or territory. All insurers, with some exceptions, report annual 
financial statements to NAIC that include data for all health 
insurance markets offered by an insurer, including MLR data.

[6] GAO, Private Health Insurance: Early Experiences Implementing New 
Medical Loss Ratio Requirements, [hyperlink, 
http://www.gao.gov/products/GAO-11-711] (Washington, D.C.: July 29, 
2011).

[7] Some insurers operate in multiple markets and multiple states, and 
a separate PPACA MLR was reported for each insurer, market, and state 
combination. For the purposes of this report, we use "insurer" to 
refer to each insurer, market, and state combination. 

[8] The credibility adjustment is based on two factors: the size of an 
insured population and plan deductibles. Because insurers did not 
report data for deductibles in 2010, our methodology applied a 1.0 
multiplier for the deductible adjustment factor for the credibility 
adjustment. This methodology was based on the assumption that few 
insurers would have had plans with deductibles greater than $2,500, 
the amount at which an insurer would be eligible for a deductible 
adjustment factor greater than 1, and is consistent with NAIC's 
approach in a recent report it issued.

[9] For the purposes of this report, medical care claims is broadly 
defined as payments made or anticipated to be made for medical care 
expenses. For example, medical care claims would include medical care 
expenses paid, medical care expenses incurred but not yet paid, as 
well as changes in an insurer's contract reserves. Contract reserves 
are funds set aside to pay certain claims expected to be incurred in 
the future.

[10] Prior to PPACA, insurers did not report traditional MLRs to NAIC 
by state.

[11] See PHSA  2718(b)(1)(A)(ii) (as added by Pub. L. No. 111-148,  
1001(5), 10101(f), 124 Stat. 119,130, 885, 886). As of September 13, 
2011, 16 states and 1 territory had applied to HHS for adjustments to 
lower the PPACA MLR standard for their individual market insurers, and 
HHS had granted adjustments to 5 of these states, had denied an 
adjustment to 2 states, advised that in the territory all insurers 
were noncredible and thus presumed to meet or exceed the statutory 
standard, and was in the process of reviewing the remaining 
applications. The 5 states with approved adjustments are Iowa, 
Kentucky, Maine, New Hampshire, and Nevada, and the approved minimum 
2011 PPACA MLR standards for these states ranged from 65 percent to 75 
percent.

[12] See 45 C.F.R.  158.160. 

[13] Our prior report did not include an analysis of insurers' 2010 
MLR data because at the time of our study, NAIC was in the process of 
validating insurers' reported data and the data were not fully 
complete. Additionally, the data included in our prior report were 
aggregated for each insurer across all of the states in which the 
insurer operated and reported by market. Beginning in 2010, insurers 
reported MLR data by market and by state, and throughout this report 
we use "insurer" to refer to each insurer, market, and state 
combination. Therefore, the average adjusted PPACA MLRs for 2010 
included in this report are not comparable to the average MLRs 
included in the earlier report.

[14] Covered lives refers to the number of lives insured by a health 
insurance plan--including the enrollee and any family members also 
covered by the plan. 

[15] In addition, all noncredible insurers were presumed to meet the 
standard. 

[16] Nonclaims expenses are those that are not related to medical care 
or expenses to improve health care quality. Examples include sales 
expenses, brokers' fees and commissions, cost containment expenses, 
and other general and administrative expenses.

[17] Insurers also said that their 2010 MLR data will not be as 
precise as their MLR data for 2011 and beyond when MLRs are subject to 
the PPACA MLR requirements. For example, some insurers said that they 
used their best estimates to report their expenses to improve health 
care quality for 2010.

[18] The insurers we interviewed said their PPACA MLRs will be 
affected by changes in the MLR formula, primarily due to the deduction 
of taxes and fees in the denominator, and to a lesser extent, the 
addition of expenses for activities to improve health care quality in 
the numerator.

[End of section] 

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