Final Rule on Medical Loss Ratio for Medicare Parts C&D

The Centers for Medicare & Medicaid Services (CMS) has published in the Federal Register a final rule implementing Medical Loss Ratio (MLR) Requirements for Medicare Advantage and Medicare Prescription Drug Benefit Programs (Medicare Parts C & D). To read the 31-page final rule, click here. The regulations take effect July 22, 2013.

The rule makes changes as required by the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, which are collectively referred to as the Affordable Care Act (ACA). The final rule implements section 1103 of Title I, Subpart B of the Reconciliation Act. This section of the ACA implements new medical loss ratio (MLR) requirements. MLR requirements have been established for private health insurers and this rule expands the MLR requirements to Medicare Parts C&D.

Several organizations commented that there was no statutory directive to make MLR requirements applicable to Medicare Part D, however, the rule Background section explains that "Because section 1860D-12(b)(3)(D) of the Act incorporates by reference the requirements of section 1857(e) of the Act, these new Affordable Care Act medical loss ratio requirements also apply to the Part D program."

In summary, the rule requires Medicare Advantage organizations and Part D sponsors to report their MLR, and they are subject to financial and other penalties for a failure to meet the statutory requirement that they have an MLR of at least 85 percent. The ACA requires several levels of sanctions for failure to meet the 85 percent minimum MLR requirement, including remittance of funds to the Secretary, a prohibition on enrolling new members, and ultimately contract termination.

With regard to how anti-fraud activities are accounted for, this new rule essentially mirrors the one that currently applies to private health insurers. Following is a key excerpt from the Comment and Response portion of the rule that addresses anti-fraud activities:

"Comment: Many commenters requested that CMS consider as QIA [quality-improving activities]all activities to prevent and reduce fraud, waste, and abuse, noting that CMS requires such activities as a condition of participation in the Part C and D programs. Commenters stated their concerns that by not allowing plans to count all expenses incurred in reducing fraud, waste, and abuse, it will result in a disincentive to engage in these beneficial activities. "Response: Fraud reduction efforts include both fraud prevention and fraud recovery. We are allowing the amount of claim payments recovered through fraud reduction efforts, not to exceed the amount of fraud reduction expenses, to be included in incurred claims per ?? 422.240(b)(2)(ix) and ?? 423.240(b)(2)(xiii). Thus, even though fraud prevention is not a QIA, we believe this provides an incentive for MA organizations and Part D sponsors to engage in fraud reduction activities. To the extent that MA organizations and Part D sponsors are engaging in other activities that meet the requirements in ?? 422.2430 and ?? 423.2430, they may be considered as quality improving activities."

??422.2430 addresses the calculation of MLR and ??423.2430 addresses the activities that improve health care quality.

Please contact Leigh McKenna, Director of Government Affairs at or 202.349.7987.