• Can you handle the MLR math?

    Reader AB responded to my plea for an equation that expresses the new MLR regulation.

    Loss ratio = (claims + activities to improve health care quality) / (premiums – total federal income taxes – state premium taxes and assessments + federal income tax on investment income)

    The last piece of the denominator is just to reflect that while federal taxes can be deducted from the denominator, taxes paid on invest income cannot. “Activities to improve health care quality” has a fairly strict set of criteria for what can be included, defined in detail in the regulations.

    There’s more to AB’s comment but it’s right at this point where he lost me in a sea of jargon and detail I don’t understand. I’m not saying it isn’t important! I just didn’t get the rest because it wasn’t in the equation. So, if you want the rest, see his comment.

    UPDATE: A reader wrote in to say there’s a formula on page 185 of this document. So there is! And it’s got more in it than in AB’s formula so maybe it picks up some details AB was getting at. Here’s that formula:

    Adjusted MLR = (c)/(p – t – f) + (b*d) + u,
    where c = incurred claims
    p = earned premiums
    t = Federal and State taxes
    f = licensing and regulatory fees
    b = base credibility adjustment factor
    d = deductible credibility adjustment factor
    u = low, medium, or high assumptions to account for quality improving activities, unknown behavioral changes and data measurement error
    • The “b” and “d” in that formula are the credibility adjustments I mentioned. The “u” is the quality improvement that really goes in the numerator, but they appear to have split it out separately in this scenario and also added in a “data measurement error” component. The latter is not part of the official calculation, a cursory reading of the pages surrounding that formula suggests they are trying to estimate future rebates and included that factor to account for uncertainty about insurer behavior and how strictly regulators will interpret the rules on quality improvement.