The impact of accounting and actuarial practice differences on medical loss ratios: an exploratory study of five HMOs

This paper explores the quantitative implications of accounting differences by examining detailed cost information on five health maintenance organizations (HMOs). Standardized cost allocations and actual medical expenses were compared to those publicly reported by HMOs in medical loss ratios (MLRs) and administrative expense ratios (AERs). Differences in accounting and actuarial practices were found to have a small percentage impact on the MLR and the AER, but they accounted for a large percentage of observed differences in reported MLRs and AERs. Policies that regulate MLR floors or AER ceilings encourage HMOs to adopt accounting practices producing the most favorable ratios for regulatory purposes.