The NAIC "Blank" Proposal, the Medical Loss Ratio and Disease Management: An Explanation

The Disease Management Care Blog has driven by those unfortunate people. The car stopped by the side of the road. Hood open. The man? Staring at the engine maze of boxes, belts, wires, bolts and metal, looking for that disconnected or unset something to reconnect or reset. The woman, of course, is on the cell phone. She is intelligently calling AAA, which she joined months ago against her partner's advice. She is arranging for roadside assistance.

Such was was the initial reaction of the male DMCB when it opened the hood and stared at the just-released National Association of Insurance Commissioners' (NAIC) "Blanks Proposal." Readers may recall that this is the NAIC's long awaited response to the Affordable Care Act's requirement that health insurers use 80% to 85% of their premium dollars toward patient care. Defining just what comprised "patient care" was left up to the NAIC.

In typical actuarial fashion, the released "Blank" is a maze of obscure boxes terms and calculations that defies easy understanding. Looking down at it, it made the DMCB want a reset by hitting an "Easy" button. However, since the DMCB has changed oil, swapped air filters, replaced brake shoes, repaired mufflers, topped brake fluids, drained radiators and rotated tires, it figured it would dive right in anyway. That didn't work. So, it took an important cue from the spouse. It got on the cell phone and called some folks for some much appreciated help.

Here's what it found.

As the DMCB understands it, the "Blank" is the proposed form that would need to be completed by health insurers when they submit information about their expenses to their respective State Departments of Insurance. Close examination reveals that on line "7" on page 2, the preliminary MLR includes "total incurred claims" plus "total of defined expenses incurred for improving health care quality." The DMCB then headed over to page 16 of the document and found that the NAIC would like to define "improving health care quality" as....

"... plan activities that are designed to improve health care quality and increase the likelihood of desired health outcomes in ways that are capable of being objectively measured and of producing verifiable results and achievements.... [They] should be grounded in evidence-based medicine, widely accepted best clinical practice, or criteria issued by recognized professional medical societies, accreditation bodies, government agencies or other nationally recognized health care quality organizations. They should not be designed primarily to control or contain cost, although they may have cost reducing or cost neutral benefits as long as the primary focus is to improve quality..... [They] can include case management, care coordination and chronic disease management .... such as providing coaching or other support to encourage compliance with evidence-based medicine" (italics DMCB).

This is very good news for the disease/care management industry. This will clearly preserve the ability of insurers to buy their services. No wonder why the DMAA is pleased with the outcome. If care management activities had been excluded from the MLR (and therefore counted as an administrative expense), the most likely outcome would have been reductions in these programs.

And check out the uncharacteristically measured response of HHS Secretary Sebelius in her HealthCare.gov blog post. No longer able to cling to her Democratic allies' canards about MLR gaming with faux-quality expenses, she thanks the NAIC and then changes the subject by recycling the anti-insurer grousing about "marketing, medical underwriting, executive salaries, and bonuses that don’t improve health outcomes and drive up costs." Right.

The DMCB isn't impressed with the health insurers' trade association "AHIP" response to the Blank either. The DMCB agrees with one observer that AHIP has little political reason to broadcast any agreement with NAIC; to do so would only prompt additional scrutiny over the 90% that AHIP successfully got out of this process.

This is not the end, since this seems to be a proposal and additional language will need to be written. The DMCB will continue to stare under the hood. And if anyone wants to call (or email) with additional roadside assistance and insights about this, please do not hesitate to do so.

Of Actuaries, Consumerism, Care Management and the Patient Centered Medical Home

"But we're saving money!" said the Disease Management Care Blog.

"I don't really care" said the company actuary.

That pretty much summed things up years ago when the DMCB was arguing the merits of expanding the care management programs. The good news is that the DMCB stopped talking, listened and got educated.

It learned that actuaries assess past patterns of health care utilization to project future patterns, much like looking in a rear view mirror to drive a car forward. Knowing that the previous years' rate of hospitalizations is "X%," that physician offices visit rates are "Y%" and that other rates for other forms of utilization are "Z%" etc., actuaries, knowing the cost for each unit of service, can then project the cost of future services. Since care management is an additional cost, that "hard" number is simply added into next year's budget. It's all added up and voila! the cost of providing insurance was known. Our customers never liked it because rates kept going up. Our State Department of Insurance - and their actuaries - required it because they knew rates had to go up.

Even though the DMCB could demonstrate that a $70,000 per year case manager could save (depending on the condition) $100 to $700 PMPM, the actuary only saw spiraling cost inflation with higher rates of utilization. Just because a segment of the overall book of business may have cost less, it was calculated that the costs for all persons with diabetes and heart failure would continue to rise and that the nurses were an additional cost center of $70K per FTE.

Case closed.

That was the logic then and is still believed by naysayers today. So, how has care née disease management survived years of actuarial skepticism?

One answer may lie in this J.D. Power press release. Human Resource directors, managers and owners that have responsibility for buying commercial health insurance are unhappy with the industry's ability to service accounts, design new products, resolve coverage problems and manage costs. However, the most important determining factor in overall satisfaction is "employee plan experience."

In reading the press release, the the DMCB can't tell what makes up "employee plan experience," but it has a pretty good idea that a large part includes wellness, prevention and care management. So, in addition to "patient engagement," and "self care" and "risk reduction" and "behavior change," care management's secret sauce consists of personalized outreach and creating special relationships with patients. It's called talking to your customers.

Which offers two lessons and a warning:

1. Service Recovery: This is one of the reasons why disease management, now called care management, wellness and prevention, has done so well in the self and fully insured commercial insurance settings. If JD Powers' press release is to be believed, insurers are relying on their care management programs to partially make up for their perennial inability to execute well on other parts of the business. That doesn't mean there isn't growing evidence that the actuaries can be wrong and that care management also saves money. This is cake and eating it too.

2. Medical Loss Ratio: Given the actuaries' biases and an in-house perception that disease management was a customer service function, it's no surprise that disease and care management programs were placed in the administrative cost column and not the MLR. The care management industry always thought it was a clinical function, but with the widespread perception that health insurer administrative costs are too high (and that the MLR is too low), the industry is working hard at getting their costs reassigned.

And the warning?

While my colleagues who are promoting the Patient Centered Medical Home (PCMH) are fixated on its ability to increase quality, reduce costs, rescue primary care, minimize variation, reverse the Federal deficit and banish all hunger in America, it may turn out that a key success factor will be none of those things. Rather, the long term staying power of the PCMH may hinge on its ability to enhance the health care experience for patients. GroupHealth understands that (here at the 30 sec mark) and so does Blue Cross Blue Shield of Michigan (here). If the actuaries get skeptical and consumers don't notice a palpable change, the PCMH may go the way of dermatologists who remember which end of the stethoscope goes in the ears, the dodo bird and good taste in a Lady GaGa music video.

Image from Wikipedia

Medical Loss Ratios & Health Insurance: Are You A "Constructionist" or an "Activist?"

As readers may recall from a prior Disease Management Care Blog posting on the topic of medical loss ratios (MLR), the ratio of health insurer medical costs to total costs is conceptually simple, yet administratively complicated. One reason is because providers of medical services - such as hospitals and physicians - are accepting various forms of risk transfer such as capitation, gain sharing and risk contracting that behave like insurance. Health insurers, in turn, have been taking on clinical roles that look and feel like traditional provider services. Examples of the latter include quality assurance, patient reminders and wellness initiatives.

Will the Patient Protection and Affordable Care Act's (PPACA) 80% to 85% MLR requirement make this mash-up "better?"

Opinions seem to fall into two camps:

1) The MLR requirement limits administrative costs and maximizes the spend on health care services and is evidence of an enlightened civilization at work that, by the way, is also providing a target rich environment for health policy bloggers

2) The MLR floor is a clumsy, ill-fated, if well meaning, intrusion into the business operations of insurers that will assure the perpetual employment of a host of health lawyer-regulators which, by the way, provides a target rich environment for bloggers.

The DMCB really thinks that the two points of view above embody a much bigger debate about the role of health insurance in reform between the

1. Constructionists, who view insurance as a means of monetizing and pooling risk in a way that enables the payment of needed health care services, or ...

2) Activists, who favor using the monetizing and pooling of risk to enable the betterment of needed health care services.

Interestingly, despite Senator Rockefeller's apparent constuctionism, the PPACA seems to favor activism. While the DMCB finds the legislative language as murky as a Gulf of Mexico oil plume, it appears to require that health insurers improve health care quality including "effective case management, care coordination, chronic disease management and medication and care compliance initiatives including through use of the medical home model.... activities to prevent hospital readmissions... including patient centered education ...(and).... activities to improve patient safety and reduce medical errors." By the way, the activist view of Medicare may underlie the nomination of Dr. Berwick to lead the Agency.

Unfortunately, since the law is flawed by being both ambiguous and ambivalent, we're in for an interesting time on this issue. Stay tuned.

The Medical Loss Ratio MLR and Disease Management: Can the Notes Be Cut?

In the movie Amadeus, Emperor Joseph II criticizes young Wolfgang's "quality" music with the observation that "....there are simply too many notes, that's all. Just cut a few and it will be perfect!"

The same kind of logic has been applied by the same kind political class to the health insurers' medical loss ratio or "MLR." According to the Patient Protection and Affordability Care Act (PPACA), "standard" health plans must now, depending on the type of business line, have a MLR of at least 80% or 85%. This is interpreted to mean that of every dollar in insurance premiums collected by insurers, at least 80 or 85 cents has to be spent on medical care. The remainder (15 to 20 cents) goes to insurance functions, such as marketing, investing, actuarial activities, underwriting, claims processing, associated overhead and profit or surplus. A low MLR could suggest skimping on medical services, bloated administrative overhead or excessive shareholder returns. Therefore, a high MLR is good, right?

Not exactly. Check out this still timely and well written piece on the MLR by James Robinson appearing in a 1997 issue of Health Affairs. He points out that the line that separates money spent for medical services from the money spent for insurance services is very blurred. Insurers are increasingly using premium to administratively promote efficient and high quality medical care, while providers are assuming varieties of insurance-like risk-based arrangements such as capitation, upside shared savings and pay for performance.

Accordingly, says Dr. Robinson, it's easy for a MLR to become "skewed." Being in a market with small number of providers, a large amount of capitated arrangements, a limited number of insurance products, a lot of large customers or government contracts and little attention to quality all require less administrative support and will therefore have a higher MLR. On the other hand, health insurers with large networks that insure significant numbers individuals and small businesses, pay claims on a fee for service basis and have NCQA accreditation are likely to have a lower MLR.

What's more, the MLR is not necessarily a good gauge of insurer efficiency. The MLR was originally developed to help regulators and investors assess health insurer solvency, creditworthiness and profitability. That's because a rising MLR could herald a looming inability of an insurer to pay its debt obligations. The converse assumption - that the MLR measures health plan quality or waste - is more uncertain. In addition, there are no studies that have shown that there is a correlation between the MLR and a) the health status of or b) the total administrative expense per managed care enrollee.

These inconvenient truths haven't stopped a hostile Congress from piling on insurers even after PPACA was passed. Much like Emperor Joseph, Senator Rockefeller prefers that health insurers not have "too many notes" in their administrative expenses and simply solve the problem by eliminating some of them. The good news is that PPACA requires that the National Association of Insurance Commissioners (NAIC) figure out just what "notes" belong among the legitimate administrative expenses of a health insurer and which ones can be assigned to the MLR.

It won't be an easy task. For example, the U.S. Senate report linked above decries the expensing of nurse "hotlines, health and wellness, including disease management and medical management and clinical health policy” in the MLR and cites them as examples of insurer shenanigans aimed at putting profits over patients. Fortunately, the DMAA The Care Continuum Alliance has come out with a more common sense position that reflects the realities described in the Robinson paper linked above.

The DMCB recalls that it helped lead a disease management program that was, in an abundance of regulatory caution, 'expensed' as an health plan administrative cost. The nurses took care of patients. We worried about blood glucose control among persons with diabetes, made sure asthmatics used their inhalers properly and worked hard to keep patients with heart failure from being unnecessarily admitted to the hospital. Based on Robinson's insights about the MLR and a common sense interpretation of what's going on in the trenches of disease management, it's silly to categorize population-based care as an "administrative" function.

Back then, the expensing of population-based care was a local and minor issue. Thanks to this now being the subject of an inflexible, clumsy and one-size-fits-all act of Congress, it's become far more important. The DMCB hopes that the NAIC will recognize that disease management makes beautiful music and that notes cannot be simply cut.

(There's lots more on Accountable Care Organizations here)

Mandate a Medical Loss Ratio. Close a Disease Management Care Program or Patient Centered Medical Home Support. How It Could Happen

Develop a wellness program that saves money: close the program. Deliver disease management and reduce costs: close that program too. Develop support for a network of patient centered medical homes and watch your insurance claims drop: close it - gone!

How can that be, you ask?

Read on.

In a prior post, the Disease Management Care Blog reviewed a section of the U.S. Senate's health reform bill (the actual language is on page 9) dealing with the 'medical loss ratio' (MLR). In a fit of populism, the World's Most Deliberative Body has proposed a mandate that required commercial insurers 'rebate' any excess profitability - defined as (depending on the type of insurance) having an MLR that is below 80% to 85%. If that survives the House-Senate Conference, it will become the law of the land.

Recall the MLR is a fraction made up of the a) the amount of money spent on medical services on top (or the numerator) and the b) the total amount of money collected in the form of payments for the insurance or 'premium' on the bottom (or the denominator). By mandating a MLR of 80% to 85%, the Senate is saying insurers must spend at least 80 to 85 cents of every dollar they collect on medical care. That means they get to 'keep' the other 20 to 15 cents. That leftover is used to pay for administrative expenses and to generate a profit.

At first glance, a large MLR suggests that a large fraction of the total premium is being spent on medical services. If 90 cents of every dollar is being spent on doctors and hospitals, that sounds good, since only 10 cents is being spent elsewhere, right? Alternatively, however, if only 75 cents out of every dollar is being spent for medical care, that suggests that 25 cents not going to the patients. 'Bad,' you say?

To our expert political elite on an anti-health insurer bender, a low MLR may sound like the work of the Devil's spawn, but the sophisticated readers of the DMCB know that health care can be far more complicated. It's not necessarily bad for health insurers to also spend money on other 'stuff' (for some examples here, here and then there's this) and it's not necessarily good for insurers to pay for all the stuff that doctors and hospitals want, do or sell (for some interesting reports and telling examples, look here, here, here, here, here, and here)

But it can get even more twisted. As pointed out previously, the language in the Senate's Manager's Amendment identifies the National Association of Insurance Commissioners (NAIC) as the body that defines exactly how a MLR is calculated. While the DMCB suggested in its prior post that the NAIC is up to the task, the one thing that the NAIC has not done well is to clarify if the costs of wellness, prevention, care management or PCMH support programs are costs that are assigned to the medical costs that make up the MLR or if they are administrative costs.

In addition, if an insurer is lucky enough to have a low MLR, that doesn't necessarily mean that there is unused money sitting in a bank somewhere. As noted previously, the proposed legislation doesn't recognize the role of the surplus in a) acting as a cushion against unforeseen losses or b) enabling an insurance company to grow. As a result, if there is any rebating to be done, insurers are more likely to have to decide if they want to rebate some of their surplus or cut their administrative costs. The DMCB thinks it's easier for insurers to cut administrative costs. If medical costs go down by (for example) 10%, the easiest way to meet a MLR ratio is to also decrease the other costs by a matching amount.

Worst case scenario? If a care management program is successful in reducing health care costs - there are fewer hospitalizations, emergency room visits and encounters with specialist physicians - the MLR will decrease. Insurers have to decide if administration or other 'non-medical' costs can be cut to make the MLR go up. Those cuts could include the very care management programs that contribute to the low MLR in the first place.

The DMCB has been down this road. Not too long ago, a customer realized its administrative costs had grown out of proportion to its medical costs. There were dozens of care management nurses on the payroll, and they were targeted in an effort to trim costs. While the DMCB was able to talk the CFO out of that move, it doubts any logic will stand up to the potentially arbitrary and capricious language currently in the U.S. Senate Manager's Amendment.

That needs to be changed. Hopefully, the Conference process will address it.

Two other points:

1) It bears repeating: as far as the DMCB can tell, the language defining a 'proper' MLR was inserted into the Manager's Amendment at the last minute, without being vetted in the usual fashion in open committee with adequate discussion from all interested stakeholders. Uh, exsqueeze me, have we thought this through?

2) This could lead to what George Will described (and the DMCB is paraphrasing) as the Latin Americanization of U.S law and regulations, where more laws and regulations are needed to make up for the unintended consequences of hopelessly complex and poorly thought out laws and regulations.