Monday, April 19, 2010

Reporting Minimum Loss Ratios

(Note : For the next few weeks, Health Reform Talk will focus on detailed explanations for specific provisions in the new health reform law. Click here for previous post.)

So what’s included in Sec. 10101(f) of the Affordable Care Act, concerning minimum loss ratios?

Health insurers offering group or individual insurance coverage must submit an annual report to the Department of Health and Human Services for each group and individual coverage for each medical plan year. This report must describe the ratio of the incurred claims plus a loss adjustment expense to earned premiums, typically called a medical loss ratio.

Loss adjustment expenses usually include legal and other fees and expenses related to the settlement of an insurer's claims. Earned premium in health care usually means the portion of a premium that has been "used up" during a policy term. With a one-year policy, half of the total premium has been earned after six months.

Reports also must be made for grandfathered plans.

The report must include the percentage of total premium revenue that such coverage expends on the following:

(1)      reimbursement for clinical services;
(2)      activities that improve health care quality; and
(3)      all other non-claims costs, including an explanation of the nature of such costs, but excluding Federal and State taxes and licensing or regulatory fees.

HHS is directed to make the reports available to the public on an HHS internet site.

Required minimum loss ratios. Minimum loss ratios are established for large group plans, small group plans, and individual plans:

The minimum loss ratio for large group plans is 85%, or a higher percentage if a state requires it.

The minimum loss ratio for individuals and small group plans (plans with 100 or fewer employees is 80%, or a higher percentage if a state requires it. HHS may adjust the percentage if it determines that an 80% loss ratio would destabilize the individual market.

Beginning no later than January 1, 2011, health insurers providing coverage that does not meet the minimum loss ratios must provide an annual rebate to each enrollee under such coverage, on a pro rata basis.

The annual rebate is calculated by multiplying the amount by which the coverage fails to meet the minimum loss ratio by the total amount of premium revenue. Premium revenue excludes federal and state taxes, licensing and regulatory fees, and payments or receipts for risk adjustments, risk corridors, and reinsurance.


ABC Insurance Company earns $2.5 million on premiums for coverage for Large Employer, Inc.’s 280 employees. Incurred claims plus a loss adjustment expense total $2.05 million, which results in a loss ratio of 82%. Assuming the earned premium already has excluded taxes, fees, and other adjustments, 3% is the amount by which the coverage fails to meet the minimum loss ratio by the total amount of premium revenue. That 3% is multiplied by $2.5 million, resulting in a total annual rebate of $75,000. This would produce an average pro rata rebate of $267.86 (75,000 divided by 280 employees) for each enrollee.

Effective date. The provision is effective for plan years beginning on or after Sept. 23, 2010.

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