On February 15, the Centers for Medicare & Medicaid Services (CMS) released its Proposed Rule, effective calendar year (CY) 2014, implementing the Medical Loss Ratio (MLR) requirements for Medicare Advantage (MA) organizations and Medicare Part D plan sponsors (collectively, Plan Sponsors). The rule is required by the Patient Protection and Affordable Care Act and the Health Care and Educational Reconciliation Act (collectively, ACA). The proposed MLR rule limits the amount Plan Sponsors can spend on marketing, overhead, and profit and, to a large extent, is modeled after MLR rules already applicable in the private health insurance market.

New MLR Requirement -

The MLR requirement is reflected as a percentage of revenue a Plan Sponsor must use for patient care, rather than for other costs, such as administrative expenses or profit. The Proposed Rule will require that Plan Sponsors spend at least 85% of total revenue on patient care costs. Total revenue is defined as the payments a Plan Sponsor receives from CMS, all premiums paid by or on behalf of enrollees in a plan, and all unpaid premium amounts that a Plan Sponsor could have collected from all enrollees in a plan under the Plan Sponsor's contract with CMS. Patient care costs include clinical services, prescription drugs, quality improvement activities, and direct benefits to beneficiaries in the form of reduced Medicare Part B premiums (which is a unique benefit of some MA plans). Certain costs must be deducted from total revenue for MLR calculation purposes, including licensing and regulatory fees, state and federal taxes, and assessments and payments made toward reducing the Medicare Part B premium for MA plan enrollees. The Proposed Rule provides significant detail regarding the specific nuances in calculating the MLR.