MLR Rule a Baby Step Toward Spending Reductions

The medical loss ratio, also known as the 80/20 rule, is trimming spending by payers. But the fate of the nation's drive to cut healthcare costs rests in the hands of the biggest spenders—providers.

Are healthcare payers parasites or purveyors of value?

As the nation struggles to rein in healthcare spending, which federal officials pegged at $2.8 trillion in 2012, payers and providers have been subjected to intense pressure to boost efficiency and reduce waste. The necessity to take action is undeniable: The share of the economy devoted to healthcare spending is about 17 percent and it is threatening to crowd out other essential goods and services.

One step in the monumental journey toward healthcare cost control is the Medical Loss Ratio law under the federal Patient Protection and Affordable Care Act. Also known as the 80/20 Rule, the MLR requires insurers to spend at least 80 percent of every premium dollar on patient care. Insurers that fail to meet the 80/20 Rule standards are required to pay refunds to health plan members.

In 2012, health plan members gained from upfront premium reductions estimated at $3.4 billion and $500 million in rebates. Last year alone, the 80/20 Rule saved consumers $3.8 billion up front on their premiums as insurance companies operated more efficiently.

Additionally, consumers nationwide will save $330 million in refunds, with 6.8 million consumers due to receive an average (2013) refund benefit of $80 per family for a total of about $9 billion in savings since the MLR program's inception.

But here's the takeaway number for me: 0.00139 percent. This number represents the healthcare spending reduction in 2012 that federal officials tied directly to the 80/20 Rule.

Providers Hold the Keys
The 0.00139 percent figure is a mathematical representation of a truth about the US healthcare system that data analytics pioneer David Burton, MD, shared with me earlier this summer: If you want to make a dent in healthcare spending, the real action is on the provider side of the equation.

Don't get me wrong. Every billion worth of savings we can squeeze from healthcare spending makes a difference.

But don't be fooled, either. Extracting unwisely spent pennies out of payers for each premium dollar is not going to fundamentally fix our healthcare spending problem.

Burton, former CEO and chairman of Salt Lake City-based Health Catalyst, told me that politics and public relations were the prime motivations behind the relatively speedy rollout of the 80/20 Rule compared to the sweeping changes required to reform the way healthcare providers do business. "It's backwards," he told me of the federally driven healthcare reform process under the PPACA.

America's Health Insurance Plans, which represents payers in Washington, has an even darker perception of the 80/20 Rule. Earlier this week, an AHIP spokeswoman provided me with a scathing critique. "The MLR does nothing to address the real drivers of premium increases: the underlying cost of medical care," she said.

"Instead, it limits any expense that does not go directly to pay for medical care or is not included on a pre-approved list of 'activities that improve healthcare quality.' As a result, this regulation places an arbitrary cap on what health plans can spend on a variety of programs and services that improve the quality and safety of patient care, help patients navigate a complicated delivery system, and help control soaring medical costs."

Steve Zaharuk, a senior vice president at Moody's assigned to follow the US health insurance market, told me AHIP's concerns over the 80/20 Rule are well-founded. "Really what you're saving is administrative costs," he told me, adding that administration can have significant cost-cutting impact. "Insurance companies put a lot of money into managed care oversight. It seems the emphasis [of the MLR] is in the wrong direction. It should be focusing on just managed care."

MLR is Just One Step
Susan Horras, director of healthcare finance policy, health plan and population health initiatives at the Healthcare Financial Management Association in Winchester, IL, says the 80/20 Rule is a step in the right direction, but many more steps will be needed to control healthcare spending.

"MLR isn't designed as the definitive answer to reducing overall healthcare costs," Horras told me this week. "MLR has accomplished creating some transparency within the system, which is something all constituents in the industry are working toward. Transparency on healthcare costs will continue to expand as consumers become more educated and demand more information to make healthcare decisions."

If we manage to get there at all, I have a feeling it will be several years before we get close to the definitive answer for our healthcare spending problem.