The risks and rewards of medical loss ratio come to managed care

The Medical Loss Ratio (MLR), a key cost control tool that went into effect last year for Medicare managed care health plans, is expected to cut Medicare costs. Given the fraud that has occurred with Medicaid managed care plans, executives for Medicare managed plans would benefit from knowing the challenges with using MLR.

The MLR rule, mandated by the Affordable Care Act, requires Medicare Advantage plans to spend a certain minimum proportion of their premium revenue on healthcare costs and quality improvement activities, and thus caps the allowable amount spent on administrative activities and collected in profits.

The MLR rule has applied to commercial plans since 2011 and had an immediate impact, requiring plans to pay significant rebates of excess profits and administrative spending. In 2012, commercial rebates amounted to $1.1 billion. CMS reported premium savings of $3.4 billion in 2012. In 2014, rebates to consumers totaled more than $332 million for 2013 premiums. Similar results could occur for Medicare managed care plans.

Given the increasing vertical consolidation in the health care industry-with plans acquiring companies that provide services covered by the MLR-MLR calculations may feature prominently in fraud schemes. For example, a plan might pay claims that improperly inflate the amounts spent on healthcare costs, bolstering the desired MLR. Alternatively, healthcare costs may be fraudulently increased through direct contracts. That is what WellCare was accused of doing.

Medicaid Managed Care plans have been required to use the MLR rule for many years in a number of states. Florida Medicaid required WellCare to employ an 80% MLR standard-80% of premium revenues toward valid healthcare costs. WellCare was accused of inflating its purported expenses on treatment costs to falsely increase its MLR. An executive was caught on a recording saying if WellCare reported truthful numbers, “We’re gonna show a 50% loss ratio.”

In some instances, WellCare allegedly manipulated its MLR by simple deception-misrepresenting its profits, medical costs, etc. Other schemes were more complicated: WellCare purportedly overpaid a subsidiary, treating the entirety of such payments as provider expenditures in its MLR reports, while in fact enjoying the flowback of enhanced profits.

WellCare paid $177.5 million to the United States and nine states to settle criminal charges and a “qui tam” (whistleblower) lawsuit that exposed this and other fraud, plus forfeited an additional $40 million. Two executives were sentenced to prison.

MLR fraud can be difficult for regulators to detect. The government might not have discovered WellCare’s fraud if former employees hadn’t filed a “qui tam” lawsuit under the federal False Claims Act and similar state laws. The statute encourages whistleblowing by offering a reward of 15 to 30 percent of the amount recovered. The WellCare whistleblowers were awarded $25 million.

Plan sponsors seeking to avoid WellCare’s legal troubles should ensure the truthfulness of their MLR reports. Potential trouble spots include (1) paying inflated costs to providers or vendors that are owned by or affiliated with the plan; (2) misclassifying administrative expenses as claims-related expenses; and (3) hiding revenue or misallocating revenue from one contract to another.

Perhaps most importantly, company managers should take seriously employees’ concerns about the legitimacy of claimed expenses and revenue allocations and address them before they find themselves facing the situation WellCare did.

ABOUT THE AUTHORS

Tim McCormack and Mary A. Inman are partners and Jessica T. Moore is an associate with Phillips & Cohen LLP, a whistleblower law practice.