Source: https://issuu.com/actuarypdf/docs/letter_medicallossratio_provisionsh_50b3c8ad25903c
Timestamp: 2017-06-25 21:49:13
Document Index: 21986904

Matched Legal Cases: ['§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§1562', '§2718', '§2718', '§2718', '§1103', '§2718', '§1302', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§1312', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§1341', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718', '§2718']

Letter_MedicalLossRatio_ProvisionsHealthReformLaw_NAIC_200410 by Lou Baccam - issuu
To:Lou Felice
Chair, Health Care Reform Solvency Impact Subgroup, NAIC
Chair, Accident & Health Working Group, NAICFrom:Rowen Bell
Chair, Medical Loss Ratio Regulation Work GroupRe:Considerations Relating to PPACA Medical Loss Ratio Provisions (§2718)Dear Lou and Steve:
The Health Practice Council of the American Academy of Actuaries1 (Academy) has recently
formed several work groups to focus on specific implementation issues relating to the passage
last month of the Patient Protection and Affordable Care Act (PPACA). The work group that I
am chairing has as its focus the provisions added by PPACA, via the creation of §2718 of the
Public Health Service Act (PHSA), regarding medical loss ratio (MLR) reporting by health
insurance issuers and the potential issuance of rebates by health insurance issuers.
Our work group is in the process of analyzing §2718, as well as preparing a response to the
Request For Comments on §2718 that was issued by the U. S. Departments of Treasury, Labor,
and Health and Human Services and published in the Federal Register on April 14, 2010. In our
group’s initial conversations, we have quickly reached the conclusion that there are a number of
important questions that need to be addressed. In light of not only the National Association of
Insurance Commissioners’ (NAIC) statutory role stipulated by the PPACA as an advisor to the
federal government regarding the implementation of §2718, but also the long history of
cooperation between the Academy and the NAIC on actuarial regulation issues, we wanted to
reach out to your respective groups at an early stage of the PPACA implementation process in
order to help frame issues that we believe are particularly important to your upcoming work.
In this letter, we identify eight key questions regarding §2718. While these are not the only
questions that we have about the statute, we have singled out these questions because we believe
they are fundamental to the NAIC charge. Understanding what the answers to these eight1The American Academy of Actuaries is a 16,000-member professional association whose mission is to serve the
also sets qualification, practice, and professionalism standards for actuaries in the United States.questions are will aid efforts in developing implementation approaches for §2718. Consequently,
we would encourage you to explore these eight questions at an early stage of your work.
In addition to the eight questions posed in this initial letter, our group is also in the process of
developing a document that will address some time-sensitive issues relating to the application of
§2718 to the individual medical insurance market. We anticipate sharing that document with you
as soon as it is ready, hopefully within the next few days.
#1.What types of health insurance products are subject to the scope of the §2718 MLR
reporting and rebate requirements?§2718 uses such phrases as “health insurance issuer” and “group or individual health insurance
coverage.” Those terms, however, are not defined within PPACA itself. This has created
uncertainty among some observers as to precisely which types of health insurance products are
supposed to be included in the scope of the §2718 MLR reporting and rebate requirements. This
is a statutory construction question requiring formal regulatory interpretation, not an actuarial or
financial question. However, we raise it here because understanding the answer to the question
may be of fundamental importance in thinking about how to construct the §2718 reporting
With many aspects of PPACA still being interpreted, some of our members have received
information arguing that those health insurance products that are considered “excepted benefits”
under HIPAA are excluded from the scope of the §2718 requirements. The rationale advanced
with this argument rests on PPACA §1562(a)(3), which amends an existing section of PHSA
indicating which portions of Title XXVII Part A of PHSA (the part in which new §2718 resides)
do not apply to excepted benefits. Again, however, we observe that this is a question requiring
regulatory interpretation. Note that the HIPAA definition of “excepted benefits” could include
many types of health insurance that carriers filing the NAIC Health Annual Statement would
report in columns other than the Comprehensive (Hospital & Medical) column of the Analysis of
Operations, such as Medicare Supplement policies, dental-only policies, vision-only policies,
hospital indemnity, long-term care, and disability income.
At the same time, there are other types of health insurance not reported in the Comprehensive
(Hospital & Medical) column that do not appear to fall under the definition of HIPAA “excepted
benefits,” such as the Federal Employees Health Benefit Program, Medicare Advantage,2
standalone Medicare prescription drug plans, and Medicaid risk. Do any or all of these types of
policies fall under the scope of §2718? What about specific and aggregate stop loss insurance
policies issued to group benefit plans that self-insure their benefits? Does the question of whether
or not a stop loss policy falls under the scope of §2718 depend in any way on the level at which
the specific attachment point and/or the aggregate protection point is set? (Similar questions also
exist for minimum premium plans.) Also, is it possible that there are types of contracts that are
2We also note that, separately, §1103 of the Health Care and Education Reconciliation Act of 2010 (HCERA)
amends Title XVIII of the Social Security Act in order to impose a minimum loss ratio requirement for Medicare
Advantage plans, effective starting in 2014.2accounted for as “uninsured plans” under the NAIC definitions in SSAP 47, but that would be
considered for federal regulatory purposes as “health insurance coverage” under PHSA and
hence properly included in the scope of §2718? Finally, will future “non-qualified”
comprehensive plans (i.e., plans that do not comply with the “Essential Health Benefits
Requirements” of PPACA §1302) be included in the scope of §2718?
In summary, with respect to scope: Achieving clarity at an early stage as to which types of health
products are included and excluded from the scope of the §2718 requirements would be
beneficial to all interested parties, and in particular might help the NAIC formulate appropriate
recommendations around §2718 reporting.
#2.Is there value in construing §2718 so as to create a single cohesive form of MLR
reporting for both §2718(a) and §2718(b), or is it necessary to construe §2718 as
creating two distinct forms of MLR reporting that may not be readily reconcilable
with one another?The first sentence of §2718(a) creates a requirement for health insurance issuers to report “the
ratio of the incurred loss (or incurred claims) plus the loss adjustment expense (or [sic]3 change
in contract reserves) to earned premiums.” For clarity, we will refer to an MLR computed under
The remaining portion of §2718(a) specifies that the reporting requirement also includes separate
In §2718(a)(1), the ratio of expenditures on “reimbursement for clinical services provided
Federal and State taxes and licensing or regulatory fees” to total premium revenue.Later, §2718(b) clarifies that the relevant MLR for purposes of calculating rebates is the sum of
“reimbursement on clinical services provided to enrollees” plus “activities that improve health
care quality” to “total premium revenue.”4 For clarity, we will refer to an MLR computed under
this definition as being the §2718(b) MLR.3The use of “or” in the statutory language, rather than “and”, is confusing. As a matter of theory, the desirability of
including loss adjustment expenses in the numerator of an MLR calculation has no relationship to whether or not the
underlying insurance contract is of a type where contract reserves are appropriate.
§2718(b) makes it clear that, for purposes of determining whether rebates are required, the “total premium
revenue” used in calculating the MLR shall exclude a number of items, such as federal and state taxes and fees. We
assume here that the use of the phrase “total premium revenue” in §2718(a) was intended to be consistent with its
use in §2718(b), i.e., with the exclusions defined in §2718(b). However, this is yet another area of potential
ambiguity with the statute as written.3With this as background, the question we are posing here is whether it would be desirable to
view the §2718(a) MLR and §2718(b) MLR as being the same quantity, or whether it is instead
necessary to view them as being different quantities?
The answer to this question seems relevant to understanding not only the scope of the §2718
reporting requirements, but also understanding which terms need to be defined under the §2718
regulations. If it is decided that the §2718(a) MLR and §2718(b) MLR are intended to be
consistent, then that disclosure might help clarify the issues relating to appropriate numerator and
denominator definitions. If the §2718(a) MLR and §2718(b) MLR are instead separate concepts,
then there will be a need to establish separate numerator and denominator definitions for both
concepts and address whether or not reconciliation of differences will be necessary.
Without commenting in full detail at this time on the pros or cons of having a single cohesive
form of §2718 reporting, we note that if there is not a single cohesive form of reporting, then the
mere existence of differences between the §2718(a) MLR and the §2718(b) MLR could lead to
significant confusion among stakeholders.
#3.Is there discretion in rulemaking to define whether the §2718 MLR reporting and
rebate requirements apply on a nationwide basis, or on a more granular level such
as on a state-by-state basis?§2718 may not clearly address whether the reporting rebate requirements apply to a health
insurance issuer’s entire geographic span of business, or whether they apply at some other level
such as a state-by-state basis. §2718(b)(1)(A)(ii) does indicate that, with respect to a health
insurance issuer offering coverage in the individual market or small group market, the 80 percent
MLR threshold may be increased to a “higher percentage as a State may by regulation
determine.” The possibility that different states might set different MLR thresholds raises
questions as to the intended geographic level of the §2718 requirements.
Getting clarity on this point is relevant to designing the §2718 reporting mechanism. For
example, if it is established that the reporting was not intended to be performed on a state-bystate basis, or alternatively that all states using the federal default threshold of 80 percent should
be grouped together while only those states using higher thresholds need to be presented
separately, then there would be implications as to the geographic granularity of the data that
needs to be included in §2718 reporting.
#4.Is there discretion in rulemaking to define whether multiple related legal entities
serving the same geographic market may be consolidated under some circumstances
for §2718 purposes, or is it necessary to construe §2718 as applying on an entity-byentity basis?While NAIC financial reporting is performed at the legal entity level, there are some
circumstances in state insurance rate regulation where related legal entities serving the same
geographic market are treated as if they were a single entity.5 The reality is that a health insurer
5For instance, see Q5 of the Academy’s December 2009 Practice Note, “Actuarial Certification of Restrictions
Relating to Premium Rates in the Small Group Market” (http://www.actuary.org/pdf/health/smallgroup_dec09.pdf).4will frequently offer both PPO and HMO coverage to the same group, but where the PPO
coverage is issued by one legal entity and the HMO coverage by a separate legal entity. This
illustrates the need for, in some circumstances, applying the §2718 requirements in a manner that
combines business across multiple legal entities. However, it is not immediately clear that the
statute permits such flexibility, given the reference to the §2718 requirements as applying to a
“health insurance issuer” (a term defined within PHSA).
#5.To which business does the 80 percent MLR threshold in §2718(b)(1)(A)(ii) apply?§2718(b)(1)(A)(ii) states that the MLR threshold relevant for determining rebates is 80 percent
instead of 85 percent, “with respect to a health insurance issuer offering coverage in the
individual market or small group market.” Members of our group are currently aware of four
alternative interpretations of what this is intended to mean:
(a) If a health insurance issuer offers coverage in the individual or small group markets, then
80 percent is the MLR threshold that applies to the sum of all of the issuer’s business
falling under the scope of §2718 (i.e., individual and/or small group and/or large group).
The 85 percent MLR threshold mentioned in §2718(b)(1)(A)(i) would only apply with
respect to an issuer who does not happen to offer coverage in either the individual or
(b) If a health insurance issuer offers coverage in the large group market, then 85 percent is
the MLR threshold that applies to the sum of all of the issuer’s business falling under the
scope of §2718 (i.e., individual and/or small group and/or large group). The 80 percent
MLR threshold mentioned in §2718(b)(1)(A)(i) would only apply with respect to an
issuer who only offers coverage in the individual and/or small group markets.
(c) If a health insurance issuer offers coverage in the individual or small group markets, then
80 percent is the MLR threshold that applies to the sum of the issuer’s individual and
small group business combined. The 85 percent MLR threshold from §2718(b)(1)(A)(i)
applies to the sum of the issuer’s large group business.
(d) If a health insurance issuer offers coverage in the individual or small group markets, then
80 percent is the MLR threshold that applies to the sum of the issuer’s individual
business, and also the threshold that applies to the sum of its small group business, but in
two separate calculations (i.e., not a single calculation as in (c) spanning individual and
small group combined). The 85 percent MLR threshold from §2718(b)(1)(A)(i) applies to
the sum of the issuer’s large group business.
Understanding which of these interpretations is correct will be very germane to constructing the
appropriate §2718 reporting mechanism. For instance, if interpretation (a) were correct, then
there may be no need for the §2718 reporting to make any effort to split an issuer’s data into
individual versus small group versus large group; whereas if interpretation (d) were correct, such
a split would be necessary.5We observe that there is some interplay between the question raised here and the question raised
in #3 above regarding nationwide versus state-by-state application of reporting. For instance,
suppose it were determined here that interpretation (a) was correct, meaning that the issuer’s
presence in or absence from the individual or small group market is relevant for determining the
MLR threshold applicable to its large group business. There might be some states in which an
issuer offers coverage in the large group market as well as in the individual or small group
markets, and other states in which an issuer offers coverage in the large group market only; this
could complicate the determination of which threshold is applicable to the issuer. As another
example, PPACA §1312(c)(3) gives a state the ability to merge its individual and small group
insurance markets. If it were determined that interpretation (d) were correct but that the reporting
should be done on a nationwide basis, then the existence of states in which the individual and
small group markets have been merged could be a complication.
#6.The §2718 MLR reporting and rebate requirements use the phrase “with respect to
each plan year.” What are the implications of “plan year” here?The use of the phrase “plan year” in §2718 raises the possibility that the intended reporting basis
was an incurral-year basis or policy-year basis, rather than the calendar-year basis inherent in
existing NAIC financial reporting. The issue being broached here is whether the set of premiums
& claims that is supposed to be included in an issuer’s §2718 reporting is different, in a temporal
sense, from the set of premiums and claims included in an issuer’s NAIC financial reporting.
This in turn raises questions as to whether or not there should be a formal tie between existing
NAIC financial reporting and §2718 reporting; possibly, the two types of reporting are intending
to measure different things.
We also note that the term “plan year” appears not just in the §2718 requirements, but
throughout PPACA. As such, decisions about what “plan year” means for purposes of §2718
reporting cannot be made in a vacuum.
An illustration might clarify the issue we are raising here. Consider an insurer’s financial
reporting as it would be reported in an NAIC Annual Statement for the year ending December
31, 2011. The premium and claim values included in that 2011 calendar year financial reporting
would typically represent a mixture of the following types of information:6
(a) Premiums earned and claims incurred in 2011 for policies issued or renewed in 2011;
(b) Premiums earned and claims incurred in 2011 for policies issued or renewed in 2010;
(c) Premiums and claims recognized in the 2011 financial statements but attributable to
the December 31, 2010 financial statements and the amounts paid in 2011 relating to
those accruals (plus the remaining accruals in the December 31, 2011 financial
statements attributable to years prior to 2011).
That 2011 calendar year financial reporting would not include the following information:6For purposes of this depiction, we have made the simplifying assumption that all policies have a 12-month policy
year, and hence that all premiums due in 2011 would relate to policies issued or renewed in either 2011 or 2010.6(d) Premiums earned and claims incurred in 2012 for policies issued or renewed in 2011.
By contrast, there could be two alternative reporting approaches:
Reporting for the 2011 incurral year (i.e., for claims incurred in 2011). This would
include (a) and (b), but exclude (c) and (d).Reporting for the 2011 policy year (i.e., for policies issued or renewed in 2011). This
would include (a) and (d), but exclude (b) and (c).A somewhat related issue is the question of what relationship should exist between the
measurement date for the §2718 reporting and rebate requirements and the time period being
measured (regardless of whether that time period is a calendar year or an incurral year or a policy
year). In NAIC financial reporting, the measurement date coincides with the end of the calendar
year being measured; this requires significant use of estimates with respect to both incurred
claims and earned premium for the calendar year. The longer the delay between the end of the
time period being measured and the measurement date, the less reliance needs to be placed on
estimates in the reporting process.
#7.How do considerations relative to statistical fluctuation and credibility need to be
addressed in responding to the above questions?By its nature, medical insurance is subject to fluctuations in experience from period to period.
Some years have higher loss experience than other years. Even large blocks of business will
undergo fluctuations in claims experience, which may point to consideration of the use of multiyear experience, as in §2718(b)(1)(B)(ii), for determining refunds.
Of particular importance is the consideration of statistical fluctuations due to the credibility of
the block of business being reported. The experience of a small block of business, whether it is a
subset of a larger line of health business (e.g., a very small individual medical line in a company
with a large volume of group business) or constitutes the entire health insurance line of a
company in a particular state or in total, may not be statistically credible. The greater the
granularity at which the §2718 requirements are deemed to apply, the lesser the likelihood that
the reported blocks of business are fully credible. Should certain exception guidelines be
developed to deal with non-credible results in addressing the refund formula and the questions
posed above? We note that currently the statistical credibility of a block of Medicare Supplement
business is considered in the refund formula for such business via the inclusion of the “tolerance
permitted” component of the formula.
#8.Is there discretion in rulemaking to determine whether the §2718 MLR reporting
and rebate requirements apply only to a health insurance issuer’s directly-issued
business, or to its business net of reinsurance assumed and/or reinsurance ceded?While §2718 does mention the word “reinsurance,” at least arguably that reference is intended to
specifically apply to the reinsurance program established in PPACA §1341, “Transitional
Reinsurance Program for Individual and Small Group Markets in Each State,” and not7necessarily to traditional reinsurance treaties entered into among insurance carriers. In light of
the fact that the §2718 requirements are stated as applying to “a health insurance issuer offering
group or individual health insurance coverage,” it is reasonable to ask whether the statute’s
requirements need to be construed as applying only to an issuer of insurance policies with
respect to its directly-written premiums, as opposed to applying to a company’s net-ofreinsurance premiums (without regard to whether or not it directly issues health insurance
coverage). This point would appear to be relevant to the NAIC as you deliberate the appropriate
degree of alignment between §2718 reporting mechanisms and existing NAIC financial
reporting, given that existing NAIC financial reporting emphasizes a net-of-reinsurance
Without commenting in full detail at this time on the pros and cons of net-of-reinsurance
reporting under §2718, we observe that if all reinsurance agreements are taken into account in
the §2718 requirements, then it raises the possibility that a health insurance issuer could avoid
paying rebates on its policies by using reinsurance to cede risk to a related entity that does not
itself issue health insurance and hence may not be technically subject to the requirements of
§2718. On the other hand, if no reinsurance agreements are taken into account in the §2718
requirements, then that may unfairly treat smaller health insurance issuers, who are more likely
to need to use reinsurance against catastrophic claims as a risk management vehicle.
We sincerely hope that our articulation of these questions is helpful to you as the NAIC
commences its work on §2718 implementation issues, and we look forward to providing you
with further input soon. If you have any immediate questions regarding this letter, please contact
Heather Jerbi, the Academy’s Senior Federal Health Policy Analyst, at jerbi@actuary.org or
202.223.8196.Sincerely yours,Rowen B. Bell, FSA, MAAA
Chairperson, Medical Loss Ratio Regulation Work Group
American Academy of ActuariesCc:Jay Angoff, Director, Office of Consumer Information and Insurance Oversight, HHS
Richard Kronick, Deputy Assistant Secretary, Health Policy, HHS8All pages:12345678InfoRead laterLikeShareDownloadMoreLetter_MedicalLossRatio_ProvisionsHealthReformLaw_NAIC_200410 Published on Dec 11, 2012 actuarypdfFollowRead moreRead moreSimilar toPopular nowJust for youGo explore