If insurers are forced to exclude medical cost-containment activities from medical loss ratio calculations, they may place less emphasis on lowering health care costs, industry analysts warn.

The Patient Protection and Affordable Care Act establishes new minimum loss ratios for health insurers. Beginning on Jan. 1, 2011, insurers will be required to spend at least 80 cents of every premium dollar paid by individuals and small groups, and no less than 85 cents of premiums collected from large groups, on direct medical care expenses. Insurers that do not meet these thresholds will be required to rebate the difference to policyholders or deduct it from the subsequent year's premiums.

In anticipation of this change, some health insurers are shifting some cost-containment activities to the medical expense column from the administrative expense column on their ledgers, a report released this month by the chairman of a Senate committee contends.

The report, released April 15 by Sen. John D. Rockefeller IV, D-W.Va., chairman of the U.S. Senate Commerce, Science and Transportation Committee, noted that Indianapolis-based WellPoint Inc. recently reclassified several activities such as nurse hot lines and health and wellness activities, including disease management and medical management, increasing the insurer's 2010 MLR by 170 basis points, or 1.7%.

The report criticized WellPoint's move, asserting that “boosting medical loss ratios through creative accounting will not fulfill the new law's goal of helping consumers realize the full value of their health insurance payments.”

So far, no other insurers reportedly have made similar accounting changes to boost their MLRs.

CIGNA Corp. said it is too early to say how the new MLR minimums will affect the company and, because the definitions still are being developed, the Philadelphia-based insurer doesn't intend to restate its MLR at this time.

Neither Hartford, Conn.-based Aetna Inc. nor Minnetonka, Minn.-based UnitedHealth Group Inc. said they had altered their accounting practices or reclassified administrative expenses, saying they are awaiting a final definition of MLR.

While consumers and policymakers view low MLRs as evidence that an insurer is spending too much money on administration and profits and not enough on medical care, investors view a declining MLR as an indication that an insurer is reducing its risk and increasing its profit potential.

In fact, during an April 20 call with analysts, UnitedHealth CEO Stephen Hemsley attributed much of the improvement in the insurer's financial performance to medical cost containment efforts, which resulted in a lower MLR for 2009. UnitedHealth's consolidated MLR on its commercial book of business was 83.5% in 2009, below the 85% threshold set by the health care reform law.

“Insurers have a whole infrastructure designed to bring down costs,” said Steve Zaharuk, vp and senior credit officer at Moody's Investors Service in New York. If those activities are excluded from MLRs, it is possible that insurers “will spend the money on health care and not try to lower costs,” he said.

“If you want to incent those behaviors, you need to reward companies for engaging in those types of practices. If you disincent companies from doing that, they're going to stop doing it,” warned Bradley Ellis, a director at Fitch Ratings in Chicago.

“They're spending dollars to prevent spending more dollars,” observed Bridget Maehr, senior financial analyst at A.M. Best Co. in Oldwick, N.J.

A similar debate has ensued among members of the National Assn. of Insurance Commissioners' Health Care Reform Solvency Impact Subgroup, which was formed after the passage of the health care reform legislation, and the Department of Health and Human Services. Although the health care reform law prescribes that activities designed to improve health may be included in the MLR, the two groups ultimately will decide which cost containment activities will be defined as medical costs.

The NAIC committee's chairmen were unavailable for interviews last week. However, sources within the NAIC told Business Insurance that the two groups have met twice so far and are reviewing materials submitted by America's Health Insurance Plans, the industry's Washington-based trade group, as well as the American Academy of Actuaries, and others.

Although the NAIC's Accident and Health Policy Experience form includes several line items for expenses that may be included in MLRs, state laws vary as to what cost-containment activities insurers may include.

For example, New Mexico regards case management, disease management, health education and promotion and preventive services as medical expenses that can be included in calculating the MLR, while many other states consider them to be “discretionary,” an NAIC spokes-man explained.

Regardless of what eventually is included in the formula for calculating MLRs under the health care reform law, it only will affect insurers' fully insured business and is unlikely to have much of an impact on insurers' self-insured business, analysts and others point out.

“When you look at (generally accepted accounting principles) statements, self-insured business is not included in the premium line. It's (administrative services only) fees. Employers buy services for medical management, and it's part of the fees,” explained Mr. Zaharuk.

“Are we going to continue to focus on bending the cost curve or just on spending to 85%?” said a spokesman for UnitedHealth. “Half of our commercial membership is self-insured. If we can't help them keep costs down, they will pay their claims themselves.”