As we forge ahead in healthcare’s post-reform era, one of the hot topics in the industry is medical loss ratio (MLR). MLR is the minimum percentage of premiums that health plans must devote to clinical services and other activities that improve care, rather than to administrative and overhead costs or revenue. For many plans, it’s a whopping 85 percent. Starting this year, health plans must meet the new MLR mandates or refund the difference to policyholders beginning in 2012. The pressure is on, but there’s no need to sweat. Many activities in which health plans are currently engaged or planning to deploy, such as health information technology (IT), meet the requirements.

The MLR mandates might seem a bit harsh and complex, but the reason they exist is relatively simple: wasteful spending. It is estimated that the American healthcare system wastes upwards of $1.2 trillion annually . The legislation, in essence, is seeking to coordinate care to make it more proactive and preventative. The thinking is that keeping people healthy is cheaper than treating them when they’re ill. Ideally, this approach will mean lower expenses, less waste and, most importantly, healthier people.

To test this concept, let’s take a look at what contributes waste in the current healthcare system and theorize some ways to reduce it.

The Chronically Ill

Approximately 80 percent of the United States’ $2.2 trillion in healthcare costs can be attributed to patients with chronic illnesses . They get the highest levels of medical management from health plans in today’s MCO-focused system, yet 60 percent of them adhere poorly to evidence-based treatments. This generally results in excessive (and often unnecessary) ER visits and hospital admissions.

Duplicate Services

Current malpractice laws often force physicians to practice defensive medicine, ordering multiple and often duplicative and redundant tests and procedures. The reform law doesn’t address this issue, so it’s likely to continue. That’s additional burden for an already overtaxed system.

Provider Utilization

Reform may bring some 50 million uninsured individuals into the ranks of the insured. It’s estimated that these patients will receive 40 percent of the amount of health resources of members who already have insurance. The influx of new patients will dramatically increase provider utilization rates.

So what are some ways to help counteract these primary sources of waste?

First, we need health plan members to be more proactive. Too often, chronically ill patients don’t fully understand their role in the care process, leading to poor drug and care adherence. With the proliferation of email, text messaging, mobile phone applications and other communications advancements, it’s easier than ever for health plans to interact with members to keep their care plan on track. As these exchanges grow and expand, it will be necessary to provide health plans with actionable, clinically-validated data.

In order to prevent the problem of duplicative services and eliminate waste, it’s also necessary to deliver information to the point of care. Most patients see more than one provider, something even more prevalent among the chronically ill. Through health information exchanges, real-time data can be delivered to providers in virtually any format and through a multitude of devices to provide a consistent and more complete view of each patient’s medical situation.

Another way to address the excessive costs associated with the chronically ill is through drug therapy, or medication therapy management (MTM). MTM applies analytics technology to the available medical information for individual patients to enable better adherence, avoid drug interactions and identify proper usage of generics. It has been shown to help identify and enforce the best use of drugs and decrease ER visits and admissions. In some cases it has produced a 4:1 return.

Also, incentives for payers and providers must be aligned. Shifting reimbursement models from fee-for-service to accountable care organizations will encourage providers to proactively engage with patients because providers will share in generated savings. The growth of the value-based insurance design concept will have a similar impact. All of this will require advanced technology and care management tools that can link multiple providers and health plans so that care is appropriately coordinated.

Together, each of these methodologies can help foster more coordinated medical management. And, under reform, the cost of implementing them can be attributed to MLR. To this end, in the next blog I’ll closely analyze the Department of Health and Human Services’ five categories of clinical- and/or quality-related activities that qualify as MLR costs and examine how health plans can utilize health IT to meet the MLR requirements.

In the meantime, what do you think about the impact of MLR regulations? Will they impact health plans as much as some think? And how can technology help alleviate the burden?

We talk more about the new MLR mandates in the second of our new series of e-books called MEDecision Insights. I invite you to download your complimentary copy of "Medical Loss Ratios: Important Implications for Care Management" and share your thoughts with us today. Get your e-book here: http://www.medecision.com/insightseries.