The minimum medical loss ratio (MLR) requirement limits the amount of premium dollars that health insurers can use for administrative expenses or retain as profit, ensuring that a minimum share of premiums is spent on claims and improvements to the quality of care. If an insurer is unable to meet a market-specific minimum threshold, the differential must be refunded to policyholders to ensure the portion of premiums allocated to benefits is sufficient compared to the portion allocated to administrative expenses and profit. The Pharmaceutical Research and Manufacturers of America (PhRMA) commissioned Milliman to study how the increasing trend of insurers vertically integrating among healthcare entities can create challenges for traditional MLR requirements. Vertical integration with pharmacy benefit managers, pharmacies, provider groups, or other entities in the healthcare delivery system or pharmacy supply chain allows insurers greater flexibility in managing how MLR is reported, as they have more discretion over how to characterize certain transactions between affiliated entities. Vertically integrated insurers can transfer revenues to vertically integrated affiliated entities, sometimes capturing more profit at the organizational level than MLR limits for the insurer would otherwise allow. In this paper, we present a theoretical example that highlights limitations of the traditional MLR model, which offers only a partial view of the profitability of vertically integrated insurers.

Key discussion points:

• MLR regulations and standards: Specifics on the commercial, Medicare Advantage and managed Medicaid markets.
• MLRs in a vertically integrated world: Intercompany eliminations, relevant regulations, supply chain reimbursement, and applicability to pharmaceutical supply chain transactions.
• The future of MLR calculations: Scrutiny and transparency over intercompany expenses, and the usual-and-customary benchmark approach.

This report was commissioned by PhRMA.