The Medical-Loss Ratio Conundrum

Since I wrote my last blog regarding the confusion that I have with the whole medical-loss ratio mandate, I have been inundated with e-mails and phone calls.

Since I wrote my last blog regarding the confusion that I have withthe whole medical-loss ratio mandate, I have been inundated with e-mails and phone calls. People either took strong opposition to my assertions or supporting my assertions about the uncertainties surrounding the MLR mandate.

I thought it would be better to write a follow-up blog to answer some of the queries/statements that were made to me rather than individually responding to all the feedback provided, as the theme was pretty consistent. So here goes.

Most of the people who had contrasting views, had their comments centered around following two points:

* The detailed explanation of what will contribute towards numerator and denominator of the MLR equation and based on that the assertions were made that it will not be that difficult to achieve the MLR ratio.

* Some of the numbers used, such as the current average of the industry of 78 percent MLR, not being accurate.

Let me take the second point first. I will be the first one to admit the numbers could vary quite significantly depending upon what report one reads or what group of payers one works with. Based on our internal research and the clients that we work with and obviously with a bit of extrapolation, we came to the 78 percent number, an approximation. So, I thank the people who provided a different set of numbers--it will only improve our research range. Though, as I will reiterate towards the end of the blog that the core theme is not about the current numbers but more about the continual strain the mandate will put on the payer community.

Now regarding the first point as to what will contribute towards the calculation of the ratio. I don’t think anybody is absolutely clear about what will be in the numerator and denominator. At best it's an educated guess as of now. In any case, once again, the issue is not about the constitution of numerator and denominator, but more about having to maintain the 85/15 split between the medical loss (ML) and the administrative loss (AL).

So let me cite an example to make my point. Let’s say, I am payer "A" and have achieved the 85/15 split (yes, I'm a big national payer and hence must adhere to the 85 percent ratio, rather than the 80 percent requirement  for smaller, regional payers). I'm sure we can all agree that for me to have achieved that ratio, it would have taken some effort. Let’s also assume my total premium intake was $100. That means I am spending $85 on the reimbursements and expenses associated with quality improvements, and $15 on other administrative expenses.

Now let’s say there's a new, revolutionary medical procedure that reduces the cost of care for a quadruple bypass by $5 and for the hypothetical example, I'm also assuming that the only claims I was paying were for the bypass. This means that I will have to pay only $80 off of my premium collected for reimbursement. But that messes up my MLR mandate because now the split is 80/15/5, the last 5 being either additional profit or some kind of repayment back to my members. Let’s say I send the $5 back to my members as a premium reduction check. Now my total premium intake is $95, of which I am spending $80 on cost of care and $15 on administrative costs. This means my ML:AL ratio is 84.21/15.79. Not exactly 85:15. This is the problem. For me to get back to 85/15 ratio, I must reduce my AL by another 88 cents because only if my premium collected is $94.12 will the $80 of medical spend be equal to 85 percent of the dollars collected.
So the big issue is that every time I'm able to reduce my cost of care, I have to make a commensurate adjustment/reduction to my administrative costs also and that is not going to be easy at all. I do understand that some of that adjustment could be pushed to support programs that support improvement in quality of care and hence could be contributing towards the numerator, but I will still have to impact the administrative costs associated with core processing.

I'm sure there's some better explanation that I am failing to grasp here, but based on the calculations that I have shown above, I believe that there is no incentive for payers to decrease cost of care as it will carry an equal impact on administrative costs and ultimately it will reach the point of no-further.

Rajiv Sabharwal is the chief solution architect in the Healthcare and Life Sciences unit at Infosys Technologies LTD. He can be reached at