Discussion on Rate Actions

Well, after taking a several months “sabbatical” from writing blog posts, I thought I would pick this up again in the new year.  The contract modifications that carriers were required to institute with new or renewed business (that was modified) starting after six months of the law– the critical 9/23/10 date since the legislation passed on 3/23/10 has come and gone.  Since my last post, the HHS, DOL and IRS have been very busy releasing clarifications/revisions related to the law with the IRS clarifying the tax deductiblity of dependents, releasing clarifications (and postponing) the W-2 reporting requirements and postponing the Discrimination testing requirements for the health plans just to name a few. 

But the thing I want to focus on most in this post is a comment I often hear when presenting to the groups.  Frequently I hear clients say something along the lines of “Now the carriers are just increasing rates and using the legislation as an excuse to do it.”  But now that we have passed 1/1/2011, it is critical that we (as brokers) educate our clients on the not very well publicized acronym “MLR” that is a very important part of the Affordable Care Act (ACA) law.  It stands for the “Minimum Loss Ratio” requirement which legislatively states that the individual and small group markets MLR are set at 80% for individual and small group markets and 85% for large group markets.  What the provision of the law mandates is that if a carrier in the individual or small group market pays less than 80¢ on the dollar in claims, they will have to refund any excess to policyholders in the class across the board.  It is important to note that this calculation is done on a BLOCK basis–not an individual or specific small group basis–because we all know that there are many individuals and small groups that maintain several hundred percent loss ratios (ie, that the carrier has paid out claims many times over in excess of premiums received).  As a random and greatly simplified example, an individual policyholder that has been diagnosed with cancer and pays $4,500 per year in premium but has $265,000 paid in cancer treatments by the insurance carrier would have to have no additional claims for the next 59 years in order for the carrier to “break even” (claims equaled the premiums received).  Thus, it takes several hundred individuals or small groups running “very well” (ie, 50¢ of the $1.00 of premium received paid out in claims) in order to be able to offset that one shock claim.  The new legislation states AS AN ENTIRE BLOCK (all individuals or small groups), the carrier must spend 80% of that total populations’ premiums received on claims.  In the unlikely event that they spend less than 80%, a proportional refund would be required across the entire block– which would be an incredibly expensive endeavor to administratively undertake.  So to the contrary of the clients’ thoughts that the carriers are trying to “reap huge profits” before the balance of the law hits in 2014, they are simply uninformed. If the carriers overprice their products TODAY and exceeds the 80% MLR, they will have to refund the difference.  The fact of the matter is one that nobody ever wants to really admit–the cost of healthcare is going up rapidly because the underlying cost of care is increasing.  It is important for brokers to educate their clients as to the existence of the MLR; and that in the event they have a large increase, it is NOT to feed the “excessive profits” of the health insurance companies but rather to cover the claims of the ever changing, perhaps health status degrading, insured population.  In fact, due to the 80% MLR and the requirement that any excess be returned, there is no incentive (and frankly huge disincentive) in “missing that mark”.  It is an education worth having particularly in harsh renewal environments.