An Obamacare provision designed to protect consumers from price gouging in health insurance is instead being manipulated to keep premiums high, driving up the costs for individuals and employers alike.
That’s the consensus of federal agencies, academics, and employer groups familiar with the workings of the Affordable Care Act’s medical loss ratio provision, which requires insurers in the individual and group markets to spend at least 80% of their premium revenue on claims or quality improvement, or refund the difference.
They say health plans are avoiding making refunds or lowering premiums by giving unwarranted bonuses to medical providers, paying some claims at a higher rate, and by claiming questionable expenses as quality improvement.
The impact is felt not just by individuals but by companies large and small. The resulting higher premiums hurt smaller companies that typically buy fully insured plans as well as their employees, who usually have to pay out-of-pocket expenses based on claims. And, while larger self-funded health plans aren’t subject to the ACA’s medical loss ratio requirement, administrators that manage those plans are often part of insurance companies and may engage in the same types of practices, people familiar with the system say.
Insurers’ bonus payments to providers inflate claims as much as 30% to 40%, the Centers for Medicare & Medicaid Services said in its 2023 Notice of Benefit and Payment Parameters proposed rule, issued in January.
In addition, the CMS said insurers have inappropriately attributed expenses such as lobbying or company parties to quality improvement activities. The proposed rule would clarify that expenses such as provider incentives must be objectively measured to improve clinical quality.
The proposal is likely to be finalized soon.
‘Gaming the System’
To avoid refunds, large group plans that cover at least 50 employees must spend at least 85% of premiums on claims or quality improvements, and small group plans covering fewer employees must spend at least 80%.
In 2020, the last year for which rebate data is available, insurers refunded more than $2 billion in excess administrative expenses and profits, including $1.3 billion that benefited 4.8 million consumers in the individual market and $675 million that benefited 5 million consumers in the group markets.
The CMS said it doesn’t know how many insurers are engaging in the questioned activities. It estimates that better insurer compliance with the medical loss ratio (MLR) rules when it comes to reporting provider bonuses and incentives alone would initially increase rebates or reduce premiums by $12 million per year.
“Effectively, it’s insurers gaming the system to reduce the rebates that they have to return to policyholders,” Sabrina Corlette, research professor with Georgetown University’s Center on Health Insurance Reforms, said, referring to the CMS’s description of insurers’ practices. The center published a blog post on the agency’s proposed rule.
“They would rather send their money to the providers than to their policyholders,” Corlette said. Many health insurers, such as UnitedHealth Group Inc., own physician practices, she noted.
Groups that represent employers are aware that the medical loss ratio could be used to inflate their premiums and costs from insurers.
Robert Smith, executive director of the Colorado Business Group on Health, said problems with the medical loss ratio are an “unintended consequence of the Affordable Care Act.”
To increase profits, “the easiest way is to let that medical expense ratio increase,” Smith said. “If your profits are fixed to a percent of the pie, then let the pie get bigger.”
AHIP Defends Incentive Payments
But Jeanette Thornton, senior vice president for product, employer, and commercial policy for health insurer trade group AHIP, said the medical loss ratio doesn’t create incentives for higher reimbursements.
“We thrive on competitive, affordable products,” Thornton said. “The MLR process is making sure that we’re meeting the threshold of spending on claims” and are managing administrative costs, she said. “Our plans are highly regulated” by state regulators who ensure that rates are justified, she said.
“CMS is clearly taking steps to provide more granular definitions around a number of these activities, because they haven’t provided guidance at this level of detail in the past,” Thornton said. “We want to see those details so that we can comply going forward.”
But Thornton said the proposal would make it harder for health plans to include provider incentives and bonuses for accountable care organizations, shared savings arrangements, and value-based contracting. The industry has been moving toward those cost-containment methods to get away from fee-for-service arrangements that are believed to drive up the volume of medical procedures by providers.
In its comment letter on the proposal, AHIP said plans should be allowed to include those types of incentive payments.
AHIP agrees with the CMS that activities such as lobbying and catering should not be allowed to be used to offset medical loss ratio requirements, Thornton said.
Large Employers Also Affected
Larger companies typically sponsor self-funded health plans in which the employer pays most medical bills directly and hires third-party administrators to handle claims and help design plans. Those plans aren’t subject to the ACA’s medical loss ratio rules, but they can be affected.
“When you look at the administrative services-only parts of those same entities, they’re very, very significant businesses, and they leverage the same network contracts,” Mark Galvin, president and CEO of TALON, said of the insurance company businesses that administer plans for self-insured employers. TALON is a Portsmouth, N.H., company that compiles health-care data.
“At the end of the day, they’re happy for medical losses to go up, as long as it’s happening kind of across the board for all of them,” said Galvin, who argues that the medical loss ratio drives up health-care prices and should be repealed.
Michael Pastor, chief executive officer of Darien, Conn.-based third party administrator CGS Health, gave an example of how high hospital charges to company health plans drive up medical loss ratios and costs for those companies.
CGS is handling a claim submitted by Lenox Hill Hospital in New York City for a complicated delivery for nearly $142,000, he said.
Normally that bill would be discounted by approximately half that amount through the network operated by the major insurance company that contracts with the hospital, Pastor said. However, the insurer, who he declined to name, has a contract with the hospital that allows the hospital to bill at the greater of either the discounted amount or the amount allowed under Medicare’s diagnosis-related group (DRG) charges, which is more than $230,000, he said.
“It should be around a $70,000 payable claim, but instead of 70, it has to be paid at $230,114,” he said.
“Because you end up paying the higher DRG claim amount—and that drives up the medical loss ratio— ultimately you’ll end up with higher premiums because of that,” he said.
Margarita Oksenkrug, director of public relations for Northwell Health, said in an email that “it would be inaccurate to generalize” that payments are being inflated to raise medical loss ratios based on the one example. Lenox Hill Hospital serves as a clinical campus for the Hofstra Northwell Health School of Medicine, which is owned by the health system in a partnership with Hofstra University.
“The case mentioned here should be considered an outlier as there are countless other examples—such as cases that include long stays and complex care—for which the payment we receive is but a fraction of the charges,” Oksenkrug said.
Galvin lamented the disconnect between insurer and employer priorities.
“What we all believed as employers—and I always believed as an employer—is that my insurance carrier is my surrogate,” Galvin said. “The insurance company should want things to be better, cheaper, faster, more convenient—all the things I want as a consumer.”
The financial incentive puts insurers at odds with their consumers, including employers and employees, Galvin said.
“The big thing that drives that messed-up incentive is this thing called MLR,” he said.