Private Health Insurance:
Early Indicators Show That Most Insurers Would Have Met or Exceeded New Medical Loss Ratio Standards
GAO-12-90R: Published: Oct 31, 2011. Publicly Released: Nov 30, 2011.
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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. 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. 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. 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. 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. 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. Congress 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?
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.