The American Journal of Managed Care March 2011
Regulating the Medical Loss Ratio: Implications for the Individual Market
Objective: To provide state-level estimates of the size and structure of the US individual market for health insurance and to investigate the potential impact of new medical loss ratio (MLR) regulation in 2011, as indicated by the Patient Protection and Affordable Care Act (PPACA).
Study Design: Using data from the National Association of Insurance Commissioners, we provided state-level estimates of the size and structure of the US individual market from 2002 to 2009. We estimated the number of insurers expected to have MLRs below the legislated minimum and their corresponding enrollment. In the case of noncompliant insurers exiting the market, we estimated the number of enrollees that may be vulnerable to major coverage disruption given poor health status.
Results: In 2009, using a PPACA-adjusted MLR definition, we estimated that 29% of insurer-state observations in the individual market would have MLRs below the 80% minimum, corresponding to 32% of total enrollment. Nine states would have at least one-half of their health insurers below the threshold. If insurers below the MLR threshold exit the market, major coverage disruption could occur for those in poor health; we estimated the range to be between 104,624 and 158,736 member-years.
Conclusion: The introduction of MLR regulation as part of the PPACA has the potential to significantly affect the functioning of the individual market for health insurance.
(Am J Manag Care. 2011;17(3):211-218)
Estimation of the number of insurers expected to have medical loss ratios (MLRs) below the legislated minimum and their corresponding enrollment indicated the following:
- In 9 states, at least 50% of health insurers would likely fail to meet the 80% minimum MLR.
- In 12 states, at least one-half of total member-years of enrollment were affiliated with health insurers under the minimum threshold.
- If market exit is pursued by insurers not in compliance, coverage disruption could occur for those in poor health.
A primary motivation behind this regulation is to ensure that premiums overwhelmingly reflect costs associated with enrollees’ receipt of clinical services, rather than excess profitability or administrative costs that provide little direct value to consumers.2,3 However, multiple stakeholders are concerned about how insurers will respond to this new regulation and what, if any, consequences it may have for individuals’ access to coverage. Of concern is whether the individual market, which currently serves approximately 7% of individuals younger than 65 years, will become less stable (eg, insurer exit, closed blocks of business, increased barriers to access).4 Using annual filing data from the National Association of Insurance Commissioners (NAIC), we provide estimates of the size and structure of the individual market for health insurance, as well as MLRs across states over the 2002-2009 time period. With the 2009 data, we generated state-level estimates of the number of individual market insurers expected to fall below the minimum threshold and their corresponding enrollment. Finally, we estimated the amount of individual market enrollment associated with insurers falling below the minimum MLR threshold that may be vulnerable to major coverage disruption due to poor health status. We conclude with a discussion of how these findings can inform policymaking activities relating to implementation and individual market functioning.
APPROACH AND METHODOLOGY
Our primary data source was the NAIC Statistical Compilation of Annual Statement Information for Health Insurance Companies for 2002-2009. (The NAIC annual statements are subject to both an annual audit from a certified public accountancy firm and an examination from the state at least every 5 years. Additionally, there is a dynamic of restating balance sheet items in various levels of detail and categorizations, which allows for cross-checking of data for reporting consistency. Finally, not only are the NAIC data reviewed by the domiciliary regulator, but also other states in which the insurer writes business may review a company’s reports.) Although these data are regularly used by state regulators and industry leaders, they are limited in 2 aspects. First, the vast majority of insurers operating within California are regulated by the California Department of Managed Health Care and do not file with the NAIC. Second, approximately 20% of premiums for comprehensive major medical policies in the individual market are written by life insurers, which do not file state-level information on enrollment, premiums, and claims specific to comprehensive major medical policies in the individual market. (For more details, please refer to eAppendices A, B, C, D, and E, available at www.ajmc.com.)
The unit of analysis is a company-state observation. (For example, United Healthcare of Tennessee would be distinct from United Healthcare of Colorado.) From the NAIC data, we observed or constructed the following:
State. Identifier for state in which a company operates.
Individual market member-years. Total member-months of coverage provided by an insurer within a state at the end of the calendar year divided by 12.
Incurred claims. Paid claims plus the change in claim reserves.
Change in contract reserves. Change in financial reserves held by an insurer to pay claims that are expected to be incurred under a contract after the valuation.5
Earned premiums. Direct written premiums plus the change in unearned premium reserves and reserve for rate credits.
Medical loss ratio. The ratio of incurred claims plus the change in contract reserves to earned premiums for the company-state observation, multiplied by 100 to convert it to a percentage.
The first set of analyses characterized the individual market across states and over time. We estimated the number of health insurers operating in each state for years 2002, 2005, and 2009, as well as estimated enrollment expressed in member-years. We also examined average MLRs within states and over time and estimated coefficients of variation to investigate whether certain states experienced relatively more or less variation over the 2002 to 2009 time period. In constructing these measures, we weighted each insurer’s contribution based on its share of enrollment in the state.
Second, we estimated the number of insurers that would have MLRs under the 80% minimum and their corresponding enrollment using the historical MLR definition as well as an “adjusted” measure to reflect changes specified within the interim final rule published by the US Department of Health and Human Services. Specifically, one modification calls for re-characterizing an insurer’s expenses for certain quality-improvement activities (eg, investments to promote evidence-based medicine and patient safety, disease management, wellness programs) to be counted as clinical benefits. The other proposed change is to remove federal and state taxes and licensing or regulatory fees from premiums.6 Since insurer filings currently lack detailed information on quality-improvement expenses, some uncertainty exists with respect to the overall effect of these modifications. However, anecdotal evidence suggests a possible upward shift on MLRs on the order of 5 percentage points.7 Therefore, our adjustment increased each insurer’s historical MLR upward by 5 percentage points.
Finally, we provided an estimate of the amount of individual market enrollment associated with insurers falling below the minimum MLR threshold that may be vulnerable to major coverage disruption due to poor health status. If regulation induces insurers to exit the market, a small percentage of enrollees with high claims experience or preexisting conditions could face disruption in the short run, particularly in states that permit medical underwriting. We began by identifying spending information for the population of individuals enrolled in state high-risk pools across the United States. These consumers are likely similar to those who might be vulnerable to coverage disruption within the individual market. Data from a recent study by the General Accounting Office8 report average paid claims of $9437 for this population in 2008. Next, we used information on annual insurer-paid spending for the nonelderly population with individual market coverage from the 2005-2007 Medical Expenditure Panel Survey (MEPS) Household Component to estimate the proportion of individuals with spending in excess of $9437. (Insurer- paid spending was inflated to 2008 dollars to align with the Government Accountability Office study findings.) We estimated this proportion to be .048. (There is well-documented evidence that spending is underreported in the MEPS. We used the adjustment to inflate expenditures by 21%.9) Lastly, we multiplied aggregate enrollment among insurers that have MLRs below the 80% minimum requirement for each state based on the NAIC data analysis by this proportion to estimate the potential enrollment vulnerable to major coverage disruption due to being medically uninsurable.
Table 1 summarizes the size and structure of the individual market by state for years 2002, 2005, and 2009. In 2009, we observed enrollment of 6.7 million member-years within 371 health insurance company-state observations. These estimates did not include any insurers operating in California or organizations that file as life insurers. (Please refer to eAppendix D for state-level estimates of life insurers selling comprehensive major medical policies.)
Not surprisingly, the number of health insurers with active operations varied widely across states, with more populated states having a larger number of insurers. In 2009, 5 states (Florida, New York, Michigan, Pennsylvania, and Ohio) each reported at least 15 insurers. In contrast, 10 states had 3 or fewer health insurers (Alabama, Mississippi, Vermont, Alaska, Delaware, Hawaii, North Dakota, New Hampshire, Rhode Island, and Wyoming). Over the 2002 and 2009 time period, most states experienced an increase in the number of health insurers and modest enrollment growth.
It is important to recognize that within states, insurers vary extensively in size, with some having a very small enrollment. As indicated in the interim final rule, insurers with fewer than 1000 member-years in a given state for 2011 would be considered to have a “non-credible MLR,” a classification that would exempt them from paying the rebate if the MLR is below the minimum. In 2009, 179 of the 371 company-state observations reported fewer than 1000 member-years. For 21 states, this additional condition reduced the number of health insurers with “credible MLRs” by more than 50%.
Within our data, some states were missing information, particularly for calendar year 2002. In other states (eg, Alabama, Illinois, Indiana), we observed implausibly large changes in enrollment between 2002 and 2009. These estimated changes in enrollment likely reflected changes in reporting behavior or state regulatory requirements, rather than actual market growth.
Table 2 provides state-level estimates of average MLRs, as well as the coefficient of variation for the 2002 to 2009 period. (For the analyses in Table 2, we performed an outlier analysis given implausibly low and high values for premiums and claims. We excluded observations that were in the bottom 1% of both claims incurred and premiums earned, and those in the top 1% of both claims incurred and premiums earned, as well as those in the bottom and top 1% of the MLR.) These estimates are an aggregate representation of insurers’ performance for each state. We observed extensive variation. Health insurers within New Hampshire had the lowest enrollment-weighted average MLR (.629). In contrast, 4 states (Alabama, Massachusetts, Michigan, and North Dakota) had enrollment-weighted average MLR values in excess of 1.0. This can happen if 1 or more large insurers within a state incur claims experience that exceeds the amount of premiums earned for that year.