Industry Worries As Regulators Decide on Critical Loss Ratio

By | October 21, 2010

A seven-month-long process for determining how much U.S. health insurers must spend on medical care comes to a head Thursday, amid fresh concerns that the rules will lead companies to desert some small-group and other niche markets.

A key group of state insurance commissioners is meeting in Orlando, Florida, to issue final recommendations for the U.S. government on the spending rules for the multibillion-dollar industry. The rules will set how much insurers allocate on medical costs as opposed to profits and administrative expenses starting next year.

Wall Street and healthcare advocates alike have been closely watching the process, which could severely alter the bottom line for insurers like Aetna Inc and WellPoint and shake up consumers’ choice in insurance policies.

“At stake is how much money the industry gets to keep from what they bring in,” said Gary Claxton, head of the Health Care Marketplace Project at the nonprofit Kaiser Family Foundation.

Ahead of the National Association of Insurance Commissioners’ vote, insurers are pressing for last-minute changes they say are needed to stay competitive, including tax exemptions, a longer phase-in period, and a broader national assessment to see if companies are meeting the rules.

Under the new healthcare law, insurers selling large group plans must spend at least 85 cents of every premium dollar on medical care, not administrative costs, while plans for individuals or small groups must spend 80 cents per dollar.

Already one major employer, McDonald’s Corp., has balked at the changes, saying its insurance providers are unlikely to meet the targets and could force the restaurant company to drop their offerings for hourly workers.

Insurers are also unsure how it will impact not only their profits but also whether they can afford to continue offering certain plans, including some small or individual coverage or other niche options such as plans for U.S. workers posted abroad.

UnitedHealth Group Inc., the first major insurer to announce third-quarter earnings, declined on Tuesday to give a specific 2011 profit forecast until the rules are clearer.

“This is a big overhang,” said Ipsita Smolinski, a Washington-based analyst with Capitol Street.


Congress charged the NAIC with proposing rules that U.S. health officials will review and likely adopt, although changes are possible.

Such spending rates, known as medical loss ratios, or MLRs, help insurers set monthly premium rates. Now when insurers spend fewer premium dollars on medical care, investors see a possible profit boost. But in 2011, that potential profit turns into a consumer rebate under the health law passed in March.

Insurance companies, which largely fought the reforms, say they need looser spending definitions to meet the targets, but Democrats who backed reform say tighter restrictions will curb the industry’s controversial practices and rising rates.

Consumer advocates worry on both fronts.

They want patients to receive adequate coverage for their costs, but they also want insurers to make enough money to stay in business and offer consumers various options.

NAIC’s members have tried to hammer out a balance.

They recommend companies calculate MLR rates on a state-by-state basis despite industry pleas for a nationwide measure. They also initially said companies should be allowed to deduct most taxes in calculating spending, an industry win.

As for care, they propose companies can count as medical care a wide range of activities and costs aimed at improving wellness, preventing medical mistakes and encouraging health information technology. But their recommendation excluded some things such as fraud prevention efforts that industry argues helps patients.

Other costs, such as nurse hotlines, should be split between medical and administrative costs, they said.


NAIC, which has risen in prominence over its new role, has said the reforms may make matters worse, at least temporarily.

Reforms can boost value for consumers and hold insurers accountable, it wrote to U.S. Health Secretary Kathleen Sebelius last week. But “improper or overly strident application … could threaten the solvency of insurers or significantly reduce competition,” it said.

States may also seek exemptions or delays from the rules to keep companies from exiting their market, NAIC said.

Already, Sebelius’ Department of Health and Human Services has signaled that it will grant some waivers, including for limited “mini-medical plans” like those offered by McDonald’s.

Paul Heldman, who follows the industry for Potomac Research Group, said most disruptions, however, are likely to affect the individual market where the people have to buy their own plan. “Some companies may struggle,” he said.

A big problem, insurers say, is that MLR and other market reforms take effect soon, but incentives to buy plans will not start until 2014 when people must have coverage or face fines. Until then, insurers must take a financial hit without increased sales to make up for changed practices, they say.

It is still unclear whether HHS will adopt all of NAIC’s proposals or make some changes. Sebelius has said the agency wants to issue the regulations this month.

(Reporting by Susan Heavey; Editing by Matthew Lewis)

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