May 14, 2010

Secretary Kathleen Sebelius
The U.S. Department of Health and Human Services
200 Independence Avenue, S.W.
Washington, DC 20201

Comments of Consumers Union of U.S., Inc.,
to the U.S. Department of Health and Human Services
on “Medical Loss Ratios”
File Code DHHS-2010-MLR

Consumers Union welcomes the opportunity to comment on the future Medical Loss Ratio (MLR) standards, to be established under Section 2718 of the Public Health Service Act (PHS Act).

Section 2718 of the PHS Act was added by Section 1001 of the Patient Protection and Affordable Care Act (PPACA), entitled “bringing down the cost of healthcare coverage.” The strategy that the law adopts for accomplishing this is to require health insurers to spend at least a minimum percentage of premiums on healthcare services or on activities that improve healthcare quality for enrollees.

Section 2718 specifically requires health insurance issuers to submit data on the proportion of premium revenues spent on clinical services and quality improvement, also known as the medical loss ratio (MLR). Insurers are required to pay rebates to enrollees if this percentage does not meet minimum standards. These minimum standards are:

  • 85 percent for coverage offered in the large group market (or a higher percentage that a given state may have determined by regulation); or
  • 80 percent for coverage offered in the small group market or in the individual market (or a higher percentage that a given state may have determined by regulation), except that the Secretary may adjust this percentage for a state if the Secretary determines that the application of the 80 percent minimum standard may destabilize the individual market in that state.

Below, Consumers Union offers comments in three areas: Uniform Definition of MLR; Recommended Levels of Aggregation, and Enforcement.

Uniform Definition of MLR

Defining Quality Improvement Activities

Section 2718 of the PHS Act calls for a specific enumeration of activities that improve healthcare quality. There is considerable debate about the types of expenses that should be considered “quality improvement,” and thus would count as expenses that help insurers meet the MLR standard.

We urge that health plans be allowed to classify as medical care consumer-focused, professional interpretation and translation services in healthcare settings for enrollees who are limited English proficient (LEP). For these plan participants, language access resources are an integral part of the clinical encounter.

Overall, insurers should be required to prove that any measures they seek to include as “quality improvement” actually improve patient outcomes. We urge that the forthcoming HHS rules on this topic include the following: insurers may not classify expenses as “quality improvement” unless they prove that the activities improve patient outcomes.

Health plans should not be discouraged from offering evidence-based disease and care management programs, but no program should be included for which there is insufficient empirical evidence that it improves the health of enrollees.

Health plans frequently cite their disease management programs as evidence of a focus on improving the health of people with chronic conditions. Many disease management programs operated by health plans lack verifiable evidence demonstrating that they improve patient outcomes. As of 2010, the National Committee for Quality Assurance (NCQA) accredits only five disease management programs: asthma, diabetes, chronic obstructive pulmonary disease, heart failure and ischemic vascular disease.

Expenses that are not likely to meet this rigorous standard—and merit close scrutiny—include the following:

  • Utilization review nurses and other administrators whose job it is to review and often deny physician-recommended treatments.
  • Quality assurance programs and provider credentialing activities that are administrative functions. Insurers have not considered these direct medical expenses in the past and should not be allowed to be reclassified as such now.
  • Medical management, to the extent it includes purely administrative functions as well as the salaries of employees whose work does not in any way improve quality. Many “medical management” expenses, including expenses related to “nurse hotlines” and proprietary disease and care management programs, are related more to cost control or expense management than to improving quality. While nurse hotlines can be a useful tool for consumers, there is the potential for them to be used by insurers to reduce utilization without regard to medical necessity.
  • Information technology (IT) spending that has not been proven to improve patients’ medical quality. Insurers invest in IT to enhance underwriting capabilities, reduce expenses pertaining to paying claims and even to identify unprofitable accounts. [1] We suggest placing the burden of proof on insurers to prove what fraction, if any, of their IT investments constitute quality improvement expenditures –with rigorous oversight. In addition, regulations will need to define the accounting period they are permitted to count—i.e. the annualized or amortized portion of costs that improved individual health.

Other Issues In Support of Strong MLR Definitions

  • The MLR should not be averaged over the “life of the policy” as many companies now do. In order for rebates to work effectively, companies need to meet the MLR requirement in each year of a policy, and if they do not then consumers can expect a rebate the following year.
  • Some insurers would like to have a special consideration or accommodation for their low cost products, e.g., limited-benefit and high-deductible plans and possibly even so-called “mini-med” plans, because, in their view, a high medical loss ratio requirement would discourage insurers from offering such products. Products with lower premiums (made possible by reducing benefits and/or requiring enrollees to pay more out of their own pockets than they would under higher premium products) have a higher percentage of revenue attributable to administrative costs. Because these products shift more of the cost of care from insurers and employers to consumers, they also typically have high profit margins. Insurers should not be given any special consideration in computing the MLRs for such products.
  • The cost of settling claims—considered a loss adjustment expense—must not be included in the MLR numerator used for determining rebates. Expenses related to settling claims are not payments for health services. Including them in the MLR numerator would provide a perverse incentive for insurers to spend more money on denying claims. Although section 2718(a) requires insurers to report their loss adjustment expenses together with incurred claims, it separately requires insurers to report expenditures for reimbursements for clinical services and for activities that improve healthcare quality. Under 2718(b), only the latter two categories of expenses are considered in determining rebates. “Reimbursement for clinical services” clearly does not include loss adjustment expenses.
  • If carriers reclassify expense from the denominator to the numerator, they should be required to restate their MLRs over the previous five years using the new standards and definitions so that customers, regulators and shareholders can see how efficiently the company delivers services compared to other companies using the same standard definitions. [2]

Recommended Levels of Aggregation

Minimum medical loss ratios must be aggregated and reported in a way that benefits consumers. To that end, we recommend 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. For the same reason, we recommend that insurers provide separate medical loss ratio information for the individual, small and large group market segments.

Aggregating this information at too high a level will present consumers with misleading averages of multiple, disparate markets.

Other considerations:

  • If insurers operate under several legal entities in a state, they should not be allowed to combine results. Insurers separated entities for a reason: to limit liabilities. They should not now be able to combine their entities’ MLRs.
  • Medicare Part D and specialized and supplemental products, such as vision only, dental only and Medicare supplement plans should be excluded from loss ratio estimates for more comprehensive products. Additionally, an insurer should not have the flexibility to average its premium equivalents under administrative services only (ASO) contracts.
  • Insurers should not be allowed to pool their experience across different product lines/markets at their own discretion.
  • Insurers should also not be allowed to pool their experience across different states.


Under Section 2718 of the PHS Act, insurers are required to pay rebates to enrollees if their MLR does not meet minimum standards.

The overall rebate amount should be the amount necessary to bring the actual loss ratio up to relevant minimum loss ratio standard. The refund should be made to all policyholders insured under the applicable policy form as of the last day of the experience period at issue. The refund shall include interest at the then current accident and health reserve interest rate established by the National Association of Insurance Commissioners calculated from the last day of the experience period at issue until the date of payment.


Insurance companies can make honest and not-so-honest mistakes in their accounting practices. [3] Consequently, the data on health and administrative spending should be submitted in a form that can be audited. These data should be independently audited at the expense of the insurer and the audited results reported to HHS and the relevant state insurance commissioner. The audit must be conducted in accordance with generally accepted auditing or actuarial standards and shall be signed by a certified public accountant or a member of the American Academy of Actuaries.

Consumers Union is grateful for the opportunity to comment on the future Medical Loss Ratio (MLR) standards, to be established under Section 2718 of the Public Health Service Act (PHS Act).

Respectfully submitted,

DeAnn Friedholm
Director, Health Reform
Consumer Union


[1] With respect to Information technology spending, it may be instructive to consider the Health Information Technology (HIT) “meaningful use” materials here. As these materials demonstrate, while some insurers make huge investments in IT, only a small fraction of that cost is attributable to clinical treatment. The bulk of expenditures go to operations, payments and underwriting functions. These activities should not be counted as “quality improvement”—to the contrary it results in consumers being excluded from coverage or charged more.

[2] There are precedents for requiring such restatements by carriers. It is not at all uncommon for the SEC to require publicly traded companies, including insurers, to restate earnings retrospectively following the discovery or disclosure of information considered material to earnings. Similarly, carriers have restated membership totals after discovering that their previous methods of calculating membership totals were flawed.

[3] During 2009, the Senate Committee on Commerce, Science and Transportation found that Aetna overstated by $4.9 billion how much it spent on patient care for small businesses and that the medical-loss ratio for small firms was 79%, not the 82% Aetna originally reported in regulatory filings.