Health Insurers Win Some Breaks with Medical Loss Ratio Rule

By and | November 22, 2010

New U.S. health insurance spending rules aimed at ensuring more customer dollars go toward medical care were finalized on Monday, ending a source of uncertainty for investors in the sector.

Although the limits are mandated in the new healthcare law, insurers such as Aetna Inc. and WellPoint Inc. did win some concessions from the U.S. government surrounding implementation of the rules and shares of health insurers mostly rose.

The rules on spending limits, known as a medical loss ratio or MLR, largely reflect earlier recommendations by a key group of state insurance regulators.

“It appears that the industry got what it was hoping for,” Joe France, an analyst with Gleacher & Co., told Reuters. “It should help the managed-care stocks … There was some concern that the regulations would be more onerous.”

Under the final rules unveiled by the Department of Health and Human Services (HHS), insurers will be able to deduct federal and state taxes from premium dollars to help meet the new spending thresholds but not taxes related to investments or capital gains.

States can also seek looser limits for up to three years.

It also allows some exemptions for smaller plans, new insurance offerings, and “mini-med” policies that offer limited coverage.

[The MLR does not exempt sales commissions, which has agents and brokers concerned and vowing to seek a legislative remedy if necessary to protect their revenue.]

Uncertainty over the final rules has hung over the health insurance industry. Companies have said they were waiting for the rules to become concrete before giving financial outlooks for next year.

Peter Costa, a senior analyst at Wells Fargo Securities, said, insurers “should move modestly higher today as it lifts some of the fear of 2011 earnings pressure in the group.”

Shares of health insurers were up 1 percent in early afternoon trade as measured by the S&P Managed Health Care Index, compared to the broader S&P 500 Index which was down 1.1 percent.

Other insurers affected by the rules include Cigna Corp., Humana Inc. and UnitedHealth Group Inc. among others.


The healthcare law requires large group health plans to allocate at least 85 cents per premium dollar to medical care, not administrative costs or profit. Plans for individuals or small groups must spend 80 cents per dollar.

If plans do not spend that much on care, policyholders get a rebate. HHS said on Monday up to 9 million Americans could be eligible for up to $1.4 billion in rebates starting in 2012.

The new MLR rules will help “guarantee that consumers get the most out of their premium dollars,” Health Secretary Kathleen Sebelius told a press conference, adding that “overhead costs contribute little or nothing to the care of patients and health of Americans.”

In releasing the final rules, HHS officials said they followed the advice of the National Association of Insurance Commissioners (NAIC) on many issues such as taxes, state waivers and consumer rebates.

A variety of experts from Wall Street analysts to state insurance officials have openly worried the new spending limits could push some insurers out of certain markets, affecting not only company bottom lines but also consumer choice.

Consumer advocates also worried fewer options in some states could destabilize the market, especially since other new rules meant to boost demand for policies do not take effect until 2014 when Americans must buy coverage of face fines.

But HHS officials said on Monday that while some people with individual health policies are in plans that fail to meet the new spending rules, most insurers should be able adjust to meet the rules.

“The health insurance industry today is well-positioned to meet the new MLR standards,” said Jay Angoff, director of HHS’ Office of Consumer Information and Insurance Oversight.

Under the rules, states can seek certain exemptions for up to three years to help keep insurers from abandoning their market. The states will not be granted blanket waivers but can seek adjusted MLR spending limits. So far, Iowa, Georgia, Maine and South Carolina have sought such help.

Other industry exemptions include a one-year grace period for mini-medical plans that offer limited coverage and generated headlines when some employers such as McDonald’s Corp. said it might have to stop offering them because of the rules. Plans for U.S. workers based overseas also have a one-year deferral while HHS gathers data.

Small plans with less than 75,000 enrollees in a state are also allowed to adjust their calculations because of their small size, while companies offering a new insurance policy will have one year before having to meet the rules.

(Reporting by Susan Heavey in Washington and Lewis Krauskopf in New York; Editing by Dave Zimmerman and Tim Dobbyn)

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