Under the PPACA MLR requirements, private insurers must report annually to CMS their MLRs by each state and insurance market in which they operate, as well as the dollar amounts for the components that make up their MLRs, such as premiums. Insurers must pay rebates when their MLRs do not meet or exceed the minimum applicable PPACA MLR standards. Agents and brokers sell insurers’ plans to individuals and employers and assist individuals and employers in various ways. PPACA requires that private insurers offering group or individual health insurance coverage report annually on the various components that are used to calculate their PPACA MLRs, and each of these components must be reported by state and by market. Private insurers first reported this information in 2012, based on their 2011 experience. The markets include large group, small group, and individual. Large and small group employers are defined by the number of their employees. Prior to PPACA, a small employer was defined in federal law as having a maximum of 50 employees. From the time PPACA was passed in 2010 until 2016, PPACA gives states the option of continuing to define a small group employer as having 50 or fewer employees, but starting in 2016, they must define small employers as having from 1 to 100 employees.The individual market includes policies sold by insurers directly to individuals. Insurers report their MLR data to CMS by entering information on a standardized form that includes multiple data fields that make up the MLR and rebate formulas. The MLR data that insurers report to CMS include the following components, as required by law. Medical claims. These include claims paid and incurred for clinical services and supplies provided to enrollees by physicians and other clinical providers. Expenses for quality improvement (QI) activities. These include expenses for activities that are designed to increase the likelihood of desired health outcomes in ways that can be objectively measured. The activities must be primarily designed to (1) improve health outcomes; (2) prevent hospital readmissions; (3) improve patient safety, reduce medical errors, and lower infection and mortality rates; or (4) implement, promote and increase wellness and health activities. Insurers are also allowed to include expenses for health information technology required to accomplish these activities as well as a percentage of their expenses for converting disease classification codes. Premiums. These include the sum of all funds paid by an enrollee and employer, if applicable, as a condition of receiving coverage from the insurer. These also include any fees or other contributions associated with the health plan. Federal and state taxes and licensing or regulatory fees. These include federal income taxes, assessments, state insurance, premium and other taxes, and regulatory authority licenses and fees. Federal income taxes on investment income and capital gains are excluded. Non-claims costs. These include all other insurer expenses—those beyond medical claims, expenses for QI activities, and federal and state taxes and licensing or regulatory fees. CMS defines non-claims costs for the following categories: (1) agents’ and brokers’ fees and commissions; (2) cost containment expenses, which reduce the number of health services provided or the costs of such services, but are not related to an activity to improve health care quality; (3) claims adjustment expenses, such as office maintenance and supplies costs, not classified as cost containment expenses; (4) salaries and benefits that insurers pay to their employees who sell their plans; (5) other taxes that may not be excluded from premium revenue; (6) other general and administrative expenses, such as salaries and advertising; and (7) community benefit expenditures, which include expenses for activities such as health educational campaigns that are available broadly to the public. The remaining amount of premiums that an insurer does not spend on the components of medical claims, QI activities, taxes and fees, and non- claims costs, will be referred to as the insurer’s “premium surplus” in this report. Premium surplus includes profit and other reserved capital. The PPACA MLR is generally calculated by dividing (a) the sum of an insurer’s medical claims and expenses for QI activities (the formula numerator) by (b) the insurer’s premiums, after excluding from them the amount of insurer’s federal and state taxes and licensing or regulatory fees (the formula denominator). (See fig. 1.) Some insurers, such as those with a small number of enrollees, are permitted certain adjustments to their MLRs. These adjustments are referred to as credibility adjustments, and they are added to, and thus Credibility adjustments are provided to increase, the insurer’s MLR.address the unreliability associated with calculating an MLR based on a small number of enrollees. Insurers with a small number of enrollees calculated their MLRs for 2012 based on their 2011 and 2012 experience combined. All insurers will calculate their MLRs for their experience in 2013 and subsequent years based on data from a 3-year period. That is, insurers will add their data for the year for which the MLR is being calculated to their MLR data for the 2 prior years. For each insurer, separate MLRs are calculated for each state and market combination in which it does business and each MLR is used to determine whether an insurer must pay rebates. Insurers must meet a minimum PPACA MLR standard, generally 80 percent for the individual and small group markets and 85 percent for the large group market, with some exceptions. Specifically, the applicable PPACA minimum MLR standard is based on one of the following: 85 percent in the large group market, 80 percent in the small group market, and 80 percent in the individual market; a higher MLR standard if specified by law in the state in which the a Department of Health and Human Services (HHS)-approved, adjusted MLR standard for a particular state’s individual market. When an insurer’s PPACA MLR is lower than the applicable PPACA MLR standard, the insurer must pay a rebate. The rebate amount is based on the PPACA MLR rebate formula, as shown in figure 2. The difference between the applicable PPACA MLR standard and the insurer’s MLR is calculated and this difference is multiplied by the insurer’s premiums, after federal and state taxes and licensing or regulatory fees are removed. There are different ways in which rebates can be paid out by insurers that depend, in part, on whether rebates are associated with individual or group market plans. In general, insurers can choose to provide rebates in the form of a lump-sum payment or as a premium credit for the following MLR year. Insurers in the individual market must provide rebates to their enrollees while insurers in the small and large group markets may meet this obligation by providing rebates to group policyholders, for example, employers. In turn, group policyholders are responsible for allocating the amount of rebate that is proportionate to the total amount of premium paid by enrollees and may retain part of the rebate based on the amount of premium that they contributed. Agents and brokers sell plans for insurers and perform a variety of functions on behalf of individuals and employers. According to the Bureau of Labor Statistics, in 2012 there were approximately 337,000 jobs held by insurance sales agents, which include agents and brokers working independently as well as those who are employed by an insurer. Agents and brokers provide assistance to individuals and employers in choosing and enrolling in plans. For example, they may assess an individual’s insurance needs and describe the characteristics of different plans that best meet those needs. Agents and brokers may also provide assistance after an individual or employee has enrolled in a plan, for example, by helping enrollees communicate with health plans in trying to resolve disputed medical claims or adding a new family member to a current plan. Insurers who use agents and brokers to sell their plans typically pay them based on a percentage of the plan’s premium or as a flat fee, for example, determined by the number of enrollees in the plan. More than three quarters of insurers met or exceeded the minimum PPACA MLR standards in 2011 and in 2012, the median PPACA MLRs for all insurers were about 88 percent in each year, and there was variation across insurance markets. Insurers’ spending on enrollees’ medical claims and non-claims costs as a percentage of premiums varied across insurance markets in 2011 and 2012. Most insurers met or exceeded the PPACA MLR standards established for the markets and state in which they operated, but group market insurers were more likely to meet or exceed the standards than individual In 2011, about 76 percent of insurers met or exceeded market insurers.the minimum PPACA MLR standards and, in 2012, 79 percent of insurers met or exceeded the standards. As an example of variation across the markets, in 2012 about 86 percent of insurers in the large group market and 81 percent of insurers in the small group market met or exceeded the MLR standards, compared to 70 percent of individual market insurers. The median PPACA MLRs in 2011 and in 2012 among all insurers were about 88 percent, and the median for the large group market was higher than that of the small group and individual markets. For example, in 2012 the median PPACA MLR for insurers in the large group market was about 91 percent compared to 86 percent in the individual market and 85 percent in the small group market. (See table 1.) We observed that insurers’ median PPACA MLRs slightly increased from 2011 to 2012 and the percent of all insurers meeting or exceeding the standards increased by about 3 percentage points. However, these 2 years of data may not reflect future patterns in MLRs. (See app. I for a listing of the PPACA MLRs in each state for 2011 and 2012.) In 2011 and 2012, the percentage of net premiums that insurers spent on their enrollees’ medical claims varied across insurance markets. Specifically, insurers in the large group market spent a higher percent of their net premiums on medical claims in both years compared to insurers in the small group and individual markets. For example, in 2012 insurers in the large group market spent about 89 percent of their net premiums on medical claims compared to the 85 percent that individual market insurers spent and the 84 percent that small group market insurers spent. Our analysis of the data showed that for the other components of the MLR formula—non-claims costs, premium surplus and QI expenses— there was more of a mix in variation across markets. We found that insurers’ spending on non-claims costs as a percent of their net premiums varied by insurance market, with insurers in the individual and small group markets spending more than insurers in the large group market on non-claims costs in 2011 and in 2012. For example, in 2012 insurers in the individual market spent about 16 percent of their net premiums on non-claims costs compared to the 7 percent that large group insurers spent. With regard to premium surplus, our analysis showed that there was also variation across the insurance markets in 2011 and in 2012, with insurers in the individual market having less premium surplus than insurers in both the small and large group markets. An insurer’s premium surplus includes profit and other reserved capital but does not account for any PPACA MLR rebates the insurer may have to pay to enrollees. Insurers’ spending on QI expenses did not vary across markets as insurers in each market spent about 1 percent of net premiums on QI expenses in 2011 and in 2012. (See table 2.) While our analysis showed that from 2011 to 2012 there were some shifts in the percentage of spending on these different components among the different markets and among all insurers, these two years of data may not reflect future patterns in spending. (See app. II for a listing of insurers’ spending on the MLR components by state for 2011 and 2012.) Three of the six non-claims cost categories generally comprised the largest share of insurers’ spending, and there was some variation across the markets in spending on each of these three categories. The three categories that made up the largest share of insurers’ spending on non- claims costs were agents’ and brokers’ fees and commissions, other general expenses, and other claims adjustment expenses. We found that insurers’ spending on these three categories of non-claims costs varied by market. Insurers in the small group market spent a higher share on agents’ and brokers’ fees and commissions than insurers in the individual and large group markets. For example, in 2012 small group insurers spent about 42 percent of their total non-claims costs on agents’ and brokers’ fees and commissions compared to the 23 percent that large group insurers spent. In comparison, insurers in the individual and large group markets spent a higher share of non-claims costs than insurers in the small market on other general expenses, such as salaries, rent, and travel; and on other claims adjustment expenses including office and computer maintenance. (See table 3.) Insurers paid about $1.1 billion in total rebates to enrollees and policyholders who paid premiums in 2011, the first year that insurers were subject to the PPACA MLR requirements, and about $520 million in rebates in 2012. These amounts would each have decreased by about 75 percent had agents’ and brokers’ fees and commissions been excluded from the MLR and rebate calculations, assuming insurers made no other changes that could affect their MLRs. Of the $1.1 billion in total rebates that insurers paid in 2011, insurers in the large group market paid 37 percent of this total, or $405 million in rebates, the largest amount across the three insurance markets. Of the $520 million in total rebates that insurers paid in 2012, insurers in the small group market paid the largest amount in rebates (about $207 million). (See app. III for a listing of the rebate amounts that insurers paid in each state for 2011 and 2012.) We calculated the average rebate amount by dividing the total amount of rebates insurers paid by the total number of individuals (including dependents) enrolled in their plans. group market. (See table 4.) However, these two years of data may not reflect future rebate patterns. Our analysis of the data showed that rebates would have been reduced by about 75 percent if agents’ and brokers’ fees and commissions were excluded from the MLR and rebate calculations. Specifically, we found that the rebates paid by insurers to enrollees and policyholders who paid premiums in 2011 would have fallen from $1.1 billion to about $272 million, and in 2012 would have fallen from $520 million to about $135 million. There was variation in the impact of the recalculated MLRs across the three markets. For example, in both years, the differences between the actual and recalculated rebate amounts were greater, on a percentage basis, in the small group market compared to the individual market. (See table 5.) These rebate calculations are based on the assumption that insurers did not make other changes during this time that would have affected their MLRs. However, if the formula had been different, insurers might have made different business decisions in those years. (See app. IV for a listing of the rebate amounts that insurers would have paid with agents’ and brokers’ commissions and fees excluded from the MLRs in each state for 2011 and 2012.) All eight insurers that we interviewed reported that they increased their premium rates since 2011 due to a variety of factors, and most (five of the eight) reported that the factors were largely unrelated to PPACA MLR requirements. Key factors cited for making premium changes included: trends in medical claims, competition with other insurers, the PPACA requirements that insurers offer their plans on a guaranteed-issue basis as well as provide essential health benefits in their plans, and the per- capita fees associated with PPACA’s reinsurance program.example, one insurer that has increased premiums in the individual market since 2011 stated that its increased premiums were due in part to the increased costs that the insurer told us was associated with it For providing coverage on a guaranteed-issue basis, as mandated under PPACA. Three of the eight insurers reported that the PPACA MLR requirements were one factor among a variety of factors that influenced their decisions regarding premium rates, and two of these insurers told us that the MLR requirements have generally moderated their premium increases. For example, one insurer that has increased its premium rates in the individual market since 2011 stated that without the PPACA MLR requirements in place the insurer would have likely increased rates further. Another insurer explained that if it does not meet the PPACA MLR standards in its planning, it will adjust its premium rate increases to avoid the associated expense and administrative work required to issue rebates to enrollees. We asked insurers about their business practices from 2011, when the PPACA MLR requirements took effect, to the present. This time period is broader than the period for which we analyzed MLR data. non-claims costs as well as offer more competitive premium rates for their plans. All eight insurers we interviewed told us that the PPACA MLR requirements have not affected where they do business and have had no effect, or a very limited effect, on their spending on QI activities since 2011. Two of the eight insurers we interviewed stated that they exited certain insurance markets since the PPACA MLR requirements began, but they did not attribute those decisions to the MLR requirements. For example, one insurer who operated in all 50 states told us that it left the individual market in three states in 2014, in part because of its concerns in each market over maintaining a sufficient network of providers and being able to provide affordable coverage. The insurer further explained that a low number of enrollees in each market contributed to its decisions to no longer operate in the three states. None of the insurers we interviewed reported that the PPACA MLR requirements have generally influenced their spending on QI activities since 2011, and all eight insurers reported other influencing factors, such as customer and employer demand for QI programs, competition among insurers, and the goal of improving enrollees’ health outcomes, which in turn could lower the use and costs of health care services. Five of the eight insurers we interviewed also commented that the 2013 PPACA MLR calculation, which is based on a 3-year period including 2013 and the prior 2 years, will likely reduce some of the effects in the MLR formula of year-to-year variability in enrollees’ medical claims. Variability in medical claims occurs when actual and expected medical claims differ, and one source of such variability is the effect of large claims. One insurer, who paid rebates in 2011, noted that it would not have owed rebates had the MLR formula been based on 3 years of insurers’ experience. In comparison, another insurer told us that it will likely owe rebates for 2013 because the MLR data it reported in 2011 and 2012 will be averaged into 2013. The insurer added that over time, however, it believes the 3-year MLR formula should be beneficial for the insurer by reducing the likelihood of owing rebates. We provided a draft of this product to HHS for comment. HHS responded that it had no general or technical comments. We are sending copies of this report to the Secretary of Health and Human Services and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or DickenJ@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. This appendix presents information on insurers’ median PPACA medical loss ratios by state and insurance market for 2011 (see table 6) and for 2012 (see table7). This appendix presents information on insurers’ spending as a percent of their net premiums, by state for all markets combined for 2011 (see table 8) and for 2012 (see table 9). This appendix presents information on the total amount of PPACA medical loss ratio rebates that insurers paid to enrollees and policyholders who paid premiums, by state and insurance market for 2011 (see table 10) and for 2012 (see table 11). This appendix presents information on the amount of rebates that insurers would have paid to enrollees and policyholders who paid premiums with agents’ and brokers’ commissions and fees excluded from the PPACA medical loss ratio and rebate calculations (absent other changes in business practices), compared to the actual amounts that insurers paid, by state for 2011 (see table 12) and for 2012 (see table 13). In addition to the contact named above, Gerardine Brennan, Assistant Director; George Bogart; Romonda McKinney Bumpus; Pamela Dooley; Julianne Flowers; and Laurie Pachter made key contributions to this report.

Summary: Private insurers are required to meet minimum PPACA MLR standards— expressed as the percent of premium dollars spent on patient care and related activities—and beginning in 2011 they must pay rebates back to enrollees and policyholders who paid premiums if they do not meet these standards. GAO was asked to review the effects of the PPACA MLR requirements on insurers and enrollees and how rebates would change if agent and broker payments were excluded from the MLR formula. This report examines (1) the extent to which insurers met the PPACA MLR standards, and how much they spent on the MLR components of claims, quality improvement activities, and non-claims costs; (2) the amount of rebates insurers paid and how this amount would have changed with agents' and brokers' commissions and fees excluded from the MLR; and (3) the perspectives of insurers on the effects of the MLR requirements on their business practices. To do this work, GAO analyzed the MLR data that insurers reported to CMS for 2011 and 2012 (the most recent data available) at the national level for each insurance market—large group, small group, and individual. GAO also interviewed eight insurers, selected based on variation in their size, concentration of business in the individual market, geography, whether they paid rebates, and profit status. In 2012 the number of enrollees covered by these insurers ranged from about 70,000 to 7 million. GAO's finding on insurers' perspectives is limited to those insurers interviewed and is not representative of the perspectives across all insurers reporting MLR data. The Patient Protection and Affordable Care Act (PPACA) established federal minimum medical loss ratio (MLR) standards for the percentage of premiums private insurers must spend on their enrollees' medical care claims and activities to improve health care quality, as opposed to what they spend on administrative (“non-claims”) costs. Insurers report to the Centers for Medicare & Medicaid Services (CMS) annually on their PPACA MLRs. More than three quarters of insurers met or exceeded the standards in 2011 and in 2012, and the median MLRs among all insurers were 88 percent. Insurers' MLRs and their spending on claims and non-claims costs varied across different insurance markets. Specifically, insurers in the large group market had higher median MLRs and spent a higher share of their premiums on enrollees' claims and less on non-claims costs, compared to insurers in the individual and small group markets. Insurers that did not meet or exceed the PPACA MLR standards in 2011 and 2012 paid rebates in the amounts of $1.1 billion and $520 million (respectively) back to enrollees and policyholders who paid premiums in those years. These amounts would have decreased by about 75 percent had the commissions and fees insurers paid to agents and brokers been excluded from the MLRs. Agents and brokers sell insurance products and provide various services to consumers and groups related to their insurance needs and the commissions and fees charged for these services are included in the MLRs. Insurers in the large group market paid the highest rebate amount ($405 million) across insurance markets in 2011 and insurers in the small group market paid the highest amount ($207 million) in 2012. Insurers in the individual market were more likely to pay rebates than insurers in the small and large group markets. GAO found that rebates would have fallen from $1.1 billion to $272 million in 2011 if the commissions and fees insurers paid to agents and brokers had been excluded from the MLRs, and rebates would have similarly fallen from $520 million to $135 million in 2012. GAO's calculations assumed that insurers did not make other changes in their business practices in response to a different method for calculating MLRs. GAO found that most of the eight insurers it interviewed reported that factors other than the PPACA MLR requirements affected their business practices since 2011. All eight insurers reported that they increased their premium rates since 2011 and that they based these decisions on a variety of factors, such as trends in medical care claims, competition with other insurers, and other requirements. Three of the eight insurers stated that the MLR requirements were one among several factors that influenced their decisions about premium rates. Four of the eight insurers stated they had recently made changes to their payments to agents and brokers, and one reported the MLR requirements were a primary driver behind its business decision. All eight insurers GAO interviewed stated that the MLR requirements did not affect their decisions to stop offering health plans in certain markets and have had no effect or a very limited effect on their spending on quality improvement activities. GAO provided a draft of this product to the Department of Health and Human Services (HHS) for comment. HHS responded that it had no general or technical comments.