State Regulators Recommend New Health Insurance Rules

Insurance regulators unanimously recommended controversial rules Thursday governing how much insurers must spend on patients’ medical care – without adopting any of several last-minute amendments some consumer advocates had feared would gut key provisions.

The rules, which involve an important provision of the new health overhaul law, now go to Health and Human Services Secretary Kathleen Sebelius, who has final say.

Leaders of the National Association of Insurance Commissioners voted after months of meetings and debate involving industry and consumer representatives. The recommended rules center on the “medical loss ratio,” which is how much insurers spend on medical care versus administration and profit.

The health overhaul law approved by Congress in March requires insurers to spend at least 80 percent of revenue on direct medical care, starting next year, or issue rebates to consumers if they fail to hit the target.

During the debate leading to the recommendations, insurers pushed for the broadest possible definition of what constitutes medical spending, including such things as the cost of paying claims, signing up doctors to their networks or running customer service call centers. The final recommendations are narrower, which is what consumer groups had urged.

The commissioners would allow, for example, insurers to include many quality improvement costs, along with payments to doctors, nurses, hospitals and other providers in their medical expense calculations but not costs of fraud control efforts or billing. They also recommended that insurers be able to deduct federal and state taxes, but not taxes they pay on investment income.

Three contentious last-minute amendments failed to pass. One would have allowed insurers to deduct broker commissions, another would have allowed them to average their medical spending nationwide, rather than state-by-state, and the third would have loosened a complex “credibility adjustment” formula to allow many insurers, particularly smaller ones, to hit the medical spending targets, even if they don’t spend 80 percent on medical care.

Today, Sebelius promised to issue regulations in coming weeks, saying, “These recommendations are reasonable, achievable for insurers and will help to ensure insurance premiums are, for the most part, supporting health benefits for consumers.”

Insurers disagreed. The rules would “reduce competition, disrupt coverage and threaten patients’ access to health plans’ quality improvement services,” America’s Health Insurance Plans (AHIP) President and CEO Karen Ignagni said in a statement.

“It’s a good day for consumers,” says NAIC consumer representative Timothy Jost, a law professor Washington and Lee University school of law. “I think insurers won some and we won some. On the whole, the main point is the rules are faithful to the law.”

Still, he doesn’t expect consumers will see many rebates because insurers will find ways to become more efficient and meet their medical spending targets. “They’re also going to have to be more transparent and tell people how much they are spending on administrative expenses and profits,” Jost says.

But some fear the new rules could also stifle competition, making it easier for larger insurers to meet the requirements than smaller ones.

“It will only lead to more market concentration,” says Robert Laszewski, who runs the consulting firm Health Policy and Strategy Associates in Virginia. “I don’t think consumers will see many rebates out of this because the market will reshuffle itself in the next year and we’ll only have left the biggest players who have the ability to comply.”

The recommended rules grant smaller insurers an adjustment – on a sliding scale based on size – to meeting the 80 percent minimum spending target. Such adjustments may help “keep insurance markets attractive to smaller competitors, which would enhance consumer
choice,” the American Academy of Actuaries said in an Oct. 8 letter, one of many comments received during the debate over the recommendations. Under the recommendations, Jost says the smallest plans will be allowed to spend as little as 66 percent of revenue on medical care, which he says would be enough for most. But Laszewski and others disagree, saying some smaller insurers will have trouble.

Sales brokers, who had pushed to have their commissions excluded from the calculations, were not successful in getting that changed. Commissions paid to sales agents will be considered part of an insurer’s administrative costs. But NAIC members will form a special committee to work with HHS to consider other ways to address the brokers’ concern that the new law threatens their business.

Still, Laszewski and Jost both say that insurers are already moving to reduce or eliminate commissions and brokers instead are being paid by clients, often business owners. They expect that trend to accelerate.

The recommendations also say insurers must calculate their medical spending state by state. Some large insurers had pressed for a national calculation, but state-based Blue Cross Blue Shield plans and some consumer representatives objected. They said a national calculation would allow insurers to average their high and low-spending policies, which could mean some policyholders would not get rebates even though their plans failed to meet the target spending.

Some issues surrounding the medical loss ratio can only be addressed by HHS, under the law, but the NAIC weighed in on them in a letter sent Oct. 13. For example, the letter suggested that rebate payments should be made to the individuals or employers who paid the premiums in the form of either a premium credit or a check.

The letter also warned that HHS faces a challenge in adopting medical loss ratio regulations in a way that doesn’t destabilize the market. Federal officials should work closely with state regulators, the letter said, to ensure that health plans aren’t forced into insolvency.