MLR Floors Are Misguided

Enforcing the medical loss ratio (MLR) provision of the Health Reform law means that health insurers must spend 80% to 85% of premiums on medical care. In my November 2010 post regarding MLRs, I noted that preliminary CMS regulations deemed that cost control efforts would not count as “medical care” – even those activities designed to detect inappropriate services .

MLR is a basic ratio. The premium (money the health insurer is paid) is the denominator and medical care (claims, case management etc.) is the numerator. Under the law, administrative activities are not counted in the numerator. As such, efforts to reduce inappropriate childhood tube insertions or unnecessary coronary artery bypass graft (CABG) surgeries are counted against the insurer in the calculation of MLR. These activities, instead, are counted in the “other non-claims costs” category. 

From a regulator’s point of view, this makes sense. How would a state insurance department be able to sort out whether an activity was a) restricting access to appropriate care to profit or b) controlling inappropriate services by profit-seeking providers? 

Unfortunately, by classifying all direct medical services as “value to the consumer,” the law fails to recognize what the Dartmouth Atlas of Health Care research has been telling us for decades: more healthcare is not necessarily good healthcare. The failure to distinguish necessary medical care from inappropriate care makes the MLR provision wholly misguided.

The MLR floor is an understandable reaction to the abuses by some health insurers who have blatantly (or incompetently) restricted access to needed care to fatten their coffers. With the new MLR law, policymakers hope that insurers:  1) increase medical care costs, or 2) decrease administrative expenses (including marketing costs and profits). 

Instead what will probably happen is that health insurers will increase premiums (while keeping administrative costs the same). This will make the MLR floor easier to obtain. They could also lobby to categorize some administrative costs (call centers, etc.) as medical care. Lobbyists are trying to convince CMS of this now. Worst case scenario, the health insurers will engage in unethical/fraudulent shell games to meet the MLR floor requirement.

Instead of a basic MLR floor, regulators should hold health insurers accountable for measurable quality standards, such as morbidity and mortality. The MLR rule sets a minimum for spending of the premium with medical providers, but, as Robinson (1997) pointed out, “Neither premiums nor expenditures by themselves indicate quality of care.”

Health insurance and healthcare delivery are complicated. In my opinion, the regulating MLR is an over-simplified solution that will not effectively reduce costs or improve quality of our healthcare system. But perhaps that policy horse has already left the barn.

The ACO Paradox

As of today, we are still awaiting the CMS regulations on Health Reform’s Accountable Care Organizations. I’ve made a couple of postings on ACOs in the past. I reiterated the importance of process measures in pay-for-performance schemes, and I scoffed at investor-owned hospitals’ proposal of cherry-picking patients for ACO membership. Here, I’d like to discuss what I’ll call the ACO Paradox.

There are two main components of the Medicare pay-for-performance program (Sec. 3022) for qualified Accountable Care Organizations (ACO), according to the Health Reform Law. First, the Medicare Shared Savings program is designed to reward ACOs for decreasing Medicare fee-for-service costs of their assigned members. If the ACO’s adjusted costs for Medicare parts A & B in the measurement year are less than the benchmark (a 3 year per-beneficiary average), then the ACO and Medicare will share in that cost difference. Second, to qualify for Shared Savings bonus, the ACO must meet quality performance standards (soon to be proposed by CMS).

It makes sense for Medicare to join the costs savings with improved quality. Both are key aims of Health Reform (expanded coverage being another). However, will the ACOs be able to achieve both cost savings and improved quality simultaneously in the measurement year?

The conventional wisdom in healthcare states that increased quality of care will save money in the short-term by reducing high-cost services, such as inpatient care. However, some QOC measures have been shown to be statistically related to increased near-term healthcare costs. For example, a recent study found that improved adherence to antiretroviral regimens used to fight HIV was associated with an increase in total medical costs. Riegal et al. (2000) have posited that the positive relationship of QOC measures to increased near-term future costs is probably due to improved access to needed services.

This isn’t to say that cost savings are not possible with improved quality. It may be that some measures do actually save in the short-term, while others do not. Or maybe it is that some (or all) quality measures save money in the long-term – 5, 10 or 20 years in the future.

So, what if the quality measures that CMS chooses are actually related to increased costs in the measurement period? What if some quality measures are not worth the investment for ACOs? In other words, will there be any Medicare cost savings to be shared in the short-term? Is there an ACO Paradox?

Perhaps Medicare should consider extending the ACO quality measurement and shared savings period to reflect the near-term investment required to produce decreased healthcare cost in the long-term.