By Avni Thakore MD, FACC, chief medical officer, Catholic Health Services of Long Island; Vikrum Malhotra, MD, cardiologist, AdvantageCare Physicians, New York; Maria Calma, service line manager, AdvantageCare Physicians; Gaganjot Uppal, student optometrist, Technological University of Dublin, Ireland; Arshjote Uppal, medical student, Queen’s University Belfast, Northern Ireland
 

Value-based care and medical loss ratio use in an accountable care organization

The Affordable Care Act (ACA) caused reimbursement for claims to shift toward a value-based reimbursement model from a fee-for-service-based model. The ACA created federal minimum medical loss ratios (MLRs) for all insurers, which require insurance companies to spend a minimum amount of the premium they collect on medical claims and clinical expenses.

The law also directed the National Association of Insurance Commissioners (NAIC) to create the formula for determining MLRs. The law requires insurers to calculate this key performance indicator (KPI) and report the MLR annually to the NAIC to identify whether insurers are meeting their requirements.

Medical loss calculations must ensure that government-specific adjustments include claims, premiums, taxes, administrative expenses and quality improvement expenses.

It can be difficult to determine what constitutes a medical or quality improvement expense as this may overlap with administrative expenses. For example, paying a healthcare professional to deliver care can fall under both categories. This issue was addressed by the NAIC when it established quality improvement objectives: activities that improve healthcare quality, prevent hospital readmissions, improve patient safety, reduce medical errors, lower rates of infection, increase wellness, promote health and increase patient awareness and knowledge.

Typically, medical and quality improvement MLR is expressed as a percentage and is calculated by dividing the claims paid plus expenses related to quality improvement over the premium collected less any taxes or fees associated with that premium (See Figure 1).

Medical practices use this key performance indicator to identify which practices are performing successfully and to attribute an objective piece of data that can be narrowed down per medical department and per physician in that department. This can be calculated in a similar manner whereby the physician or department expenses are divided by the premiums collected less any taxes or fees associated with that premium.

For example: If an insurance company paid out $1,000 in allowable expenses ($900 in claims and $100 in quality expenses) divided by $1,500 (adjusted premium $2,000 less $500 in taxes and fees), the calculated MLR would be 1,000 divided by 1,500, or about 67%. This 67% MLR would mean that the insurer pays 67 cents out of every dollar of the insuree’s premium toward medical claims and activities that improve quality of care, while the remaining is spent on nonmedical costs such as administrative expenses, payroll, overhead and advertising. The MLR calculation can be demonstrated mathematically using the equation:

In general the minimum MLR is 80% for individual and small practices and 85% for larger practices. An MLR of 85% or less often is not desirable. Should an insurer fail to meet at least an 85% MLR, it is required to offer a rebate to customers. It is important to note that MLR requirements vary by state and allow for differences in rural and urban health insurance markets where the levels of competition vary. Typically, markets with more insurers competing for business must meet a higher MLR.

As a key performance indicator, MLR can be utilized in multiple ways. MLR has the potential to bend the cost curve in healthcare. Expenses directed toward quality improvement activities that show tangible results (especially in prevention, patient medication adherence, chronic disease management, etc.) are likely to be viewed positively.

Rebates are administered to the insurance company and the medical practice based on this key performance indicator. MLR can also be used in medical practices to dictate the reimbursements of medical professionals and operational staff. MLR can be utilized as a way of holding organizations accountable for their medical resource utilization, which often include marketing salaries, administrative costs, overhead and agent commissions. 

Although maintaining a high MLR by insurers has meant a more effective delivery of healthcare to insurees, there are some issues with this. Overly stringent MLRs could drive insurers out of some markets, leaving consumers with very few coverage options. This is especially a problem for small insurers, because their MLR can fluctuate from year to year based on market volatility. For example, if fewer medical claims are filed for a given year, the MLR will fall below government thresholds, resulting in the organization having to issue customer rebates. In the next year, they may have a lot of claims, causing MLRs to skyrocket, which could result in the insurer struggling to recoup these costs.

The NAIC proposed allowing credibility adjustments that would entitle the insurer to receive additional credits based on the amount of business they see. These credits would be added to the costs associated with medical claims and quality improvement activities, and hopefully account for market fluctuations.

Medical practice administrators and leadership have been tasked to design cost savings, quality and access improvement measures as healthcare reimbursement models continue to evolve. Health systems and medical practices will be required to participate in downside risk while also benefitting from upside supplemental reimbursement.

To create a robust clinical and operational strategy, one must understand the MLR principles and how they influence an institutions’ financial health to thrive.