HOW HEALTHCARE PAYERS EXCEEDED

FEDERALLY-MANDATED MEDICAL LOSS

RATIO WITH ESIGNATURES

EXECUTIVE SUMMARY

Under federal mandates and public scrutiny, healthcare payers need

strategic plans to reduce wasted administrative resources, prevent profit

loss and keep premiums reasonable. Identifying the inefficiencies that

can be solved with implementation of healthcare IT solutions, such as

electronic signatures, is one answer. Modification of administrative

processes – with electronic signatures at the forefront – has the potential

to save insurance companies millions in excessive costs.

Excessive administrative costs not only mean loss of profit and higher

costs to consumers, but also risking additional expenses in the form of

consumer rebates when the required Medical Loss Ratio is missed. These

losses are entirely avoidable.

This paper will discuss the business implications of the Affordable Care

Act in greater detail.

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MEDICAL LOSS RATIO: NOW

DIFFERENTIATES HEALTHCARE PAYERSThe Patient Protection and Affordable Care Act (PPACA) enforces a policy called

the “80/20 Rule”. Also commonly known as the Medical Loss Ratio (MLR) Rule,

this policy regulates the percentage of health insurance premium dollars that can

be spent on things other than healthcare. Healthcare payers are now required to

make their medical loss ratio public record.

“Medical costs seem to be growing

at historically low rates, health

insurance premiums have up until

very recently not reflected that,”

according to Timothy Stoltzfus Jost,

J.D. who holds the Robert L. Willett

Family Professorship of Law at

Washington and Lee University. “Health insurance premiums have continued to

grow even though medical costs aren’t growing so fast.”

A leading expert in health law, Professor Jost’s most recent works on the topic

include Health Care at Risk: A Critique of the Consumer-Driven Movement. He

identifies two beneficial effects the medical loss ratio requirements have had for

consumers.

“It forces the insurers to align their premiums with their incurred claims, with

their costs, and there’s some evidence that at least last year their premiums have

come down a little bit so I think that reflects that,” according to Professor Jost.

“The other issue is efficiency. Insurers are forced by the 80/20 Rule to use their

resources more efficiently.”

Starting in 2012, healthcare payers across the country were required to submit

annual MLR reports on all coverage provided within the previous year to the

Department of Health and Human Services (HHS) by a June 1 deadline. If a payer

spent more than 20 percent of premium dollars on administrative costs, that payer

had to provide rebates to its consumers by August 1.

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“Insurers are

forced by the

80/20 Rule

to use their

resources more

efficiently.”

-Prof. Timothy Stoltzfus Jost

80% Healthcare & Quality 20%

Admin

MLR Mandate

AVERAGE HEALTH PAYER REBATES PER

FAMILY IN ALL MARKETS (2012)1

1. Data based on U.S. Department of Health and Human Services report published on June 21, 2012.

(URL: http://ombud.com/r/y3)

2. New Mexico and Rhode Island had the lowest average rebate, $0 per family.

3. The average health payer rebate per family in the United States was $151.

4. Virginia had the largest average rebate, $807 per family.

$50 or less2

$51 - $100

$101 - $1513

$152 - $200

$200 or more4

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“Insurance

Companies need

to plan to

operate their

organizations as

efficiently as

possible.”

-Prof. Timothy Stoltzfus Jost

Additionally, that payer must send a letter to its consumers explaining the 80/20

Rule, the difference between that goal and the payer’s MLR and the percentage

consumers should expect in rebates. For this first year, payers who met or exceeded

the standard were also required to send a notice to consumers.

On top of those regulations, premium rate increases of 10 percent or more are

subject to a review process in which additional documentation is required and the

payer’s MLR is further scrutinized. Federally-approved states have the power to

approve or deny those requests. As the HHS gets underway managing the scrutiny,

one such state can be viewed as a model for methodology - Iowa.

HOW IOWA REGULATES HEALTH PREMIUMS

AND LESSONS FOR PPACA IMPLEMENTATIONThe Iowa State Legislature created the position of Iowa Consumer Advocate

within the Iowa Insurance Division in 2008. Since then, the Iowa legislature has

mandated public hearings and personal notifications for premium rate increases

greater than the annual average health spending growth rate published by the

Centers of Medicaid and Medicare Services (CMS).

According to Angel Robinson, Customer Advocate, Iowa Insurance Division, “Our

changes actually were not brought about by the ACA. They were brought about

by our state legislature before the ACA was even implemented [as a result of]

consumer complaints about not being able to participate in a rate increase process.

Consumers were receiving rate increases. They felt that they didn’t have proper

notice and that they were not being considered in the decision-making process

for approving rates, so the legislature’s response was to create this particular law.”

A precursor to the Affordable Care Act, Iowa law essentially mandates greater

transparency, requiring healthcare payers to provide an explanation for the

proposed increase via personal notices to consumers. This includes a ranking

and quantification of all factors causing the rate increases in consumer-friendly

terminology, according to Ms. Robinson.

Wellmark Blue Cross Blue Shield of Iowa was the only health payer in Iowa to

request a rate increase above the average annual health spending growth rate (as

published by CMS) for 2012 and therefore the only payer required by Iowa law to

participate in this process for 2012 rate increases.

This year, Ms. Robinson has seen a decrease in the number of comments she has

received prior to the hearing. She thinks this is primarily due to consumers’ belief

that the payer will get a rate increase of some amount regardless of consumer

input. Despite this, Ms. Robinson does note an increase in complaints in one area:

healthcare reform’s effect on rate increases.

Whether healthcare payers are ready – or not – their spending is being scrutinized.

Iowa consumers have been analyzing Wellmark Blue Cross Blue Shield of Iowa’s

Healthcare payer spendingis being publicly

scrutinized.

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administrative expenses in relation to premium dollars for a few years now. These

regulations now apply to healthcare payers across the US - not all of whom are as

prepared as Wellmark.

WELLMARK BCBS REDUCING PAPERWORK

AND PERFORMING WELL UNDER SCRUTINYWellmark has performed well under this increased scrutiny, partially as a result

of being ahead of the curve in implementing technologies to reduce excessive

administrative expenses.

WELLMARK’S MLR VS STANDARD (2011)5

Wellmark’s MLR MLR Standard

Individual Market 90.2% 67%

Small Group Market 80.9% 80%

Large Group Market 88.9% 85%

5. As reported by the HHS (URL: http://ombud.com/r/y4)

Iowa Health Insurance

Costs Report:

http://ombud.com/r/y7

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Despite decreased administrative costs, Wellmark Blue Cross Blue Shield of Iowa

has once again requested rate increases for 2013. All have been posted to their

company profile on the federal healthcare website (URL: http://ombud.com/r/y5),

and one is outlined below.

A WELLMARK REQUESTED RATE INCREASE (2013)

It is important to note the per-member-per-month administrative expenses cover

costs that have decreased for Wellmark. This payer has already implemented

healthcare IT solutions – such as electronic signatures – as a preventive measure to

keep administrative costs reasonable.

According to Wellmark’s written explanation of the requested rate increase,

“Administrative costs in aggregate have decreased as a percent of premium from

the prior rating period. Changes in distribution costs are the main driver of this

change in administrative cost.”

Wellmark uses DocuSign to replace manual, paper-based administrative processes

to eliminate excessive expenses with legally-binding electronic signatures.

ESignatures have been part of the solution to achieve compliance, increase

efficiency and save resources. They have exceeded the government-mandated

MLR and reduced the need for printing, faxing, scanning and shipping documents.

Keeping those reduced administrative costs in mind, it is additionally important

to look at Wellmark’s 2013 requested rate increase in context with their 2012

administrative expenses. In 2012, Wellmark’s administrative expenses ranged from

$29.27 to a whopping $92.80 per member per month – all while staying within

a range of 9.02 to 13.81 percent of premium dollars. Although the percentages

remain low, the actual dollar amounts of administrative costs remain high – even

for payers making an effort to cut administrative costs.

MILLIONS OF DOLLARS IN ADMINISTRATIVE

SAVINGS FOR HEALTHCARE PAYERSAccording to HHS, health insurance rate regulations in the state of Iowa saved

6,929 consumers in the small group market $1,125,000 last year. Each payer could

save that amount with electronic signatures.

Payers, such as United HealthCare, have seen electronic signature ROIs of one

million dollars in the first year – on paper-related costs alone. Payers are currently

receiving incomplete paper documents in the mail that must be returned and

resubmitted. Because field completion can be required for submission of electronic

forms, contract turnaround time is reduced from days to minutes.

Prior to eSignatures, it took United HealthCare an average of 32.5 days to add a

provider to their network. This meant they received a completed paper contract

in the mail, ready to countersign and return to the doctor. ESignatures has cut

that time from more than one month to two days, according to Marvin Clark, a Six

Sigma Consultant at United HealthCare with about 16 years of experience in the

“Administrative costs in aggregate have decreased as

a percent of premium from the

prior rating period.”

-Wellmark BCBS of Iowa

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healthcare industry.

This drastic decrease in turnaround time also changed other metrics, according to

Mr. Clark. Previously, the processes of credentialing providers and signing contracts

took place simultaneously, with fingers crossed that both would be completed at

about the same time. Now the provider must be credentialed before a contract is

sent because the process moves so quickly.

Those dollar and time savings extend out of the office for even greater environmental

savings. According to Mr. Clark, if he stacked the paper eSignatures has saved

United HealthCare, that stack of 3.5 million sheets of paper would be 109 stories

tall – taller than the Empire State Building.

“We’re taking trucks off the road; the environmental savings is tremendous,”

according to Mr. Clark.

Healthcare payers are completing administrative tasks in less time, with less

wasted resources, at a lower cost. This means lower costs transferred to consumers

and greater potential for affordable care. That is just one aspect of the potential

savings eSignatures has to offer healthcare payers.

IMPLEMENTING HEALTHCARE IT: ESSENTIAL

TO MAINTAIN COMPETITIVE ADVANTAGEIn regards to health insurance, the Affordable Care Act essentially mandates

greater transparency. These new regulations benefit consumers in several ways:

1. The government enforces returns of premium dollars to consumers if

those dollars were spent inappropriately.

2. The government regulates the percentage increase of premium dollars

with public hearings.

3. Consumers can actually compare the way multiple healthcare payers

spend premium dollars on healthcare and administrative costs. These ratios

can be influential in deciding which payer to choose.

ESignatures are essential

for affordable healthcare to

be a reality for Americans.

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Ombud, Inc.

www.ombud.com

1877 Broadway, Boulder, CO 80302

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This transparency means more administrative tasks are required for compliance.

As a result, healthcare payers publicly benefit from reducing the inefficiencies in

their administrative processes sooner rather than later.

Strategic planning to reduce wasted resources (both time and money) in

administrative processes could be the game changer. Smart payers have already

begun implementing the latest healthcare IT to cut those administrative costs that

are entirely avoidable – to the tune of millions of dollars in savings.

“Insurance companies need to plan to operate their organizations as efficiently as

possible,” according to Professor Jost.

Sure, that’s just smart business, but come 2014, MLR compliance will be last on

healthcare payers’ compliance check list. At that time, the MLR will change to a

three-year average, and other federal programs will be applied prior to the MLR.

“If insurers need to do strategic planning for anything, it’s trying to figure out how

those programs are going to affect their business,” according to Prof. Jost.

Low administrative costs are no longer just good business practices. Low

administrative costs are required to be competitive in the market. Plus, time

is running out to implement a strategic plan to improve processes, eliminate

excessive administrative costs and establish transparency for compliance. While

there is still a lot of room for growth in the successful implementation of paperless

technologies and streamlining the paperwork approval process, electronic

signatures are essential to making affordable care a reality for more Americans.

ADDITIONAL RESOURCES• Fereral government website managed by the U.S. Department of Health

and Human Service: http://www.healthcare.gov

• Iowa Insurance Consumer Advocate website: http://insuranceca.iowa.gov

Low admin costs are

required to maintain a

competitive advantage.

Ombud, Inc.

www.ombud.com

1877 Broadway, Boulder, CO 80302

Record

MLR

Report

MLR

Notify and/orRefund

Consumers

InformConsumers

RequestPremiumIncreases