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NAIC Adopts Medical Loss Ratio Standards

10.01.2010

At its last meeting, the National Association of Insurance Commissioners ("NAIC") adopted standards defining the elements that must be used to calculate and report minimum medical loss ratios ("MLR") under the Patient Protection and Affordable Care Act ("PPACA"). Following approval, the standards were submitted to the Secretary of Health and Human Services ("HHS"). Under PPACA, the Secretary is charged with reviewing the standards developed by the NAIC and, if the Secretary deems appropriate, certifying the standards for use. It is anticipated the Secretary will certify the NAIC's standards since HHS staff assisted the NAIC in developing the standards.

PPACA's MLR requirements provide only two expense items for the numerator when calculating loss ratios: (1) funds spent on reimbursement for clinical services provided to enrollees and (2) funds spent on activities that improve health care quality.

The NAIC's new standards define quality improvement expenses as "expenses for all plan activities that are designed to improve health care quality and increase the likelihood of desired health outcomes in ways that are capable of being objectively measured and of producing verifiable results and achievements. The expenses must be directed toward individual enrollees or may be incurred for the benefit of specified segments of enrollees." To qualify as a quality improvement expense, the "expenses must be grounded in evidence-based medicine, widely accepted best clinical practice, or criteria issued by recognized professional medical societies, accreditation bodies, government agencies or other nationally recognized health care quality organizations." Although the expenses may have cost-reducing benefits, quality improvement expenses may not be designed primarily to control or contain cost. The primary focus of the expenditure must be to improve the quality of health care provided to enrollees.

The NAIC standards include five categories of quality improvement expenditures.

Improvement in health outcomes These are insurer expenses, as well as services performed on the insurer's behalf by business associates, with providers and/or the enrollee or the enrollee's representatives for activities designed to improve health outcomes. The contact may be through face-to-face or telephonic meetings, web-based interactions or other means of communication. This category includes costs for associated activities such as case management, care coordination and chronic disease management, including making/verifying appointments and medication and care compliance initiatives. It would also include programs to support shared decision making with patients, their families and the patient's representatives; activities to identify and encourage evidence-based medicine; the use of the medical homes models; and education and participation in self-management programs.

Activities designed to prevent hospital readmission This category includes expenses such as comprehensive discharge planning, e.g., arranging and managing transitions from one setting to another to help assure appropriate care and avoid readmission to the hospital. It also includes post-discharge counseling, quality reporting and related documentation for activities designed to prevent hospital readmissions as well as health information technology ("HIT") expenses and data extraction, analysis and transmission in support of these activities. Finally, activities to promote the sharing of medical records and ensure that clinical providers have access to accurate records from all providers participating in a patient's care also are included.

Activities to improve patient safety and reduce medical errors As set forth in the standards, these are expenses for activities to improve patient safety and reduce medical errors, including the identification and use of best clinical practices, activities to identify and encourage evidence-based medicine in addressing independently identified and documented clinical errors or safety concerns and activities to lower risk of facility-acquired infections. These also include utilization review to identify potential adverse drug interactions; quality reporting and related documentation for activities that improve patient safety and reduce medical errors; and data extraction, analysis and transmission in support of these activities. Activities designed to promote sharing of medical records to ensure that all clinical providers have access to consistent and accurate records from all participants in a patient's care are also included in the standards.

Wellness and health promotion activities This category includes expenses for programs that provide wellness and health promotion activity. These activities may be through face-to-face, telephonic or web-based interactions or other forms of communication. As set forth in the NAIC standards, expenditures for wellness assessment and coaching programs to achieve measurable improvements or to educate individuals about effective means for dealing with a specific chronic disease or condition are qualified expenditures. Public health education campaigns, if performed in conjunction with state or local health departments, are also included. Certain rewards and incentive programs (including reductions in co-pays) also qualify as wellness and health promotion expenditures. To qualify, the expenditures for rewards and incentive programs must not be already reflected in premiums or claims and the programs are only allowed for employer groups. Individual policies may not, for purposes of MLR calculations, take advantage of reward or incentive programs. As with other categories of expenses, any quality reporting and related documentation for wellness and health promotion activities and HIT expenses to support these activities are included.

Health information technology expenses for health care quality improvements The NAIC standards also recognize HIT expenditures that may improve the quality of care or provide technological infrastructure to enhance existing quality improvement activities or make new initiatives possible as expenditures to be included in the MLR numerator. The NAIC standards provide that HIT expenditures used to accomplish activities in the first four categories described above are expenditures that improve quality. It also specifically recognizes expenditures for monitoring, measuring or reporting clinical effectiveness including reporting and analysis costs related to maintaining accreditation or costs for public reporting of quality of care (both required and/or encouraged by law) as quality expenditures. In addition, the standards recognize that HIT expenditures for advancing the ability to efficiently communicate clinical or medical information to determine patient status, avoid harmful drug interactions or direct appropriate care are expenditures that improve quality.

Other qualifying HIT expenditures are monies spent to track whether a specific class of medical interventions or a bundle of related services leads to better patient outcomes; monies spent to re-format, transmit or report data to government-based health organizations for the purposes of indentifying or treating specific conditions or controlling the spread of disease; and monies spent to provide electronic health records and patient portals. The NAIC standards exclude costs associated with establishing or maintaining a claims adjudication system, including costs directly related to upgrades in HIT designed primarily or solely to improve claims payment capabilities or to meet regulatory requirements for processing claims.

The standards also include a list of activities that do not qualify as quality improvement expenditures. These are "all retrospective and concurrent utilization review; fraud prevention activities; costs associated with developing and executing provider contracts and other fees associated with managing provider networks; provider credentialing; marketing expenses; accreditation fees; and cost associated with administering incentive programs." The list of excluded expenses also includes a catch-all provision that any function or activity not expressly listed as a quality improvement expense is excluded from the quality improvement category. Unfortunately, this means any new quality improvement program that does not fit within one of the existing approved categories of qualified improvement activities will not be allowed as a quality improvement expenditure. The NAIC has indicated it will revisit the list of approved activities as new quality improvement programs are developed, but this will provide relief only after the NAIC and HHS go through what could be a lengthy review process to approve the program.

The NAIC also has developed an MLR schedule that insurers must prepare and submit to each jurisdiction in which the company has written "direct comprehensive major medical health business, or has direct amounts paid, incurred or unpaid for provisions of health care services." Although the NAIC uses the phrase "comprehensive major medical coverage," it appears that PPACA's MLR requirements apply to all types of health insurance coverage other than those coverages that are defined as excepted benefits or that qualify as short-term, limited duration insurance. The schedule also includes columns for insures to report premiums for excepted benefits. The NAIC indicated it included these columns so insurers could not simply shift administrative expenses to supplemental products.

The NAIC standards include three important exceptions to the reporting requirements. First, insurers without any major medical business to report on the schedule are not required to complete the MLR blank supplement. Second, insurers whose reportable major medical business is less than 2% of their total accident and health business are not required to report their excepted benefits premium, but they must complete all other components of the supplement. Finally, insurers in run off (major medical claims incurred with zero major medical premiums) are not required to complete the minimum loss ratio blank supplement.

Insurers will be required to allocate premium and claims in "the jurisdiction in which the contract is issued or delivered as stated in the contract." For individual business sold through an association, the allocation is based on the issue state of the certificate of coverage. For employer business issued through a group trust, the allocation is based on the location of the employer.

In addition to the various state-based submissions required, the NAIC proposal also includes a separate regulator-only supplemental filing that insurers must complete. In this single, regulator-only filing, insurers must provide a description of the method for allocating quality improvement expenditures on a state-by-state basis and show the insurer's method for allocating expenses among lines of business. Additionally, insurers must include a detailed description of each reported quality improvement expense item, including a narrative explaining why the insurer believes the specific expense qualifies under one of the quality improvement categories described above.

The NAIC standards will not become effective until certified by the Secretary of HHS

Chris Petersen is a Partner in the firm's Insurance and Reinsurance Practice where he concentrates on legal and compliance services relating to the Health Insurance Portability and Accountability Act (HIPAA), privacy, state small group and individual insurance reform regulation and the interaction between state and federal law. Mr. Petersen received his bachelor's degree from Washington University in St. Louis, Mo. and his law degree from Georgetown University School of Law.

Joseph T. Holahan is Of Counsel in the firm's Insurance Practice and a member of the firm's Privacy Practice. Mr. Holahan advises insurers and reinsurers on a variety of legal matters, including all aspects of regulatory compliance. Mr. Holahan received his undergraduate degree from the University of Virginia and his law degree from the Catholic University of America.