Medical Loss Ratio: CMS gives healthcare payers a break on ICD-10 costs

Carl Natale
by Carl Natale

The Centers for Medicare and Medicaid Services (CMS) is allowing healthcare payers to classify some ICD-10 conversion expenses as clinical care.

Health insurers are required to spend 80 percent (in small markets) or 85 percent (in large markets) of premiums on clinical care. The rest can be spent on non-clinical and administrative costs.

This is called medical loss ratio (MLR).

A recent final rule published by CMS classifies part of the ICD-10 implementation costs in 2012 and 2013 as clinical care spending. Specifically it's quality improvement activity (QIA):

"Specifically, the final rule allows ICD-10 conversion costs of up to 0.3 percent of an issuer’s earned premium in the relevant State market to be considered quality improvement activities, for each of the 2012 and 2013 MLR reporting years."

Although CMS is seeking comments on the final rule until Jan. 6, it is effective  Jan. 1.

HealthData Management has an excellent explainer of the MLR change and you can download the final rule (PDF) for reading.

The final rule requires QIA compliant activities to "be designed, among other things, to improve health quality and increase the likelihood of desired health outcomes in ways that are capable of being objectively measured and of producing verifiable results and achievements." Also, the primary purpose must meet one of these requirements:

  1. "Improve health outcomes"
  2. "Prevent hospital readmissions"
  3. "Improve patient safety"
  4. "Implement, promote and increase wellness and health activities"

Until now, "upgrades in HIT that are designed primarily or solely to improve claims payment capabilities or to meet regulatory requirements for processing claims" were specifically excluded from qualifying as QIA.


Provider associations and advocacy groups opposed changing the rule. The reason is very interesting to the political junkies out there:

"Specifically, provider associations contended that ICD-10 does not have any bearing on the treatment that an enrollee receives, and that there is no direct impact on patient outcomes, even if it benefits the medical community as a whole. "

Does that sound familiar?

Health insurers argued that they will be better able to share data among healthcare providers - which will lead to better diagnoses and medical treatment. Basically, they used CMS' arguments for mandating ICD-10 in the first place.