My year as one of two George W. Merck Fellows at IHI will end June 30, 2010. This  has been a tremendous immersion in the science of quality improvement, attaining and honing leadership skills and having a front row seat to the re-framing of the US health care system to one that has more value as opposed to more volume (costs and revenue generation). We celebrate the beginnings of health reform with the beginning of health insurance reform. The aim remains to change the world. While writing this post, I am watching Ken Burns:  The Civil War, maybe no coincidence. The battles for health care reform are only warming up. This war will be fought on thousands of fronts.

Over the next half year, the health insurance industry will continue it’s attempts to out flank the law.

With the passage of the Affordable Care Act, the US health insurance lobby has rapidly focused on so called medical loss ratios:

effective Jan. 1,  the law requires that a minimum percentage of premium dollars be spent on true medical costs related to patient care — not retained by insurers as profits or used to cover administrative expenses. Insurers must refund money to consumers if they do not meet the standards, known as minimum loss ratios.

The definition of medical loss ratio is currently under construction by the insurance industry so that it can most benefit their interpretation of the law.

As reported by Robert Pear, in the New York Times (May16, 2010) Senator John D. Rockefeller IV, Democrat of West Virginia, said the definition would be just as important for consumers and small businesses.

“The health insurance industry has shifted its focus from opposing health care reform to influencing how the new law will be implemented,” he said.

The law requires insurers to spend a minimum percentage of premiums on health care services and “activities that improve health care quality” for patients.

Insurers are eager to classify as many expenses as possible in these categories, so they can meet the new test and avoid paying rebates to policyholders.

Thus, insurers are lobbying for a broad definition of quality improvement activities that would allow them to count spending on health information technology, nurse hot lines and efforts to prevent fraud. They also want to include the cost of reviewing care by doctors and hospitals, to determine if it was appropriate and followed clinical protocols.

Senator John Rockefeller is coming out as an opponent of attempts by Health Care insurance companies to define loss ratios in certain ways:

Insurers are to report the data this year, with a provision, stating anything over those amounts be returned to customers, taking effect Jan. 1, 2011.

Part of what the two groups are working on is the definition of what constitutes “medical costs” and what constitutes “administrative costs,” one of the concerns noted by Rockefeller in his letter.

“To the extent insurers try to invent ways to ‘game’ the minimum medical loss ratio requirement without changing their actual business practices, they are defeating the purpose of the medical loss ratio provision,” the senator wrote.

He added that this stipulation is “one of the most important events for consumers and small businesses” prior to the creation of health insurance exchanges in 2014.
Deceptive data

Rockefeller made two recommendations to both the NAIC and HHS in his letter: that minimum medical loss ratios be aggregated and reported in a way that benefits consumers, and that insurers be required to demonstrate that quality-improving expenditures actually benefit consumers.

Regarding reporting efforts, Rockefeller pointed out that medical loss ratio is reported differently among health insurers, using frequent target WellPoint as an example. The senator noted that there were not only a great deal of variation between different market segments, but variation within market segments.

As an example, Rockefeller used data submitted by the insurer to show an individual market medical loss ratio of 62.9% in New Hampshire through its Anthem subsidiary, while Maine’s Anthem reported a 95.2% ratio.

To solve this issue, Rockefeller proposes reporting medical loss ratio “at a level of aggregation that would allow consumers living in a particular state or other definable geographic region” to determine how insurers are spending their premiums.

“Aggregating this information at too high a level will present consumers with misleading averages of multiple, disparate markets,” Rockefeller said. “For the same reason, I also recommend that insurers provide separate medical loss ratio information for the individual, small and large group market segments.”

The new reform law adds to the definition of medical loss ratio a new accounting category for expenditures on activities “that improve health care quality,” that are not considered administrative expenses, but medical expenses that are included in the calculations of the 80% and 85% levels.

Sec. 10101(f) of the Affordable Care Act, concerning minimum loss ratios  will require:

Health insurers offering group or individual insurance coverage must submit an annual report to the Department of Health and Human Services for each group and individual coverage for each medical plan year. This report must describe the ratio of the incurred claims plus a loss adjustment expense to earned premiums, typically called a medical loss ratio.

Loss adjustment expenses usually include legal and other fees and expenses related to the settlement of an insurer’s claims. Earned premium in health care usually means the portion of a premium that has been “used up” during a policy term. With a one-year policy, half of the total premium has been earned after six months.

Reports also must be made for grandfathered plans.

The report must include the percentage of total premium revenue that such coverage expends on the following:

(1)      reimbursement for clinical services;

(2)      activities that improve health care quality; and

(3)      all other non-claims costs, including an explanation of the nature of such costs, but excluding Federal and State taxes and licensing or regulatory fees.

HHS is directed to make the reports available to the public on an HHS internet site.

Required minimum loss ratios. Minimum loss ratios are established for large group plans, small group plans, and individual plans:

The minimum loss ratio for large group plans is 85%, or a higher percentage if a state requires it.

The minimum loss ratio for individuals and small group plans (plans with 100 or fewer employees is 80%, or a higher percentage if a state requires it. HHS may adjust the percentage if it determines that an 80% loss ratio would destabilize the individual market.

Beginning no later than January 1, 2011, health insurers providing coverage that does not meet the minimum loss ratios must provide an annual rebate to each enrollee under such coverage, on a pro rata basis.

The annual rebate is calculated by multiplying the amount by which the coverage fails to meet the minimum loss ratio by the total amount of premium revenue. Premium revenue excludes federal and state taxes, licensing and regulatory fees, and payments or receipts for risk adjustments, risk corridors, and reinsurance.


Quality First Insurance Company earns $1.5  million on premiums for coverage for Good Employer, Inc.’s 140 employees. Incurred claims plus a loss adjustment expense total $1.23 million, which results in a loss ratio of 82%. Assuming the earned premium already has excluded taxes, fees, and other adjustments, 3% is the amount by which the coverage fails to meet the minimum loss ratio by the total amount of premium revenue. That 3% is multiplied by $ 1.5 million, resulting in a total annual rebate of $45,000. This would produce an average pro rata rebate of $321.40 (45,000 divided by 140 employees) for each enrollee.


John Reichard of CQ HEALTHBEAT recently reported , an internal memo by an official with the America’s Health Insurance Plans (AHIP) says that various types of insurance company activities could be in jeopardy if regulators aren’t convinced that they should be designated as medical on the grounds that they improve quality of care.

“As we approach the May 14 deadline for submitting comments, it is critically important for you to explain what you are doing to improve quality of care, reduce readmissions, eliminate unnecessary procedures, improve safety and reduce fraud and abuse,” says the memo to AHIP member companies from AHIP Senior Vice President Scott Styles.

“We urge you to explain how these activities meet the statutory definition of “activities that improve health care quality” for purposes of calculating MLRs, “because they improve patient health outcomes and reduce unnecessary and potentially harmful care.”

The memo further advises that “you… describe your innovative case management, disease management, and care coordination initiatives including: health risk assessments, including maternity and neonatal risk assessment,” and programs to promote “wellness” and “nurse advice lines to help patients get the care they need while reducing the likelihood of adverse health problems.”

However, consumer activists say that some of these programs involve denial of care that harms patients and that it’s perverse to count them as medical care.

In a recent post on the website of Consumer, the group’s research director, Judy Dugan, took exception to a recent earnings report by United HealthCare that credited good results in part to “expense management.”

“‘Strong expense management’ refers to the pencil-pushers in the back room whose job is to delay and deny the care your doctor prescribes,” Dugan blogged. “Delay is almost as profitable as denial. Every day a dollar is not spent is a day it earns interest for the company. Yet this is one of the functions that insurance companies are now transferring into the ‘medical care’ column.”

“By moving administrative jobs into the medical care category, United HealthCare will be able to meet health reform requirements for medical loss ratios of up to 85% without sweating, and still make just as much profit,” Dugan added. “A lot of what insurance companies can get away with will depend on how new regulations to govern the health care reforms are written — and who gets to write them.”

But AHIP spokesman Robert Zirkelbach said that insurers seek through their management programs to determine appropriate levels of care, which he said means correcting underuse of care in some instances and overuse in others that could be dangerous. He said for example that overuse of medical imaging is hazardous because of exposure to radiation that can be unsafe.


Effective date. The provision is effective for plan years beginning on or after Sept. 23, 2010.

“We are here to make another world.”

W. Edwards Deming quote