RPC Reg Spotlight November 1, 2011

 

Regulatory Action in the Spotlight:

 

Medical Loss Ratio requirements

 

Adverse Effects:

 

  • Fewer insurance choices for the insured.
  • Increased costs to insurers and patients.
  • Job losses at insurance companies.

 

Response of the Obama Administration:

 

As part of the Patient Protection and Affordable Care Act, the Department of Health and Human Services (HHS) issued a regulation, published in the Federal Register on December 1, 2010 (75 Fed. Reg. 74864), implementing medical loss ratio (MLR) requirements on health insurers.  This rule requires insurers in the large group market to spend up to 85 percent of premium dollars on medical care and health care quality improvement, rather than on administrative costs, starting in 2011.  The insurers in the individual and small group markets will have to spend at least 80 percent of the premium dollars they collect on medical care and quality improvement activities.  Insurance companies that are not meeting the MLR standard will be required to provide rebates to their consumers beginning in 2012. 

 

Impact on the United States:

 

MLR requirements impact coverage choice and affordability.  It requires insurers in the large group market to spend 85 percent of premium revenue on claims or quality improvement.  While this may sound like an admirable requirement, when applied it actually creates perverse incentives.  To calculate the MLR, the Department of Health and Human Services (HHS) determined which costs would be considered administrative rather than for clinical or quality improvement purposes.  Included in administrative costs are funds spent to limit fraud and abuse and implement the mandatory coding change from the International Classification of Diseases (ICD) diagnosis and billing codes from ICD-9 to the ICD-10 code set.  A Blue Cross Blue Shield sponsored study indicated it will cost up to $13.5 billion for implementation during a 2-3 year period. This definition of administrative costs creates a clear disincentive for insurers to invest in fraud prevention, and it is counterintuitive that insurers could potentially be penalized for implementing changes they are required to make.  As a consequence, insurance companies have cut commissions to their agents, trimmed back-office employment, and stopped writing health insurance altogether.   On October 20, 2011, Des Moines-based American Enterprise Group announced that it will exit the individual major medical insurance market, making it the 13th company to pull out of Iowa since June 2010.  One hundred ten employees are expected to lose their jobs over the next three years.  “It’s a fairly predictable consequence of the regulation,” said Michael Abbott, the president and CEO of the American Enterprise Group.  “The regulatory environment’s getting really complicated.  Agents who sell health insurance are not mere order takers, but spend considerable time working with each customer.”  Additionally, HHS estimates compliance will cost insurance companies up to $67 million in one-time and $29 million in ongoing administrative costs.  Rebates are estimated to cost the industry up to $569 million by 2013.

 

In Closing:

 

The new MLR rule is harmful to both the insured and the companies providing coverage, making it more difficult for insurance companies to stay in the health insurance business.  HHS can grant exemptions from the MLR standards if it is determined that they may destabilize the marketplace in the state.  Already, 17 states and Guam have applied for exemptions.  A consequence of the exemptions is the required ratios now vary from state to state, which will require insurers to spend more on regulatory compliance.  As a result, some insurers have already left, or are considering exiting, the health care market.  “One goal of the health care law is to increase competition, but the MLR provision is having an opposite effect,” said Terry Headley of the National Association of Insurance and Financial Advisors.  “As agents are driven out of the marketplace, their clients have fewer and fewer choices for receiving coverage with quality customer service and less opportunity to have plans tailored to their specific needs.” 

 

Relevant Legislation:

 

Rep. Tom Price introduced H.R. 2077, the MLR Repeal Act of 2011, which repeals the MLR requirement, and Rep. Mike Rogers introduced H.R. 1206, the Access to Professional Health Insurance Advisors Act of 2011.  The legislation excludes remuneration paid for insurance commissions from MLR administrative cost calculations.  It also requires the Secretary of HHS to defer to state determinations when a state requests a MLR adjustment.