As you might have guessed from my previous posts, I’m more or less in favor of the health care reform mandates, but there are still individual rules I’m concerned about, and some I’m definitely confused about. This post focuses on one such confusing rule--the requirement for payers to use 85% member premiums toward the MLR (Medical Loss Ratio). Simply, payers must spend at least 85% of the amount they collect toward the cost of care.

On the surface, it’s a very admirable goal. Restrict your administrative overhead to 15% by making the organization more efficient and hence reduce the overall cost of care. Not bad. But when I start thinking about it a bit more, certain flaws in the logic emerge that could render the whole mandate impotent.

The success or failure of any mandate hinges on the incentives and penalties associated with it. In the case of the MLR, there doesn’t seem to be much of an incentive, but the penalty is pretty drastic (i.e., reimbursing members the difference between 85% and the actual spend on the MLR via monthly reimbursement checks.) Basically, if a payer can’t maintain the 85% MLR and is sitting at somewhere around 83%, the payer will be required to distribute reimbursement checks for 2% (the differential) of the premiums they collected.

Also, payers can’t combine different lines of businesses and other corporate entities to calculate overall MLR. Doing so would have enabled payers to consolidate some efficient and some not-so-efficient units together in order to protect themselves from MLR-related penalties.

Let’s take an example (I promise you, it will get a bit complicated, so please bear with me) to try to figure this out. Industry research indicates the average payer is sitting at somewhere around 78% of MLR. But for the sake of example, let’s put one at 80 percent. That means the payer spends $80 for every $100 it takes in premiums on the reimbursement for medical costs, and around $20 on administrative costs, including the cost of sale (such as brokerage fees), salaries, IT systems and infrastructure support, profits, etc.

Now to bring the MLR up to 85%, there are two things a payer could do:

1. Reduce the overall premium revenue by $5.89, so that the $80 being spent on the MLR side will represent 85% of overall premiums.

2. Maintain the premium dollars, but redirect an additional $5 from the administrative loss ratio (ALR) costs to MLR costs, thereby increasing the reimbursements being made to providers.

In the first scenario, the positive is that the premium is going down, and hence the consumers (employers and employees) are benefiting. The downside is the cost of actual health delivery has not been reduced (i.e., providers are still not incentivized/penalized for redundant or non-standardized procedures.) This means the inherent ills of the health care delivery are not being resolved, just a pseudo-reduction is being achieved through tightening the belt on the payer side.

Under the second scenario, it’s even worse. Instead of striving to penalize the providers for non-performance, we are actually incentivizing them to increase the reimbursement by 6.25%.

Under both the scenarios, once the required balance (85/15 ratio) is achieved, the payer would not be interested in reducing the cost of care any further by focusing more on preventive rather than curative routes. Why? Because for every 1% you cut from the MLR, you have to cut the equivalent amount in the ALR in order to maintain an 85/15 ratio. After already having been squeezed by the initial shift from ALR to MLR to achieve the 85/15 ratio, the payer wouldn’t want to reduce the ALR any further and hence would have no incentive to reduce the MLR (since an equivalent cut in ALR will be required.) This will lead to a situation where payers see reduction in the MLR as a penalty, rather than an incentive, and wouldn’t try to reduce it. Providers wouldn’t care about standardizing care delivery, and the consumer part of health reform will continue down the current path, with no improvement whatsoever.

So, unless somebody explains to me another path of logic, I’ll continue to believe that the MLR mandate is actually going to do more harm than good.

Rajiv Sabharwal is the chief solution architect in the Healthcare and Life Sciences unit at Infosys Technologies LTD. He can be reached at

This column originally appeared in the blog for Health Data Management, a SourceMedia publication.


Related content:

Changes afoot in MLR rule?

Rogers: Rewrite MLR rules

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