The MLR has been a contentious issue since it was written into the recently upheld law. As health insurance agents and brokers are aware, the MLR provision in the PPACA requires insurers to spend at least 80% of individual and small group health insurance premiums and 85% of large group policies on medical or quality improvement expenses.

Since it went into effect in January 2011, the MLR has prompted most insurance companies to slash the commissions of insurance agents and brokers, say agent groups. The MLR has publicly split the NAIC on occasion in its approach to dealings with the U.S. Department of Health and Human Services (HHS), which oversees it.

The NAIC's Health Care Reform Actuarial (B) Working Group (HCRAWG) MLR Subgroup is looking at how rebate payments in years before 2014 will effect MLR calculation in subsequent years in draft paper IRD14-013.

The MLR subgroup wrote that to “avoid a situation where an issuer pays a rebate based upon multiple years of experience where a rebate has been paid previously, the numerator of the MLR formula includes previous rebates paid for the last two previous years included in the formula.”

For example, in the 2012 reporting years MLR calculations (done in 2013), an issuer will include the rebates paid in 2012 from the 2011 reporting year in the numerator if the 2011 and 2012 experience is combined. But an issue will not include rebates incurred as part of the 2012 reporting year calculations.

Previous rebates paid in the last two years for a reporting year that is not one of the last two actual years are not to be included in the formula, concluded the NAIC subgroup. Thus, any rebate paid in 2012 for the 2011 reporting year is not to be included in the 2014 MLR calculation, but rebates paid in 2013 for the 2012 reporting year are to be included.

Timothy Jost, an NAIC consumer representative, health insurance law professor and textbook writer at Washington and Lee University School of Law, opposed the subgroup's calculation, stating that it “does not achieve the statutory MLR thresholds of 80% or 85% if the insurer prices to achieve an MLR below 80% or 85%.”

Jost assumes that a carrier prices products to achieve a loss ratio of 70% each year. He says that if the rebates are the previous rebates are not added to the numerator of the formula for subsequent years, then each year the rebate is sufficient for the sum of the (losses + rebates ) / premium to equal 80%. Otherwise, it will be about 76%, he says, which is too low.

In, RD14-016, the HCRAWG MLR Subgroup recommended that reporting of MLR rebate calculations for 2014-2016 be modified to reflect reinsurance, risk corridor payments and risk adjustment payments and credits –or “the 3Rs.”

Much of the calculation is contingent on information and guidance from the states and from HHS, so carriers need to pay careful attention to updates and changes from multiple regulators.