Developments in Medical Loss Ratio Regulation

1. Developments in Medical Loss Ratio Regulation Sponsored by the Payors, Plans, and Managed Care (PPMC) Practice Group of the American Health Lawyers AssociationOctober 15, 2010  12:00-1:00 pm EasternPresenters:Barbara R. Hartung, Esq.Greenebaum Doll & McDonald PLLCPeter L. Thurman, Jr., Esq.Greenebaum Doll & McDonald PLLCWe would like to thank HP AG Co-Chairs Kirk Nahra, Esquire (Wiley Rein LLP, Washington, DC), and Linda Tiano, Esquire (Health Net Inc., Woodland Hills, CA), for planning this call. Barbara R. Hartung Peter L. Thurman, Jr.502.587.3649 / brh@gdm.com 502.587.3582 / plt@gdm.com Greenebaum Doll & McDonald PLLC 3500 National City Tower | 101 South Fifth Street Louisville, KY 40202 | 502.589.4200 | www.greenebaum.com

2. Overview • Background on Medical Loss Ratios (MLRs) • Federal Health Care Reform • NAIC Recommendations: • MLR Blanks Proposal • Draft MLR Regulations • State Waiver Requests and Phase-In • Implementation and Other Considerations • Timeline • What’s Yet to Come

3. Background on MLRs • Concept • National Association of Insurance Commissioners (NAIC) Model • 1980 Guidelines for Filing of Rates for Individual Health Insurance Forms • No similar guidelines for small group market • State Approaches • Individual market • Group market • Other • Absence of Federal Regulation • Summer/Fall 2009 Congressional Investigations

4. Federal Health Care Reform • Patient Protection and Affordable Care Act, Public Law 111-148, enacted on March 23, 2010, as amended by the Health Care and Education Reconciliation of Act of 2010, enacted on March 30, 2010 (both Acts generally are referred to as “PPACA”) • Sections 1001 and 10101 of PPACA added Section 2718 of the Public Health Service (PHS) Act • Establishes MLR guidelines, reporting and rebate requirements • Effective January 1, 2011

5. PPACA & Accounting for Costs • Health insurance issuers offering individual or group coverage must annually report to the U.S. Department of Health and Human Services (HHS) the ratio of the incurred loss (or incurred claims) plus the loss adjustment expense (or change in contract reserves) to earned premiums. • Reports must include the percentage of total premium revenue, after accounting for collections or receipts for risk adjustment and risk corridors and payments of reinsurance, that such coverage expends on: • Reimbursement for clinical services; • Activities that improve health care quality; and • All other non-claims costs, including an explanation of the nature of such costs, and excluding federal and state taxes and licensing or regulatory fees. • Reports to be made publicly available on HHS Internet website

6. PPACA & Ensuring Value for Premiums • Requires MLR of: • 85% for large group market • 80% for small group and individual markets • Health insurance issuers failing to the meet the applicable MLR must provide a premium rebate to policyholders. • Permissible variances in MLR requirements: • Individual market exception • State ability to impose a higher MLR percentage

7. PPACA & Ensuring Value for Premiums (cont’d) • MLR requirement applies to grandfathered plans. • Uniform definitions and standardized methodologies to be established by the NAIC • Deadline of December 31, 2010 • Subject to HHS certification • Methodologies to be “designed to take into account the special circumstances of smaller plans, different types of plans, and newer plans”

8. NAIC Recommendations & HHS Request for Information • On April 12, 2010, HHS sent a letter to the NAIC requesting assistance and recommendations by June 1, 2010. • On April 14, 2010, HHS, along with the Departments of Labor and the Treasury, issued a Request for Information on determining MLRs under PPACA. • Comments were due to HHS by May 14, 2010. • The devil is in the details. • A difficult and delicate balancing act • The HHS target date of June 1, 2010 has slipped several times, first to the end of July, then to mid-August, then to the “end of summer” and finally to the end of October.

9. NAIC Recommendations: MLR Blanks Proposal • Approved by Joint Executive Committee/Plenary on August 17, 2010 • Blanks are the actual forms submitted by insurance companies to report financial information to state regulators, which regulators will review to determine a company’s MLR.

10. MLR Blanks Proposal & Activities “Improving Health Care Quality” • Supplemental Health Care Exhibit – Part 3 • Identifies activities considered as “improving health care quality” • Costs of these activities to be included in a health insurance issuer’s MLR calculation • Qualifying “Quality Improvement” activities are “primarily designed” to achieve the “strategy” or goals outlined in Section 1311(g) of PPACA: • Improve health outcomes; • Prevent hospital readmissions; • Improve patient safety and reduce medical errors, lower infection and mortality rates; • Increase wellness and promote health activities; or • Enhance use of health care data to improve quality, transparency and outcomes.

11. MLR Blanks Proposal & Activities “Improving Health Care Quality” (cont’d) • Each goal represents a category of activities. • Improve Health Outcomes may includes costs for: • Case management, care coordination and chronic disease management • Prevent Hospital Readmissions may includes costs for: • Comprehensive discharge planning • Personalized post discharge counseling • Improve Patient Safety and Reduce Medical Errors may include costs for: • Identification and use of best clinical practices to avoid harm • Identify and encourage evidence-based medicine • Activities to lower risk of facility acquired infections • Prospective prescription drug utilization review to identify potential adverse drug interactions

12. MLR Blanks Proposal & Activities “Improving Health Care Quality” (cont’d) • Wellness and Health Promotion Activities may include costs for: • Wellness assessment and lifestyle coaching programs • Public health education campaigns performed in conjunction with state or local health departments • Actual rewards/incentives/bonuses/reductions in co-pays, etc. that are not already reflected in premiums or claims • Administrative costs of these programs are excluded • Only allowed for small and large employer groups, not individual business • Expense amount is limited to the same percentage as the HIPAA incentive amount limit • Health Information Technology may include costs for: • Expenses to accomplish the activities reported in connection with advancing the other 4 goals or categories • Monitor, measure or report clinical effectiveness • Tracking patient outcomes resulting from a class of medical interventions or a bundle of related services • Providing for electronic health records or patient portals

13. MLR Blanks Proposal & Activities “Improving Health Care Quality” (cont’d) • Activities excluded from “Improving Health Care Quality” include costs associated with: • Establishing or maintaining claims adjudication systems, including HIT upgrades • Retrospective and concurrent utilization review • Most fraud prevention activities • Developing and administering provider networks • Provider credentialing • Marketing expenses • Accreditation fees • Calculating and administering individual enrollee or employee incentives • NAIC, however, will review requests to include expenses for excluded activities and those not described in each category of activities.

14. NAIC Recommendations: Draft MLR Regulations • Short Title • Patient Protection & Affordable Care Act Medical Loss Ratio Regulation • Purpose • To promulgate uniform definitions and a standardized methodology for calculating the MLR • Applies to any health insurance issuer offering group or individual coverage for plan years 2011, 2012 and 2013 • First draft issued on September 23, 2010 • Adopted by Life & Health Actuarial Task Force on October 4, 2010 • Adopted by Health Insurance & Managed Care (B) Committee on October 14, 2010 • A middle-of-the-road approach?

15. Draft MLR Regulations: Basic MLR Calculation • Numerator – “incurred claims” plus any “expenses to improve health care quality” • Limited numerator adjustments applicable to coverage provided to a single employer at blended rates • Denominator – “earned premiums” less federal and state taxes and licensing or regulatory fees • How does this federal standard deviate from existing state approaches? Future interplay between federal and state MLRs?

16. Draft MLR Regulations: “Expenses to Improve Health Care Quality” • Definition derived from Supplemental Health Care Exhibit – Part 3 to NAIC Blanks Proposal • What’s included: • Care coordination • Disease management • Most wellness promotion programs • What’s not included: • Fraud detection • Concurrent utilization review • ICD-10 implementation

17. Draft MLR Regulations: Federal and State Taxes • Literal reading of PPACA MLR requirement • All federal and state taxes and fees are to be excluded from MLR calculation. • Congressional Committee position • Only new taxes and fees specified in PPACA were intended to be excluded. • NAIC Draft MLR Regulations exclude almost all federal and state taxes and fees, other than those on investment income. • Effect on investor-owned plans? • HHS approval?

18. Draft MLR Regulations: Definition of Small Group Health Plans • Discussed during an October 14, 2010 conference call • Different definitions in NAIC MLR Blanks Proposal and Draft MLR Regulations • Note there are different definitions for an individual health plan as well. • Different definitions in PPACA and PHS Act • 50 employees or fewer; or • 100 employees or fewer • Different definitions among states • Ability of states to define small group as groups up to 50 employees until 2016

19. Draft MLR Regulations: Aggregation of MLR Calculations • 3 levels of aggregation • MLR calculated at the “licensed entity level within a state” with experience allocated to states based on the “situs of the contract.” • Experience subdivided into: (i) individual; (ii) small group; and (iii) large group health plans, unless a state requires the individual and small group insurance markets to be merged.

20. Draft MLR Regulations: Premium Rebates • Calculated annually using data as of December 31 of the plan year, except for incurred claims which must be restated as of March 31 of the year following the plan year • Must be reported to the applicable state(s) by May 31 of the year following the plan year • Paid annually by June 30 of the year following the plan year

21. Key Issues Still in Play • Aggregation • Draft regulation calls for MLR to be calculated for each company by state. • Ability to aggregate nationwide for large groups or by legal entity? • Taxes • Draft regulation permits deducting for most taxes from premiums when calculating MLR. • Calls for more restrictive definition leading to a higher effective ratio • Fluctuations • Permit adjustments over years for smaller health plans to avoid penalizing them for a year with unusually low pay outs

22. Other Issues Coming to Light • On October 13, 2010, the NAIC sent HHS a letter to “highlight several issues that have come to light during our extensive deliberations,” as follows: • Solvency and competitive markets: • Phase-in of MLR limits; • Application of the MLR to expatriate policies; and • Payment of rebates. • The NAIC letter also notes its goal to deliver a final product to HHS in October.

23. State Waivers of MLR & Phase-In Period • States requesting waivers • Maine • Fear of disruption in the individual market as there are only 2 insurers selling coverage in this market • Iowa • Fear of disruption in the individual market as smaller insurers will likely not meet the 80% MLR and need a phase-in period • Florida too? • Reports indicate more states are expected to seek waivers. • No determination by HHS as to whether to permit waivers • Some Commissioners have suggested phasing in the MLR on a state-by-state basis. THIS IS AN ADVERTISEMENT

24. Implementation and Other Considerations • Case-by-case consideration of certain services to determine inclusion in MLR calculation • Health care professional (e.g., nurse) hotlines • Prospective utilization review • Radiology benefit managers • Transition period • Issue Resolution Document Number 041 • Small group market • MLR application to mini-med plans

25. Implementation and Other Considerations (cont’d) • Ensuring MLR compliance may result in: • Cutting administrative costs • Reduce staff levels • Re-evaluate agent/broker arrangements • Shifting administrative costs • Reducing fraud detection and concurrent utilization review activities • Industry consolidation • Richer benefit packages • Exit from a particular market segment or the health insurance business altogether

26. Timeline • March 23, 2010 – Enactment of PPACA • April 12, 2010 – HHS Request for NAIC Recommendations • April 14, 2010 – HHS Request for Information • May 14, 2010 – Deadline for Comments • August 17, 2010 – NAIC Issues Blanks Proposal • September 23, 2010 – NAIC Issues Draft MLR Regulations • October 14, 2010 – NAIC Health Insurance & Managed Care (B) Committee Conference Call • October 18-21, 2010 – Fall Meeting of Full NAIC

27. What’s Yet to Come • NAIC final approval of MLR regulations • MLR regulations subject to HHS certification • Will limitations or other standards be imposed on activities “improving health care quality?” • Advancing goals of PPACA • Incentivize and improve quality and health • Improving outcomes or controlling costs

28. Thank you for your time. If you have any questions, please feel free to contact:Barbara R. Hartung502.587.3649 / (brh@gdm.com) Peter L. Thurman, Jr.502.587.3582 / (plt@gdm.com) Greenebaum Doll & McDonald PLLC | 3500 National City Tower | 101 South Fifth StreetLouisville, KY 40202 | 502.587.4200 | www.greenebaum.com