Prohibited Costs in QIA (§§ 438.8(e)(3)(i) and 457.1203(c))
CMS’ finalized changes to prohibit the inclusion of indirect or overhead expenses not directly improving health care quality for reporting of QIA costs in the numerator of the MLR further supports alignment with Marketplace guidance. In addition, it improves MLR reporting consistency for better comparison across managed care plans and lines of business. CMS addresses that managed care plans should continue to report its Medicare MLR consistent with the Medicare regulations.
As explained in the Marketplace and Medicaid rule’s comments and responses, the previous lack of clarity in regulation resulted in wide discrepancies regarding the types of expenses reported as QIA, creating an unequal playing field among issuers. CMS clarified in the Marketplace rule that non-salary benefits (health coverage, retirement contributions, life insurance, or similar) of employees performing QIA functions would be considered direct QIA expenditures, but are limited to the actual percentage of time spent performing QIA duties. CMS noted within the Medicaid rule that in such cases, states should ensure the managed care plan provides documentation, such as time studies, showing how it determined the portion of time that staff expended on QIA programs versus non-QIA programs.
However, many other indirect expenses would be incurred, regardless of whether the issuer was engaged in QIA or not and thus are non-includable as QIA. CMS provided a list of non-exhaustive examples of indirect expenses to be excluded from QIA reported costs within the Marketplace rule, but declined to specify within the Medicaid rule, as these types of costs are numerous and providing such a list could lead to inappropriate inclusion of costs that were not specified in the regulation.
Nevertheless, CMS noted the Marketplace final rule preamble included: office space (including rent or depreciation, facility maintenance, janitorial, utilities, property taxes, insurance, and wall art), human resources, salaries of counsel and executives, computer and telephone usage, travel and entertainment, company parties and retreats, IT systems, and marketing of issuers’ products. CMS further stated as a general guideline, there must be a quantifiable and reasonable relationship that exclusively or primarily supports health care quality to be considered as a direct QIA expense. If the managed care plan indicates it cannot separate indirect or overhead expense for QIA, CMS clarified the state should disallow the entirety of QIA claimed expenditures in the MLR.
Expenses supporting regular business or other functions would be considered non-claims costs. CMS further clarified when a software license or IT infrastructure is used to support QIA activities, but is not the primary function, this expense is not considered QIA. Other costs of IT that primarily support regular business functions, including billing, enrollment, claims processing, financial analysis, and cost containment do not constitute a direct expense related to QIA.
CMS clarified when QIA is outsourced versus provided in-house, the same principles for determination of QIA costs is necessary, which means the vendor’s indirect costs and any profits cannot be includable as QIA within the MLR calculation.
CMS also addressed social determinants of health (SDOH), health-related social needs (HRSN), and value-added services (VAS) related to QIA. CMS references the State Health Official Letter dated January 1, 2021, to address SDOH and HRSN expenses in the MLR. Regarding VAS, the costs of these services may not be included in the capitation rate; however, they can be considered as incurred claims in the numerator for the MLR calculation if the services are activities that improve health care quality.
