A rule aimed at cracking down on how commercial insurers spend consumers’ premium dollars could upend provider compensation and accelerate adoption of value-based contracts, experts say.

The Centers for Medicare and Medicaid Services proposed in December that provider bonuses included as incurred claims in insurers’ medical loss ratio must be explicitly tied to quality or clinical improvement standards. CMS also recommended that only spending directly related to quality improvement count towards insurers’ quality improvement claims in their MLR.

The medical loss ratio policy means health plans must spend 80% of individual and small group premiums and 85% of larger group plans on patient care. If insurers fail to reach those minimums they must pay consumers back the difference through either a premium credit, check, credit card or direct deposit.

After auditing a series of health plans’ MLRs, regulators said some insurers should be returning consumers a bigger piece of the pie.

Health plans have been offering providers bonuses instead of returning excess profits to patients, CMS wrote in the proposed rule. While some bonuses and incentives should count towards MLR reporting because they motivate and reward high-quality care, offering bonuses to skirt paying rebates misses the point, the agency said.

“This artificial inflation of MLR often eliminates most, or in some cases even all, of the rebate owed to enrollees, regardless of how low enrollees’ claims costs are relative to premiums those enrollees pay,” CMS wrote, adding that the practice denies consumers their guarantee of getting money back in low-claims yearslike when care is deferred due to a global pandemic.

In 2020, insurers paid out $2 billion in consumer rebates to approximately 9.8 million members, according to CMS. Health Care Service Corporation, which runs Blue Cross and Blue Shield plans in five states, returned the most in rebates at $198.6 million; Cigna’s Nebraska affiliate paid out the least, forking over little more than $5,400.

While consumer advocates like the National Health Law Program say the policy changes are appropriate and necessary, insurers and providers have reservations. AHIP and the American Hospital Association both urged CMS to clarify that bonuses related to formal value-based arrangements can qualify. The American Medical Association also worries the policy change could add to physician burdens to earn incentive money.

But if finalized, these changes could lead to greater rebates to consumers in the short term and consumer costs may fall a bit in the long term, since insurers like to set rates so they’re less likely to have to pay rebates, said Mark Hall , director of the health law and policy program at Wake Forest University. CMS estimates the proposed change would increase rebates or reduce premiums for consumers by about $12 million a year.

CMS said it can’t say how often this maneuver has been used or how much consumers have lost out on rebates as a result, since examinations of MLR data haven’t been finalized yet. The most recent public audit available on the agency’s website is from 2017. Regulators noted that the incentive to inflate bonuses is particularly high for integrated medical systems where the insurer owns or is affiliated with a hospital system.

The rule comes as health insurers increasingly pick up physician practices. At the end of last year, UnitedHealth Group grew to 60,000 total physicians, with the nation’s largest health insurer also transforming into what is reportedly the largest employer of clinicians. CVS Health, which houses the insurer Aetna, likewise announced a clinician recruitment push, aiming to add 10,000 pharmacists and primary care professionals to its rolls last year. And once Humana finishes integrating its $8.1 billion acquisition of home health provider Kindred at Home into its business in 2023, at least half of its organization will be made up of clinicians.

This rule will likely not slow growth of payviderssaid Michael Kolber, a partner with Manatt Health. Rather, he just expects it to add scrutiny to contractual terms between payers and providers—particularly those engaged in value-based relationships—and eventually set a precedent for Medicare and Medicaid programs. But unlike Hall, he does not expect it to lower healthcare costs.

“If a plan isn’t going to meet its MLR threshold, it has an incentive to find ways to pay its providers more,” Kolbar said. “When we talk about bending the cost curve and trying to make health costs more sustainable, it really doesn’t do anything to that.”

Along with ensuring that provider bonuses are based on patient outcomes, the agency also wants to stop insurers from using expenses not directly related to quality improvement to inflate their MLRs. Some insurers count expenses like overhead, marketing, lobbying, office space, executives’ salaries, company retreats and wall art as incurred claims, CMS wrote in the proposed rule. The agency expects its proposed change to increase rebates or reduce premiums by almost $50 million per year.

This proposal is unpopular with insurance lobbying giant AHIP, which said in comments on the proposed rule that indirect expenses like salaries, phones and information technology are necessary to help plans carry out quality initiatives.

AHIP agreed that lobbying and executive salaries don’t merit inclusion in MLR reporting, but said insurers should be able to claim a broader set of expenses as quality improvement activities if they can show these expenses are related to quality improvement. CMS should also release examples of what wouldn’t count as a direct quality improvement activity under the new policy, AHIP said.

Today, insurers spend most of their quality improvement dollars on patient navigation and care coordination, said Jonathan Buck, a principal at Polsinelli who focuses on health law.

If this rule is finalized, it could underscore the importance of collaboration between payers and providers, and accelerate adoption of value-based care among health systems, since they will have to share more information to insurers to satisfy their MLR requirements, Buck said. This could spur investment in data libraries and management service organizations, particularly for independent physician associations that may lack administrative capabilities.

“It might be the case that service providers are going to be in demand,” Buck said. “The Humanas and the Uniteds of the world can probably do this in-house, but a very large IPA group might not have the capability to just whip these reports up.”

On the health system side, this rule could also impact their incentive structures, change their operating models, and may change federal reporting requirements, said Bryan Komornik, a partner at the healthcare and life sciences division of consultancy West Monroe. Komornik said provider groups will have to invest in additional administrative, compliance and quality tools to meet these new standards. He hoped the end result would be greater consumer transparency, and not healthcare costs.

“To me, let’s not get hung up on the calculation,” Komornik said. “Not the metrics, but the outcomes, let’s address population health needs, let’s get the data in a place where we can actually prioritize the care appropriately, and shift the insurer from being the person that didn’t pay the claim to being someone that’s actually helping navigate a complex process for the betterment of everybody.”