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Implementing Health Reform: Essential Health Benefits And Medical Loss Ratios



February 18th, 2012

On December 16, 2011, the Department of Health and Human Services issued a bulletin describing the approach that it intended to take to defining the essential health benefits (EHB) that individual (nongroup) and small group plans must cover under the Affordable Care Act.  In that bulletin, HHS indicated that each state will select a benchmark plan from a menu of alternatives.  Services covered by that benchmark plan will set the minimum EHB that all small group and nongroup plans in the state must cover.  Plans must cover, however, all ten categories of essential health benefits listed in the ACA.

The EHB bulletin raised a host of questions as to how this approach would work.  On February 17, 2012, HHS issued guidance in the form of an FAQ (frequently asked questions) addressing some of these questions.  This post will discuss this FAQ, as well as information that HHS released on February 16 on implementation of the medical loss ratio (MLR) provisions of the ACA.

The possible benchmarks that a state may choose include:

(1) the largest plan by enrollment in any of the three largest small group insurance products in the State’s small group market;

(2) any of the largest three State employee health benefit plans by enrollment;

(3) any of the largest three national FEHBP plan options by enrollment; or

(4) the largest insured commercial non-Medicaid Health Maintenance Organization.

A single benchmark plan. The FAQ clarify that states must choose a single benchmark plan for both the individual and small group markets.  A state must choose a single benchmark plan in the third quarter of 2012, and the services covered by the benchmark plan at that time will be the benchmark services for 2014 and 2015.  As of 2016, HHS will revisit the benchmark approach.  This approach of choosing a single plan to cover the two year period and both markets should avoid disruption and simplify administration.

State mandates. Several questions in the FAQ address the issue of state mandates.  The ACA requires that states must pay the cost of mandates applied to qualified health plans that exceed the EHB.   For 2014 and 2015, a state can avoid this cost by choosing a benchmark plan from the small group market that covers the mandated services.  However, if a state’s mandates apply to the individual but not to the small group market, and thus mandated services are not covered by a small group plan, the state may need to repeal the mandate or cover the cost.  Also, states may not impose new mandates after December 31, 2011.

If the benchmark plan chosen by the state fails to cover any of the ten statutory categories of  EHBs, the state must supplement the benchmark plan with services covered by one of the other small group plans, or that failing, from the Federal Employees Health Benefits Plan with the highest enrollment.  Special rules are provided for the three most commonly missing services—habilitation and pediatric oral and vision care.

Explaining definitions. One category of benchmarks is the largest plan of one of the state’s three largest small group products.  The original bulletin defined :

“products” as the services covered as a package by an issuer, which may have several cost-sharing options and riders as options. A “plan” refers to the specific benefits and cost-sharing provisions available to an enrolled consumer. For example, multiple plans with different cost-sharing structures and rider options may derive from a single product.

The FAQ explains that a product is the package of benefits filed in an insurance filing with the states, and “for purposes of identifying the benchmark plan, we identify the plan as the benefits covered by the product excluding all riders.”  It seems to me that this definition contradicts the definitions of plan and product found in the bulletin, which defines plan as a product supplemented by riders, further confusing rather than clarifying the matter.

Health plans will have some flexibility in complying with the benchmark standard.  They may substitute services within one of the ten statutory categories of services as long as the substitutions are actuarially equivalent and as long as they do not violate other statutory requirements, such as the nondiscrimination requirement.  Substitution will not apparently be permitted, however, between categories.

Non-dollar limitations. Plans can impose scope and duration of services limitations as long as they are substantially equal to the benchmark plan and do not discriminate.  Under other provisions of the ACA, plans may not impose annual or lifetime dollar limits, even if such limits are found in state mandates.  The FAQ provides, however, that plans may impose non-dollar limits that are actuarially equivalent to dollar limits.  This will substantially undermine the dollar limit prohibition.

Although large group, self-insured, and grandfathered group plans do not need to cover the EHB, they may not impose annual or lifetime limits on EHBs.  The FAQ indicates that these plans may use any definition of EHB authorized by HHS, and will not be penalized if they make a good faith effort to do so.   Small employers who operate in multiple states must comply with the EHB of the state in which the employer policy is issued, which would normally be where the employer has its principle place of business.

Under additional FAQ, provisions of the ACA requiring coverage of preventive services and mental health parity must be followed regardless of the benchmark plan selected by a state.   States must choose one of the benchmark options and cannot devise their own EHB package.  HHS will identify the largest FEHBP and small group market plans in a state, the states will identify their largest employee plans and HMO plan.  States must identify benchmark plans by the third quarter of 2012 to give insurers time to comply.  A state may select its benchmark plan by whatever process is required under state law, but HHS expects that normally the benchmark will be identified by the state executive branch.

Defining the EHB for Medicaid. Finally, the FAQ begin to address the question of how the EHB will be determined for Medicaid categories that must cover the EHB beginning in 2014 (including the adult expansion population).  The state Medicaid agency may choose a benchmark plans from any of the three categories permitted under section 1937 of the Social Security Act (the State’s largest non-Medicaid HMO, the State’s employee health plan, and the FEHBP Blue Cross Blue Shield plan), as long as it covers the ten required categories, and meets other requirements like mental health parity.

A state need not select the same benchmark plan for both commercial plans and Medicaid, and indeed must use separate plans if the state chooses a small group plan for its benchmark.  A state may also use its traditional Medicaid benefit package to specify the Medicaid EHB.  In any event, states must also cover required Medicaid services beyond the benchmark package, such as early periodic, screening, diagnosis, and treatment (EPSDT) services for children.

Summing up. The FAQ do go some distance toward clarifying a number of the issues left open by the initial bulletin, in particular how plan flexibility will (and will not) work, that states will not establish a new EHB every year, and that a state’s commercial plan EHB need not apply to Medicaid.  The approach selected by HHS will allow states to maintain their coverage mandates (or at least those that apply to the small group market) until 2016, but will preclude the addition of new mandates.  It is still hard to imagine how this is all going to work out in practice, however, and more to the point how plan compliance will ever be monitored, given the ability of plans to substitute services within categories.  One must wonder whether in the end it might not have been more straightforward simply to come up with a federal menu of services.

Medical Loss Ratio Requirements

On February 16, 2012, HHS completed its review of the pending state medical loss ratio adjustments, denying an adjustment to Wisconsin and granting North Carolina an adjustment for one year.  In total, HHS received adjustment requests from 17 states.  HHS granted adjustments to seven states for one or more years, and denied adjustments to 10, but modified most of the state requests it granted.  HHS estimates that the denial or modification of state adjustment requests will result in consumers receiving over $300 million more in rebates than they would have received had the state MLR adjustment requests been granted.

On February 16, HHS also published proposed notices for insurers to use in informing consumers that they are receiving a rebate because of the MLR requirement.   It further requested comments on whether insurers should notify consumers when the insurer meets the MLR requirement and therefore does not need to issue a rebate.

The MLR requirement has proven to be intensely controversial, but it is reportedly driving current actual reductions in premiums and premium holidays, and it is likely to result in significant rebates in August of this year for 2011.  The requirement has, allegedly resulted in reduced compensation for agents and brokers, who are pushing legislation in both the House and the Senate that would remove broker and agent compensation from the rebate calculation.  According to a NAIC study, this legislation would have reduced rebates in 2010, had they been granted for that year, from $1.95 to $770 million.  It might cost consumers even more for 2011.   Whether or not this legislation will be adopted remains to be seen.

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