• MLR vs Cadillac tax: Something’s got to give (right?)

    This came up in the comments to another post. What happens when the minimum loss ratio requirements meet the Cadillac tax?

    The Cadillac tax is an excise tax on insurers beginning in 2018, applied to premiums over a threshold. That threshold is indexed to general inflation which is below medical inflation. So the tax grows over time.

    The MLR regulations set a minimum proportion of premiums that must pay for health care costs and, in particular, not taxes. So who or what will pay for the Cadillac tax as it grows?

    These two provisions cannot coexist unless neither is binding. That’s possible if medical inflation comes down to general inflation. But, really? Is that even sensible? It’s not unreasonable for medical inflation to be above general inflation by some amount. General inflation is an average. Some things inflate more, some less. So, it’s hard to fathom how this can work long after 2018. Something has got to give. What will it be?

    Or am I not understanding one or the other of these?

    Later: If I’m understanding the NAIC rules, I think the answer is that taxes are not included in the denominator of the MLR calculation. So, if policyholders pay the excise tax through higher premiums, they get subtracted out. The insurer need only purchase health care services to the tune of (MLR minimum) x (premiums – tax) to satisfy the law. A reader says the latest version of the NAIC rules are here.

    And Later Still: I could have rewritten this whole post to make myself look more informed, but I didn’t because this actually illustrates why it makes sense to subtract out taxes before computing a plan’s MLR. It also shows a way to put more bite into the Cadillac tax. Namely, if only a portion of the tax were permitted to be excluded, like 98% or something, it would put pressure on insurers to be that much more efficient with premium dollars. (I know, this will never happen.)

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    • You are entirely right on the main point – the new excise tax under the ACA is excluded, and (probably) also the federal premium taxes. But Appendix C of the NAIC report states that federal taxes on insurance company investment income are in the denominator. It doesn’t really say what happens to federal income taxes on underwriting income.

      NAIC Report to HHS here: http://www.naic.org/documents/committees_ex_mlr_reg_asadopted.pdf