PPACA, Medical Loss Ratios, and Capitation – a Loop Hole Big Enough to Drive an Armored Truck Through


One of the new health reform provisions in the PPACA regulations is a requirement for health insurers to spend a certain proportion of health insurance premiums on actual medical care, thus limiting to some extent the proportion of these premiums that can be allocated to administrative expenses and profits. This proportion is called the medical loss ratio (MLR), and in the regs the proportion that must be spent on care is 85% or higher in large-group markets and 80% or higher in individual and small-group markets. I believe the impetus for this rule is two fold: 1) to try to get insurers to minimize the costs associated with administration of the plan (so as to maximize their profits within the MLR restriction), and 2) to try to insure that any successful cost-effective care strategies that are adopted go directly to reducing the premium costs for enrollees. Insurers that fail to meet this standard must rebate some premiums back to enrolees. It doesn’t take much savvy to imagine that insurance companies executives would, in response to this reform of their market, launch aggressive advocacy strategies to modify these regulations in order to recoup their potential profit margins and maintain their obscene executive salaries.

Great debates have been sparked at DHHS and at the National Association of Insurance Commissioners over a wide range of MLR issues, especially around what types of activities should be included in the definition of ‘medical services provided to enrollees’ (should nurse advice lines and other ‘cost-containment strategies’ count as care?), whether federal taxes should be factored into or excluded from the calculations, to which types of plans should MLR standards apply (should mini-med plans be included?), and a whole host of other accounting, reporting, and procedural issues. Nothing generates gaming the system in Washington like new federal regulations, and health insurance lobbyists are having a field day. I had to laugh when I read that the former director of the Congressional Budget Office and president of the think tank American Action Forum was quoted as saying: “I was surprised to see the members of Congress try to influence this process.” Really?

In all the fuss, some of which has actually made it into the national news media, there appears to be one particular loophole for insurers that seems to have escaped much attention. This loophole is big enough to drive an armored truck through, on the way to the bank (with a brief stop-over in Wall Street to rack up some leveraged premium on the insurer’s stock price). When health plans, particularly HMOs, capitate medical groups and IPAs to service their enrollees, these plans typically pass, via the per-member-per-month cap payment, not only the risk of paying for care, but also much of the cost for managing the program. Capitated medical groups are often delegated the responsibility for paying non-contracted provider claims, credentialing providers, managing prior authorizations, investing in IT, marketing plans to potential enrollees, and a whole host of other administrative tasks normally performed by the plan. Yet in accounting for administrative overhead to meet the MLR requirements, it appears that these plans will be allowed to shift these administrative costs to their subcontracted medical groups and IPAs and count them as ‘medical services’. What a deal for the plans!

At a recent Department of Managed Health Care meeting in California, a representative of a large capitated medical group described the development of one of the first Accountable Care Organizations (ACOs) in the state, in concert with Blue Cross. When I asked this representative, during the public question period, which of the administrative costs associated with management of the ACO would be attributed to Blue Cross when it came time to calculate the MLRs for the plan; he at first hemmed and hawed, then said that the issue had not been discussed with the plan yet. Really? This far into the planning process, you would think that issue would be pretty high on the list. ACOs are not just going to be Medicare Advantage programs, they are going to evolve into the next iteration of commercial health coverage, and you can bet that many plans will skip right over shared savings and similar strategies and go directly to capitation, because there is nothing better for an insurance company than collecting premiums like a health plan, acting like a broker, and shucking all the risk on to the providers. At this same DMHC hearing, CAL/ACEP testified as to how EMTALA obligated providers were being ripped off by these unregulated subcontracting medical groups and IPAs, and left holding bags full of unpaid claims when these risk bearing organizations go belly up. The HMOs, of course, often respectfully decline to take responsibility for these unpaid claims. Remember the term ‘negligent delegation’ when an ACO near you goes bankrupt – it may come in handy.

But I digress. My point here is that, for some reason, DHHS seems to have been deterred from closing this ‘capitation-delegation model’ loophole in the MLR rules, and we can only hope they catch on before the rules are finalized.

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