Medicare Medical Loss Ratio

Medicare Advantage plans (MAO) have been increasingly popular with Medicare eligible beneficiaries enrolling 51% of the eligible population in 2023 taking in $454 billion (or 54%) in Medicare spending. Notwithstanding popularity of the MA program, payments to private health plans are continuously debated and scrutinized by the likes of the Medicare Payment Advisory Committee (MedPac) and health economists. At the heart of the debate is whether Medicare is obtaining good value for the program’s expenditures, i.e., maintaining beneficiaries’ access to high-quality services while encouraging efficient use of resources. To ensure good stewardship of the Medicare Trust Fund, the Centers for Medicare & Medicaid Services (CMS) perpetually makes changes to improve various aspects of the program – quality of care, health equity and payment methodology, to name a few.

Updating risk-adjustable codes for Hierarchical Condition Categories (HCC) for payments by using ICD-10-CM, and revising risk adjustment data validation methodology exemplify some of the improvement measures. The requirement for annual reporting of Medical Loss Ratio (MLR) beginning in contract year 2014 is another attempt to glean from the reported details how Medicare and beneficiary payments are spent to meet the program’s goal. The codified MLR requirements apply to MA plans, Part D plans and Medicare Advantage Prescription Drug plans (MA, PDP and MAPD, collectively Sponsors). Failure to meet the statutory requirement of an MLR of at least 85 percent can result in financial and other penalties for the reporting plan.

CMS has provided instructions to guide reporting entities on inclusions and exclusions in the numerator and denominator of the MLR.

The first rule in the guidance is to apply Statutory Accounting Principles to explain how revenue is used to pay for non-claims expenditures. Secondly, expenditures that benefit multiple contracts, or contracts other than those being reported must be reported on a pro rata share. Some Sponsors own multiple businesses generating profits to the parent company not subject to MLR regulations. This rule is a way to assess if transfer pricing or expense allocation is appropriate. Thirdly, per member per month capitation payments to providers can be included as direct claims for covered services minus any distinct administrative service fees if they are specified in the contract.

When a third-party vendor, through its own employees, provides clinical services directly to enrollees, the entire portion of the amount the Sponsor pays to the third-party vendor attributable to the direct provision of clinical services should be considered incurred claims, even if such amount includes reimbursement for administrative costs directly related to the vendor’s direct provision of clinical services. However, if the third-party vendor hires contracted providers to perform the service instead of its employees, the payments to the third-party vendor may not be included. Some Sponsor use a third-party vendor to conduct coverage determination of medical services or drug benefits, the fees to the vendor can be included as incurred claim if the service is performed by the vendor’s own employees.

Bundled payments to an Independent Practice Association (IPA) or an Accountable Care Organization (ACO) that is a risk-bearing entity are considered payments for incurred claims but not when the payment is to a Pharmacy Benefit Manager (PBM) that pays retail pharmacies for submitted claims, in which case the PBM bears pricing risk but not financial risk for utilization. CMS provides a four-prong test to determine if the risk-bearing entity meets the criteria for “risk-bearing”.

Beginning CY 2019, activities related to fraud reduction and improvement of health care quality are included in the MLR calculation as expenditures. In a subsequent final rule (CY 2021), CMS allows all amounts that an MA plan pays (including under capitation contracts) for covered services including amounts paid to individuals or entities that do not meet the definition of “provider”, such as over-the-counter allowances, meals after a hospital stay or transportation.

MLR measures the percentage of premium income and Medicare payments a Sponsor pays for medical claims. Even with guidance from CMS and Statutory Accounting Principles, gathering and categorizing the required data for reporting can be a complex and, at times, an equivocal process. Mistakes discovered in a CMS audit can pose financial setbacks and compliance risks to the reporting plan. On the other hand, omission of items that should be in the numerator for the MLR is a financial disadvantage for the Sponsor.

Inovaare knows the world of Medicare, Medicaid and Commercial health plans from over 125 years of combined hands-on Regulatory Compliance department oversight. Our consultative approach guides health-plan compliance teams through everything needed to sustain a continuous audit-ready status and the Inovaare platform empowers them to submit CMS-compliant reports with the touch of a button. If you would like an in-depth discussion on how to meet the challenges of dynamic landscape of regulatory changes and stay compliant at all times, please call us at 1.408.850.2235 or  Contact Us