Kaiser Health News is reporting that the Obama administration is preparing to implement yet another rule change in the rollout of Obamacare that would relax the enforcement of the medical loss ratio (MLR) provision for health insurers.

To review:  The MLR provision, which took effect in 2012, requires all insurers in the individual and small-group  health insurance market to spend 80% of every insurance premium dollar (85% for insurers in the large-group market) on medical care and expenses for customers, according to specific guidelines developed by the government. Only the remaining percentage of 15-20% can be used for administrative costs and profits. If an insurer does not meet its minimum-loss ratio, it must issue a rebate to its customers.

From Heritage.org: “In the Federal Register, the Department of Health and Human Services signaled it may give insurers a temporary break on the ratio requirements, citing “the special circumstances” of the disastrous launch of Obamacare’s federal exchange website (HealthCare.gov). The administration also made other last-minute political changes during open enrollment, which ends on March 31.”

The minimum-loss provisions have been roundly criticized in this and other forums, as insurers would have little reason to manage claims costs below the MLR, since they will be penalized for doing so. It essentially sets the allowable limit for profit, regardless of how efficient or how successful a carrier is. In other words, health insurance carriers are regulated as utilities (a concept I first ran across in a well-known industry publication more than fifteen years ago).

The issue appears to be that insurer costs relating to the botched launch of Obamacare will make it difficult if not impossible to meet the MLR. Of course, at that point, if losses due to claims and other costs exceed revenue (likely, in my opinion), then the next big crisis will be “risk corridors”, which will compensate health insurance carriers for unanticipated losses. An understanding of this can be found here. And yes, it is a bailout, since the government agreed to compensate insurance carriers, who are required to meet claims and loss guidelines mandated by the government, for losses under The Affordable Care Act.

That it is considered to be a bailout by conservatives and not-a-bailout by progressives is a given. The reality is that the taxpayer is on the hook for outflows from companies who agreed to participate in the health insurance exchanges, if inflows don’t meet requirements for claims and costs (very likely, given that much lower numbers of previously-uninsured applicants, as well as applicants who are in the younger ages that the plan requires, have actually enrolled in Obamacare). In fact, many in the media get it completely wrong, as detailed here.

It is puzzling to me why some Republicans are quick to introduce legislation forbidding insurer compensation (known as the risk-corridor provisions) for losses incurred in meeting the requirements of Obamacare. They’d be better off simply allowing the Act to come apart on its own, which is what will happen, given the amount of panicked fiddling that is occurring with its implementation, and replacing it with something that will work, minus all of the social re-engineering. Eliminating the risk corridor provisions of Obamacare will simply bankrupt most carriers who agreed to participate in the exchanges, since they will be unable to sustain the losses that will occur given the conditions as they exist “in real-ville”. It’s been obvious for some time that the estimated number of uninsured, by most left-of-center pundits and think tanks, including FamiliesUSA, was optimistic; those numbers were used to justify and support all of the projections needed to make Obamacare work. That it isn’t working shouldn’t now be a surprise, and bankrupting insurers will simply provide Democrats with the end game they’ve always wanted: the death of the private health insurance market. Republicans should brandish the “no bailouts!” banner with great trepidation.

Senators John Barrasso, R-WY, and  Sen. Tom Coburn, R-OK, have co-authored a report detailing the disaster known as Obamacare. Senators Barrasso and Coburn have a unique perspective on the emerging octopus of centralized/federalized health insurance: they are both physicians.

Some excerpts from the 38 page report:

• Warned the health care law could eliminate about 788,000 jobs. CBO Director Doug Elmendorf confirmed in Congressional testimony that the health care law would reduce the workforce by approximately 800,000 jobs.
• Concluded the Medicaid expansion’s “extra costs forced upon state taxpayers and state governments could climb into the hundreds of billions of dollars”. In fact, according to a tally of state estimates, the law will impose about $120 billion in additional costs on states, just in the first few years of the law’s implementation.
• Explained the Community Living Assistance Services and Support (CLASS) program was “a budget gimmick to appear to offset new spending” and warned the program could “expose taxpayers to tens of billions of dollars of loss” because it was would eventually collapse. The Department of Health and Human Services (HHS) has admitted CLASS was unworkable, and shuttered the program.
• Cautioned “the appearance of Medicare‘s extended solvency is actually only a mirage. In reality, under the new law, Medicare‘s unfunded liabilities will grow worse”. The Medicare Actuary late concluded that Medicare’s unfunded liabilities are made worse by about $2 trillion under the law.
• Warned that “as the new law is being implemented, millions of Americans are in danger of losing their current health insurance.” HHS concluded that, under the law, between 39 and 69 percent of businesses will lose their status as “grandfathered health plans”—plans largely unaffected by the law’s new mandates. HHS estimates by 2013, up to 80 percent of small businesses will lose their grandfather status.
• Noted that “rather than fixing an issue everyone in Congress agreed was a problem, Congressional leaders left the doc fix out of the final health bill” because of “budgetary shenanigans” to decrease the appearance of the bill’s cost. We warned that this policy omission “could endanger access to care for millions of seniors. In fact, Congress has already had to intervene several times to prevent severe cuts to physician reimbursements that would harm seniors’ access to care.

An eye opening report that every employee worried about their employer abandoning their health care, and every employer worried about the spiraling cost of benefits, should read.

The Republicans, to their credit, are determined to fulfill a campaign promise to repeal Obamacare and have scheduled debate and most likely hearings on the legislation, which should keep the issue front-and-center as a national campaign issue as we enter the 2012 Presidential campaign – something that has already started, for those who don’t yet know it.

“Let’s be clear” – to borrow a phrase – the POTUS will veto anything that smacks of repeal, or anything that waters down his intent to bring the private health insurance industry under the wing of the federal regulatory apparatus via wage and price controls that were legislated and are now being promulgated as regulations by HHS, CMS, and the IRS. The “battle lines” are drawn (sorry for the un-civil reference; it is a good one, though).

Democrats are doing their usual bang-up job, aided and abetted by like-minded media types, of characterizing Repubs as cruel and inhuman for wanting to, say, do away with the reforms that Obamacare brought to pre-existing conditions limitations, even though, in practical terms, the issue really isn’t an issue, only affecting 2-4 million people yearly, out of a total insured population of around 260 million under age 65. And the solution they’ve proposed through Obamacare, which essentially forces individual health plans to become small group health plans in all markets, will be substantially more expensive for all, driving even more people into the ranks of the uninsured – until the subsidies kick in, mind you, which really just redistribute tax dollars from those with more income to those with less income (and explains why the feds are setting up for a massive increase in Medicaid enrollees – I’ve seen estimates of more than 80 MILLION enrolled by 2014!). Never mind that solutions already exist, and have existed for years, but have never been enthusiastically developed to provide an efficient, truly workable safety net for those unfortunate 2-4 million people who do have pre-existing conditions and would like to remain covered. No, what was needed, claim the proponents of Obamacare, was a massive expansion of the federal entitlement bureaucracy and a new redistributive scheme. We even have the words of Donald Berwick, recess appointed as administrator of the CMS, as proof.

So, what now?

Opponents of Obamacare need to counter the overblown and, frankly, inaccurate claims by progressives that repeal of any part of the Affordable Care Act will lead to “people dying” or other incendiary comments thrown around by those who are in a lather about dismantling their latest entitlement expansion. Bottom line is that it needs dismantling.

First, Republicans need to outline, in no uncertain terms, what they are proposing and what they will support – and then let everyone know it. Otherwise, from this observers’ position, the Democrats’ win the public relations battle hands-down. It’s the old “they are going to take away your Social Security” argument, one that Dems have honed to a fine edge – and that some people accept as conventional wisdom, even if it contains not one shred of truth.

Second, while repealing Obamacare right now is essentially a symbolic act (although, given the nervousness of some Senate Democrats, I’m not so sure a repeal couldn’t land on POTUS’ desk for him to veto; that would be a gift) politics is all about symbolic acts, and the Republicans need to stick to their principles, and the promises made during the 2010 election cycle, and do everything possible to repeal it entirely, now and in the months ahead. This is a defining moment for Republicans, and they better not waver. Symbolic or not, it will prove to the voters who handed them the keys that they can be trusted.

Since outright repeal is probably not going to happen, given the veto pen over at the White House, constructive replacement is called for, and here is a good list to start.

The biggest danger, though, is one that is receiving little media coverage, which, to my suspicious eye, is by design. The Medical Loss Ratio (MLR) provisions are essentially wage and price controls which will drive out companies currently in the health insurance market, further weakening an already under-performing industry and essentially mandating their financial performance. For proof, look no further than Forbes, which gave the industry a 2.2% profit margin – lower than your grocer. What’s more alarming is that MLRs make no practical sense, as detailed here.

If Republicans want to gain traction quickly, this is one of the first places I’d target (oops -my bad) to change. Mandatory Medical Loss Ratios only make sense if you hate insurance companies and see no practical benefit to allowing them to survive – a view not endorsed by the millions of Americans (a majority, actually) who view them favorably.

To recap, interim regulations concerning the new minimum-loss-ratios (MLRs) were recently released for public comment.

OVERVIEW: Beginning in 2011, health insurers must spend at least 80%, or 85% for the large group (more than 100 employees) market, of premiums for medical care claim expenses and “health-care quality improvement”. Otherwise, they will be penalized – beginning in 2012, they will be required to provide rebates to their customers.

The National Association of Insurance Commissioners (NAIC) was entrusted with writing and creating the definitions and formula for calculating MLRs. The Department of Health and Human Services (HHS) reserved the authority to make final decisions about these regulations, based on the NAIC recommendations.

As previously mentioned in a prior post, HHS went along with the NAIC on their recommendations, for the most part. A review of the interim regulations shows that:

1. insurers are allowed to deduct state and federal taxes from premiums used to calculate MLRs.
2. agent/broker commissions, rather than being treated as pass-through expenses, will be treated as administrative expenses. (More on this in a moment)
3. anti-fraud programs are counted as admin expenses, rather than as quality improvements, as many in the health insurance industry had hoped.
4. MLRs, rather than being judged collectively, are required to be accounted for separately in every state.

Regarding so-called “mini-med” policies, of the kind that have elicited so much press recently concerning waivers from the new regulations on coverage, these plans will have at least another year to gather data before falling under the requirement. Mini-med plans are used in many service industries, in place of traditional health insurance policies, primarily due to costs. [Senator Rockefeller, D-WV, is holding a hearing Dec. 1 on whether limited-benefit “mini-med” plans should even be classified as health plans, which is certainly a shot-across-the-bow in the battle to have these  so-called “mini-med” plans removed from the market, forcing employers to provide much more expensive policies for all full and part-time employees – a jobs killer, for sure!]

States may apply to have the MLR standard adjusted or modified if the requirement would result in the destabilization of their individual health insurance market; some states have already said they will apply for such adjustments.

The agent/broker issue: Many in the industry are puzzled about why compensation, in the form of commissions, were treated as administrative expenses. It’s been argued that commissions aren’t premium income, but are a service charge or fee that is tacked on to the total premium and relayed to the agent as a pass-through expense. NAIC side-stepped this issue on first examination, but the truth is many people are concerned that, without insurance agents and brokers, state agencies would be overwhelmed with questions about how to purchase coverage, what kind of coverage, and so on. HHS, along with the NAIC, is participating in a working group, studying the agent-broker issue further, because of the concern that the market could be destabilized without properly trained and experienced professional agents and brokers helping consumers make informed choices. Developing…

First, some background: medical-loss-ratio (MLR) regs are a controversial element in the Affordable Care Act (ACA), generally known as Obamacare. These regulations impose specific mandates on insurer premium revenues that relate directly to payments for clinical care. Under the ACA, 85 cents of every premium dollar must be spent for claims in the large group market, with 80 cents used as the new rule for the small group and individual health insurance market, regardless of where the insurer does business. These regulations are intended, so the story goes, to reduce excessive administrative expenses. You know, things like, salaries, commissions, and so on. Obviously expenses that are luxuries, right?

Maybe somebody should try and do that with Medicare and Medicaid, neither of which can even estimate, for example, what fraud costs the American taxpayer. But I digress.

To put this in contrast, it has been generally reported that health insurers spent 60 to 70% of premium revenue, more or less, on clinical care payments prior to the enactment of the legislation. Some insurers probably spent more, some less, of course.

Now, it’s no secret that meeting this new medical loss ratio will be problematic for insurers. There is, roughly, a 10 to 20% gap between where insurers are and where they need to be under the new regulations, maybe more. One might be prompted, if you were inclined to froth on about “obscene profits” or rant against “evil health insurers”, to assume that health insurers would simply reduce their allegedly bloated profits, or simply increase rates to meet this new requirement. However, it isn’t as simple as that – especially given the fact that your local grocery store probably makes more in profit percentage than, say, Aetna on an average year. Obviously, given the fact that the federal government is now in charge of both setting prices on premiums, as well as determining what will and won’t count towards the “80% MLR”, insurers were keen to make sure that HHS listened to their concerns regarding what counted as claims-expense and what didn’t.

The actual interim rule, scheduled for official release December 1 and with an official date of January 1, is published here. Entitled “Health Insurance Issuers Implementing Medical Loss Ratio (MLR) Requirements under the Patient Protection and Affordable Care Act”, the document is 308 pages long, and was written by the Office of Consumer Information and Insurance Oversight, Department of Health and Human Services, headed by Jay Angoff. The interim rules build on discussions between Health and Human Services (HHS) and the National Association of Insurance Commissioners (NAIC). In spite of the over-heated warnings of insurance industry “demands” coming from so-called consumer advocacy groups, virtually all of whom are progressive policy organizations, HHS recognized the NAIC by stating that “this interim final regulation adopts and certifies in full all of the recommendations in the model regulation of the National Association of Insurance Commissioners (NAIC) regarding MLRs.” As a practical matter, though, it seems to escape the champions of left-wing “consumer justice” that these interim rules were adopted without any changes by the health insurance industry, as reported by the Wall Street Journal here and here.

It will take me a little time to review this interim rule, and I will comment on it in the future. One thing that I did note in my brief review is the apparent suspicion that HHS holds for the health insurance industry. The other is that, regarding their recommendations to HHS, the NAIC acts very much like any other political organization, in that it’s actions and recommendations are all based on political calculus intended to advance policy positions. It should be obvious to anyone that the NAIC is made up of appointed (by governors) or elected (as in California) state insurance commissioners who do make a point of advancing the policy goals of their respective Democrat or Republican leaders, bureaucracy notwithstanding. It will be interesting to see what will happen going forward, as newly elected Republican Governors begin to make their weight felt in the proceedings of the NAIC and its recommendations to HHS with model rules, especially with states that appoint insurance commissioners. Colorado, due to the election of John Hickenlooper, will likely continue its left of center lean with rule-making recommendations. I suspect that, in the future, HHS might view the NAIC with less and less authority, especially if they begin to differ with the timeline or policy goals of health care reform as laid out by the Obama Administration.

UPDATE: Commentary on the impact of medical-loss-ratios here.