Health Insurance Info for Colorado

news & commentary on health insurance and benefits

Follow-up: medical-loss-ratios

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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…

HHS issues interim medical-loss-ratio (MLR) regs

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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.

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