HEALTH REFORM: Alternative Provider Reimbursement Models – How Are They Treated Under MLR Rules?

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In a recent health reform alert, “New Rules Issued on Medical Loss Ratio Requirements,” we described the rules issued by the Centers for Medicare & Medicaid Services ("CMS") and the U.S. Department of Health and Human Services regarding the calculation of the Medical Loss Ratio (“MLR”) pursuant to the Patient Protection and Affordable Care Act (45 C.F.R. Part 158). Such rules require individual and group health plans (other than self-funded health plans) to spend a minimum percentage of premium towards medical expense or “medical loss” (or else provide rebates to enrollees). Other expenses are generally considered “administrative” and not counted toward such minimum. For purposes of this alert, “medical expense” (or “medical loss”) is defined primarily as “incurred claims” and certain quality improvement activities (“QIAs”).

The line differentiating administrative expense and medical expense can be difficult to determine. Historically, most health insurers (issuers) have reimbursed providers for clinical services rendered on a “fee for service” basis. Such fees clearly qualify as “incurred claims.” Increasingly, however, alternative payment models are being used, including “pay for performance” bonuses that measure a provider’s performance against quality and/or cost (“efficiency”) criteria, bundled payment models, sharing “pools” of funds based on relative value units, and capitation models. Sometimes, these arrangements involve intermediary entities like independent practice associations (“IPAs”) or pharmacy benefit management companies (“PBMs”) that may also perform administrative services, such as utilization review and claims payment. This alert addresses whether such alternative reimbursement models qualify as “medical expense” for purposes of calculating MLR Federal regulations define the term "incurred claims," which is a component of the numerator for determining MLR. These regulations also permit activities that improve health care quality to be counted as “medical loss” for purposes of calculating MLR. The MLR regulations specify that QIAs must be designed to do the following...

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