FASTalert: New Medical Loss Ratio Threshold Mandated by Feds Will Jumpstart Technology Spending by Health Insurers

September 24, 2010 2 Comments FASTalerts by Jack Dean

See WSJ Article.  The new minimum Medical Loss Ratio (MLR) requirements mandated by the federal health overhaul will force health insurers to adjust their business models and aggressively reduce administrative expenses.  The fastest way to reduce the MLR is to implement technology initiatives to automate and streamline processes and transactions.

MLR is a performance metric that measures the amount of spending on medical expenses as a percentage of total premiums or revenues.  The new law stipulates that the MLR must exceed 80% for providers of individual and small-business health plans, and 85% for large-company health plans.  Said another way, providers of individual and small-business health plans must not allocate more than 20% of total premiums to administrative costs plus profits, and providers of large-company health plans must not exceed 25%.

These new medical expense ‘spending requirements’ effectively shrink the slice of the revenue pie that insurers allocate to administrative expenses and profits.   As a result, the for-profit health insurers will be motivated to attack all non-medical expenses to preserve their profit margins. This represents a huge compelling event for sales professionals calling on public-company health insurers such as Aetna, Cigna, Humana, Coventry, UnitedHealth, Wellpoint, and Sierra Health.

Yesterday, regulators issued draft rules clarifying details of the federal health overhaul legislation.  Final approval of the rules governing the measurement of MLRs will be approved by HHS in October.

For providers of large-company health plans performing at MLRs below 85% (for example, UnitedHealth’s MLR was 83% in 2009), pressure will mount to reduce administrative costs or possible pay rebates to the Feds and forfeit profit margin.  And for providers who produce MLRs above 85% (for example, Humana was 88% and Aetna was 87% in 2009), the battle to reduce medical cost expenditures down to the 85% level will represent opportunity cost and foregone profits.

The insurers were disappointed with yesterday’s draft rule which, as written, requires them to account for MLRs separately at every business unit in every state.  If this interpretation remains in the final regulations, this assures that every company in the industry will have to take aggressive actions to reduce administrative expenses or forfeit profit margin in some part of their company.

What a wonderful compelling event for sales professional selling technology into the health insurance vertical.   Take advantage of it!

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