Improving the Affordable Care Act by Modifying the MLR Rule

The Affordable Care Act is a big step in the right direction, but like any big complex new thing (think 787 Dreamliner) there are likely to be hiccups coming out of the gate. I’d like to see us learn from implementation of the law and make improvements along the way. Unfortunately many opponents take the opposite view – and would still rather repeal the whole law or resist implementation.

The Affordable Care Act is a big step in the right direction, but like any big complex new thing (think 787 Dreamliner) there are likely to be hiccups coming out of the gate. I’d like to see us learn from implementation of the law and make improvements along the way. Unfortunately many opponents take the opposite view – and would still rather repeal the whole law or resist implementation. For example, Eric Cantor is again vowing a House vote on full repeal, states are rejecting the Medicaid expansion and having the federal government run insurance exchanges in their states rather than doing it themselves.

In the spirit of improving the law, I’d like to see a modification to the minimum medical loss ratio rules for health plans. Under the law, plans have to spend at least 80 percent (individual and small group) or 85 percent (large group) of premiums on medical costs. On the positive side this ensures that health plans use their resources on medical care and reduces incentives to restrict access, but it also limits the incentives for health plans to contain costs. After all, if medical costs are contained “too much” then the plan has to pay a rebate.

But we really should want plans to contain costs: by negotiating hard with providers, by introducing better network designs, and improving payment methodologies. Plans should be rewarded financially for doing this.

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One way to make it happen would be to let plans with a strong track record of cost containment escape the MLR, at least partially. For example, if a plan raised its premiums by less than the market rate or less than some external benchmark such as the Consumer Price Index, it could be allowed to have a lower MLR –and higher profit margin. That would encourage plans to do a better job of holding the line on costs because it would be the surest route to enhanced profitability.

(image: medical loss ratio rules / shutterstock)