The first set of these data  will be submitted to HHS in June 2012, reflecting insurers’ experiences  from 2011. Traditional MLRs on Average Generally Exceeded PPACA MLR Standards, but Varied, Particularly among Individual Market and Smaller Insurers

Traditional MLR averages generally exceeded the PPACA MLR  standards in each market, even without the changes in the new PPACA  MLR formula that will generally further increase MLRs. However,  traditional MLRs also varied among insurers, particularly among those in  the individual market and smaller insurers. Within this variation in the individual  market, a larger proportion of insurers generally had lower MLRs; that is,  they spent a lower percentage of their premiums on medical claims, as  compared to insurers in the small and large group markets. Traditional MLRs were also more varied for smaller insurers in all three  markets from 2006 through 2009. PPACA MLRs Will Be Affected by Changes in the MLR Calculation and Insurers’ Ability to Provide More Precise Data in 2011 and Beyond

The insurers we interviewed said their PPACA MLRs will be affected by  changes in the MLR formula, primarily due to the deduction of taxes and  fees in the denominator, and to a lesser extent, the addition of expenses  for activities to improve health care quality in the numerator. Insurers said they expect the precision of their  PPACA MLR data to improve in 2011 and beyond, in part because their  2010 MLRs were based on best estimates. Insurers Reported That Changes in the Way MLRs Are Calculated Will Affect Their PPACA MLRs

Most of the insurers we interviewed reported that the deduction of taxes  and fees in the denominator of the PPACA MLR formula would contribute  to the largest change in 2010 MLRs compared to the traditional MLR  formula, but some insurers said the effect of the deductions vary by state  and may vary in 2011 and beyond. Because HHS’s interim final rule on PPACA MLRs  was published in late 2010, insurers told us that they used their best  estimates to apply the PPACA definition to experiences incurred earlier in  the year. For  example, one insurer told us that their health IT is a centralized function  that is also used for other lines of insurance business, such as Medicare  and Medicaid, which they said are not subject to PPACA MLR  requirements. Insurers Reported That They Are Making or Considering Changes to Brokers’ Commissions and Premiums, and to Other Business Practices

Almost all of the insurers we interviewed were reducing brokers’  commissions and making adjustments to premiums in response to the  PPACA MLR requirements. These insurers said that they have decreased  or plan to decrease commissions to brokers in an effort to increase their  MLRs. Insurers we interviewed varied on how the PPACA MLR requirements  might affect their decisions on activities to improve health care quality. This insurer also said  the PPACA MLR requirements provide an incentive to spend more money  on quality improvement activities, which will affect their decisions on  implementing new activities in the future. Conversely, five other insurers  told us that the PPACA MLR requirements are not a factor in decisions  about their activities to improve health care quality. Insurers we interviewed also varied on how the PPACA MLR  requirements may affect where they do business. For example, one large  insurer that operates in multiple states said that they have exited the  individual market in one state where they did not have a large market  share, in part, because of the MLR requirements, and they are evaluating  whether to exit this market in other states where it might be difficult to  meet the PPACA MLR requirements. One for-profit insurer told us that  they plan to exit or stop issuing new business in the individual market in  multiple states as well as consolidating some of their insurance  companies in some states in which they did not think they would meet  PPACA MLR requirements. Several other insurers said that the PPACA  MLR requirements will not affect decisions on where they do business. Additionally, we provided a draft of this report to NAIC for comment.
Why GAO Did This Study

To help ensure that Americans receive value for their premium dollars, the Patient Protection and Affordable Care Act (PPACA) established minimum "medical loss ratio" (MLR) standards for health insurers. The MLR is a basic financial indicator, traditionally referring to the percentage of premiums spent on medical claims. The PPACA MLR is defined differently from the traditional MLR. Beginning in 2011, insurers must meet minimum MLR requirements or pay rebates to enrollees. While insurers' first set of data subject to the MLR requirements will be for 2011, and is not due until June 2012, insurers prepared preliminary PPACA MLR data for 2010. GAO examined: (1) what can be learned from the traditional MLR data reported by health insurers prior to PPACA; (2) what factors might affect the MLRs that insurers will report under PPACA; and (3) what changes in business practices, if any, have insurers made or planned to make in response to the PPACA MLR requirements. GAO analyzed premiums, claims, and traditional MLR data for nearly all insurers for 2006- 2009 and interviewed a judgmental sample of seven insurers--selected to provide a range based on their size, profit status, and the number of states in which they operated--about their experiences using the PPACA MLR definition.

What GAO Found

From 2006 through 2009, traditional MLRs on average generally exceeded PPACA MLR standards. This is even without the additional components in the new PPACA MLR that will generally increase MLRs. However, traditional MLRs also varied among insurers. Traditional MLRs within the individual market varied more than those within the small and large group markets, and a larger proportion of individual market insurers generally had lower MLRs. Additionally, traditional MLRs varied more among smaller insurers than among larger insurers in all three markets. Some components of the PPACA MLR requirements may mitigate the implications of some of these variations. The insurers GAO interviewed said their PPACA MLRs will be affected by changes in the MLR formula and their ability to provide more precise data in 2011 and beyond. Most of these insurers reported that the deduction of taxes and fees in the PPACA MLR formula would contribute to the largest change in their 2010 MLRs. Including expenses for activities to improve health care quality was also cited as a factor affecting insurers' MLRs but to a lesser extent. In addition, because insurers had limited time to respond to HHS's interim final rule on PPACA MLRs, which was published in late 2010, they said that their 2010 MLRs were based in part on best estimates. Insurers said they expect their ability to provide more precise PPACA MLR data will improve in 2011 and beyond. Most of the insurers GAO interviewed were reducing brokers' commissions and making adjustments to premiums, as well as making changes to other business practices, in response to the PPACA MLR requirements. Almost all of the insurers said they had decreased or planned to decrease commissions to brokers in an effort to increase their MLRs. Insurers varied on how the PPACA MLR requirements might affect their decisions to implement activities to improve health care quality. While one insurer said that their decision to implement new activities would be affected by whether or not an activity could be included as a quality improvement activity in the PPACA MLR formula, other insurers said that the PPACA MLR requirements are not a factor in such decisions. Insurers also differed on how the PPACA MLR requirement may affect where they do business. One insurer said that they have considered exiting the individual market in some states in which they did not expect to meet the PPACA MLR requirements, while several other insurers said that the PPACA MLR requirements will not affect where they do business. In commenting on a draft of this report, the Department of Health and Human Services (HHS) said that the MLR provision will increase transparency in the insurance market and value for consumers' premiums.