First Medical Loss Ratio Audits Suggest Need For Clearer Standards

Implementing Health Reform. On March 29, 2016, the Centers for Medicare and Medicaid Services (CMS) posted the results of the first audits it has conducted of insurers under the Affordable Care Act's (ACA) medical loss ratio (MLR) program. The MLR provisions of the ACA requires insurers to spend a certain percentage of their premium revenue (80 percent in the individual and small-group markets and 85 percent in the large-group market) on health care claims or health care quality improvement expenses. The audits covered four insurance companies for the 2013 reporting year, which included 2011, 2012, and 2013 data.

The reports cover the procedures that the companies followed for classifying policies as large- or small-group or individual and for aggregation of claims and other data by market. They also address the accuracy of reporting of incurred claims, claims recovered through fraud reduction efforts, quality improvement activity expenses, earned premiums, and taxes. The reports examine how the companies applied credibility adjustments and calculated, disbursed, and gave notice of the rebate amount if any was due.

One of the audited companies, Wellmark, Inc. of Iowa, passed with flying colors — no concerns were noted in the audit. Another company, HealthAssurance of Pennsylvania was found to have overstated its claims by double counting capitation payments to a particular provider. HealthAmerica of Pennsylvania was also found to have overstated its claims through errors in recording capitation expenses. As HealthAssurance's and HealthAmerica's MLRs were already above required thresholds, they were not required to pay rebates and the error did not change their liability.

The audit of a fourth company, Health First Health Plans Inc. of Florida found more serious and pervasive problems. The company failed to:

• maintain adequate documentation to verify how it classified groups by size;
• apply consistent standards in allocating premium, claims, and life year experience between small- and large-group markets;
• correctly classify COBRA enrollees and conversion policies; and,
• properly report agent and broker commissions.

The audit also criticized Health First for failing to properly report quality improvement activities. The company had over-reported quality improvement expenses in the large- and small-group market by reporting total expenses rather than the pro-rata amount for each market. On the other hand it underreported quality improvement expenses by failing to count fitness/gym membership fees for its enrollees. (One would think that paying gym fees would be a great strategy for risk segmentation but it counts as a wellness activity and thus as quality improvement). Health First also misclassified prospective utilization management services for high tech imaging services as activities to "prevent hospital readmission" rather than to "improve patient safety and reduce medical errors."

The National Association of Insurance Commissioners is currently reviewing the quality improvement expenses that can be claimed by insurers for meeting MLR requirements. The Health First audit illustrates the problems caused by the current vague standards as to what can be claimed as quality improvement and the possibilities of classifying expenses as either quality improvement or administrative. In the end the corrections applied by CMS resulted in decreasing Health First's small-group market MLR by 0.6 percent and increasing its large-group market MLR by 0.4 percent. Since Health First's MLRs were above the rebate threshold for both markets, however, the adjustment was without consequence for rebates.

The MLR audits give us a peek into how health plans are dealing with MLR reporting. But the plans affected are only a tiny fraction of the health plans in the market. One would hope that more audit information would soon be forthcoming.

from Health Affairs BlogHealth Affairs Blog http://ift.tt/1RL376j