MLR: What it is and how to manage it - Gorman Health Group · 8/19/2014 · mlr: what it is and...

MLR: WHAT IT IS AND HOW TO MANAGE IT

Insight into the Medical Loss Ratio

JOHN NIMSKY SENIOR VICE PRESIDENT, HEALTHCARE INNOVATIONS

AUGUST 19, 2014

BILL MACBAIN, SENIOR VICE PRESIDENT, STRATEGY

Copyright © 2014, Gorman Health Group, LLC

• Loss ratio o In the insurance business, the ratio of

insured losses to earned premiums.

EM-A-LAR --- WHAT IS IT?

• Medical loss ratio (MLR) o Used to be simple: the ratio of a health insurer’s incurred

medical claims to earned. o Now it’s not: in post-Affordable Care Act health insurance,

MLR is the ratio of medical claims plus quality improvement costs, divided by earned premiums minus federal and state taxes and fees and payments in lieu of taxes.


• Numerator o Incurred claims (the regulation has over 60 elements to

what’s in and what’s out in calculating incurred claims for an MAPD plan).

o Capitation payments (100% allowable). o Money paid to subsidize Part B premiums. o Rebates deposited into medical savings accounts for high

deductible MSA plans. o Cost of activities “designed” to improve quality (intent

is important).

MEDICARE ADVANTAGE MLR

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C + B + R + Q


• Improve health outcomes • This can include re-designed utilization review, if

the redesign is prospective and focused on quality rather than cost.

• Prevent hospital readmission. • Improve patient safety and reduce medical errors. • Wellness and health promotion activities. • Health information technology expenses related to

healthcare quality. • Allowable ICD-10 expenses (allowable up to 0.3% of the

adjusted revenue in the MLR denominator). • Costs allocated based on GAAP.

WHAT DOES “DESIGNED TO IMPROVE QUALITY” MEAN?

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WHAT DOES “DESIGNED TO IMPROVE QUALITY” MEAN? The Four “Gotta Be” design criteria (all four required):

To improve health quality. To increase the likelihood of desired health outcomes in ways that

are capable of being objectively measured and of producing verifiable results and achievements.

To be directed toward individual enrollees or incurred for the benefit of specified segments of enrollees or provide health improvements to the population beyond those enrolled in coverage as long as no additional costs are incurred due to the non-enrollees.

To be grounded in evidence-based medicine, widely accepted best clinical practice, or criteria issued by recognized professional medical associations, accreditation bodies, government agencies or other nationally recognized health care quality organizations.

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• To demonstrate that an activity is “designed to improve quality” -- o Have quality-related targets. o Measure and report accomplishments in relation to those

targets. o Demonstrate actions taken to strengthen effective

programs and improve sub-par programs. o If cost is addressed at all in measurement, make it a

secondary byproduct of quality metrics. o Base metrics on sound evidence. o Document: job descriptions, meeting agendas and

minutes.

WHAT DOES “DESIGNED TO IMPROVE QUALITY” MEAN?

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(1) Those that are designed primarily to control or contain costs. (2) The pro rata share of expenses that are for lines of business or products other than those being reported, including but not limited to, those that are for or benefit self-funded plans. (3) Those which otherwise meet the definitions for quality improving activities but which were paid for with grant money or other funding separate from premium revenue. (4) Those activities that can be billed or allocated by a provider for care delivery and that are reimbursed as clinical services. (5) Establishing or maintaining a claims adjudication system, including costs directly related to upgrades in health information technology that are designed primarily or solely to improve claims payment capabilities or to meet regulatory requirements for processing claims, including ICD-10 implementation costs in excess of 0.3 percent of total revenue under this part, and maintenance of ICD-10 code sets adopted in accordance with to the Health Insurance Portability and Accountability Act (HIPAA), 42 U.S.C. 1320d-2, as amended.

EXCLUDED FROM QUALITY ACTIVITIES

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These are the regs…


(6) That portion of the activities of health care professional hotlines that does not meet the definition of activities that improve health quality. (7) All retrospective and concurrent utilization review. (8) Fraud prevention activities (but you only have to deduct recoveries from claim expense to the extent they exceed the cost of fraud prevention). (9) The cost of developing and executing provider contracts and fees associated with establishing or managing a provider network, including fees paid to a vendor for the same reason. (10) Provider credentialing. (11) Marketing expenses. (12) Costs associated with calculating and administering individual enrollee or employee incentives. (13) That portion of prospective utilization review that does not meet the definition of activities that improve health quality. (14) Any function or activity not expressly permitted by CMS under this part.

EXCLUDED FROM QUALITY ACTIVITIES

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• Earned premiums (including rebates, low income subsidies), LESS o Most state and federal taxes and fees (see the

regulation). o Guarantee fund assessments. o Costs of community benefit activities up to 3% of

premium revenue or the state’s highest premium tax. o EHR incentive payments for meaningful use.

WHAT’S IN THE DENOMINATOR?

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C + B + R + Q P - (T + F + G + CB) - EHR


• If MA, Part D, or MAPD MLR is below 85%, rebate the “excess” premium to CMS.

• No rebates to beneficiaries. • If a plan misses 85% three years

in a row, it is suspended from marketing for a year.

• If a plan misses 5 years in a row, it is terminated from the program.

• Small plans get a break, in the form of a credibility adjustment that increases their MLR.

PENALTIES

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Time line challenge

PENALTIES

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2014 2015 2016 2017Incur claims Incur claims Incur claims Incur claims

June: do 2015 bid June: do 2016 bid June: do 2017 bid June: do 2018 bid

84% MLR Q2: calculate prior MLR Q2: calculate prior MLR Q2: calculate prior MLRAdjust 2016 bid based on

2014 MLRAdjust 2017 bid based on


2016 MLR

84% MLR2014 MLR affects 2016 bid. 2015 is already "in the can"


Time line challenge

PENALTIES

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2014 2015 2016 2017Incur claims Incur claims Incur claims Incur claims

June: do 2015 bid June: do 2016 bid June: do 2017 bid June: do 2018 bid

84% MLR Q2: calculate prior MLR Q2: calculate prior MLR Q2: calculate prior MLRAdjust 2016 bid based on



2016 MLR

84% MLR2014 MLR affects 2016 bid. 2015 is already "in the can"

The plan is already potentially out of

compliance in 2014 and 2015, based on bids using 2012 and 2013 data. Can

only adjust for 3rd year.


Low MLR is no longer a sign of strength. Goal is MLR = 85% = “just right”

THE GOLDILOCKS RULE

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MLR less than 85% is a marketing opportunity: Reduce premiums, Increase benefits

MLR greater than 85% is a drag on earnings, may force higher

premiums or reduced benefits.


• If too low in bid, add benefits and/or reduce premium

• If too low in second half of the year, o Increase numerator (you will have to

rebate it if you don’t spend it, so get some value from it)

TOO LOW?

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• Provider bonuses (after all, they are the ones who are getting you to a lower MLR than you predicted in your bid)

• Increase expenditures on activities designed to improve quality

o Decrease denominator: slow down on risk adjustment until next year

o Have an early warning system, so you know if your MLR is going to be too low without intervention


TOO HIGH If MLR is > 85%, the old rules all apply:

• Increase denominator – earn more money = risk adjustment

• Reduce SG&A to improve margins • Reduce numerator

o Quality-related activities? o Claims costs

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• Overall Medical utilization o Impacted by medical management o Impacted by clinical protocols o Impacted by out of network (OON) referrals o Driven by clinical performance standards

• Inaccurate coding o Results in retrospective impact on MLR o Impacts accurate representation of member acuity

• Network outliers include o Poor performing providers within participating network

and/or within market peer group o Services not provided within network

MLR COST DRIVERS

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• Out of network referrals and leakage (especially PPO benefit designs) - conflict between established provider referral patterns, patient/provider relationship and Plan network configuration.

• Inappropriate use of specialists services: o Can be constrained by improved

treatment plan coordination between PCP and specialist.

o Can benefit from improved inpatient discharge planning.

o Can benefit from periodic UM reviews with providers.

MLR COST DRIVERS

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• Use of ER - about 60% of all ER visits are non-emergent

• Home based services - proper discharge referrals • Pharmacy management

o Monitor “drug shopping” o Establish pain management protocols

• Claims configuration issues - minimize “work-arounds”

• Encounter reporting errors

MLR COST DRIVERS

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1. Development of forward looking budget assumptions for benefit premiums, project clinical utilization and provider reimbursement budgets.

2. Trend projections - medical spend over time. 3. Development of clinical and financial performance

metrics - designed to bring performance in line with expectations.

4. Strategies around how to best impact provider practice patterns - access, treatment, referrals and coordination of care.

5. Network modifications - based on clinical and financial performance.

KNOWLEDGE OF THE COST DRIVERS WILL LEAD TO:

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6. Performance based payment - provider reimbursement

benchmarked to clinical & financial outcomes metrics. 7. Medical expense management strategies/plan - forward

looking actionable medical management and provider management initiatives intended to address. performance outliers such as inappropriate referrals, duplicative procedures, inappropriate coding, claims payment inaccuracies, ER utilization, etc. Can be, and should be, guided by STAR program adherence.

KNOWLEDGE OF THE COST DRIVERS WILL LEAD TO:

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Gorman Health Group (GHG) is a national health care and federal programs consultancy staffed by subject matter experts, former health plan executives, and seasoned regulators. For over 16 years, hundreds of clients serving millions of consumers have leveraged GHG’s strategic counsel, technology, and knowledge-based solutions to achieve growth objectives, maximize and maintain compliant operations, improve market positions, develop new market opportunities, advance profitability, and provide timely, industry-based content and education. GHG’s solutions continually evolve to meet the needs of our clients. Our customizable knowledge utility, the Point, makes available our knowledge-based offerings and timely, unparalleled expertise. Through the Point, the industry has direct access to the same timely tools and analyses our own consultants use to stay informed. An annual membership to the Point entitles each user to access our archive of educational webinars, podcasts, regulatory summaries, and more. In addition, Gorman UniversityTM makes live and web-based trainings available to your entire organization. Find out more at www.gormanhealthgroup.com.

Bill MacBain Senior Vice President, Strategy

202-204-6238

[email protected]

John Nimsky Senior Vice President, Healthcare Innovations

602-625-0026

[email protected]

MLR: What it is and how to manage it - Gorman Health Group · 8/19/2014 · mlr: what it is and...

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