Final Medical Loss Ratio Rule Rebuffs Insurance Agents

The Obama administration issued a rule today that is sure to disappoint insurance agents: Fees paid to brokers and agents won’t count as medical care, under limits imposed on insurers in the 2010 federal health law.

Photo by Thomas Hawk via Flickr

That’s key because under the health law, insurers must spend at least 80 percent of their premium revenue on medical care and quality improvement – or issue rebates to consumers.  The target is 85 percent for large-group issuers.

Brokers had lobbied hard to have their fees exempted from the calculation of administrative costs, which also includes such expenses as marketing and executive salaries, saying that without such a move, commissions will be cut and agents could lose their jobs, leaving consumers without as much access to brokers who help them choose health insurance.

But consumer advocates fought the move, saying commissions are clearly administrative costs and removing them would make it easier for insurers to avoid paying the required rebates to consumers. Those rebates will go out next year to individuals and small-business policyholders whose insurers fail to hit spending targets this year. The rebates could come in the form of reduced premiums.

Under an earlier rule, rebates to employers would have been taxable, so the final rule says any rebates given for group policies should be in the form of lower premiums or “in other ways that are not taxable.”  It will then be up to the employer or group policyholder to “ensure that the rebate is used for the benefit of subscribers.” In addition, the rule requires insurers to provide notices of rebates not only to the employer, but also to the enrollees.

“If your insurance company doesn’t spend enough of your premium dollars on medical care or quality improvement this year, they’ll have to give you rebates next year,” said CMS Acting Administrator Marilyn Tavenner, who is in her first day as chief of the agency. “This will bring costs down and give insurance companies the incentive to focus on what matters for patients – high quality health care.”

Late last month, the National Association of Insurance Commissioners adopted a resolution urging Congress to amend the federal health law to exempt broker commissions from the tally, known as the “medical loss ratio.” But the NAIC vote was closely divided, and the organization had raised no objection to inclusion of broker commissions a year ago when the draft rule was first issued.

The final rule does not explicitly address the plea from brokers and agents, instead leaving the calculation of administrative costs unchanged from the original draft.

Tim Jost, a law professor and a NAIC consumer advocate, says he is pleased that broker commissions remain in the administrative cost calculation. The overall requirement that insurers spend at least 80 percent of revenue on medical care “is a major benefit to consumers” and will help slow premium growth because “it will result in rebates from insurers who don’t bring down premiums.”

The National Association of Health Underwriters, the trade group that represents agents, said it is disappointed that the Department of Health and Human Services did nothing to mitigate the adverse effects the MLR rule is currently having on the ability of insurance producers to serve the demands and needs of health care consumers.

HHS did agree to phase out rather than abruptly halt special allowances for the administrative expenses of so-called “mini-med” plans that offer limited benefits to individuals or small groups.

Phil Galewitz contributed to this report.

Updated at 2:40 p.m.