Some states already limit health insurance company spending

Kaiser Health NewsDecember 21, 2009 

WASHINGTON — Amid all their squabbling over health care legislation, congressional Democrats agree on the need to regulate how insurers spend their customers' money.

The measure that the House of Representatives has passed and the Senate bill that's expected to pass later this week would force insurers to spend the vast majority of their premium revenues on medical care for their customers, reducing their profits, executive salaries, sales and administrative spending.

The Senate bill would require insurers to spend at least 80 percent on medical care and quality improvements, while the House bill specifies 85 percent. Insurers that don't comply would owe rebates to customers.

Congressional supporters say those provisions would pressure insurance companies to be more efficient and would help restrain price increases. However, even some advocates say that companies could game the system, by broadly defining medical costs, for example.

Moreover, spending limits alone may not stop insurers from raising rates. When New York state tried to limit non-medical care spending, many insurers complied but still instituted double-digit rate increases.

"By themselves, such limits are not enough," said Kevin Lembo, who heads Connecticut's Office of the Healthcare Advocate. Regulators must define medical costs carefully and use other means to help curb premium increases, consumer analysts say.

Regardless of how well they'd work, the limits could be short-lived. House lawmakers call for them to end in 2013, when new insurance marketplaces, called exchanges, open. The bill released by Senate Majority Leader Harry Reid, D-Nev., would continue the limits indefinitely. Reid expects the bill to be approved by Christmas.

The Senate bill sets an 85 percent minimum for plans sold to large groups and 80 percent for policies marketed to small groups and individuals. The House bill's 85 percent requirement applies to all insurance categories. The remaining revenue would go for expenses such as marketing, claims processing, executive salaries and commissions to sales agents, and to profits.

Certain nonprofit insurers that spend at least 92 percent of their revenues on medical care would be exempt from an excise tax the Senate bill would levy on insurers.

Insurers now spend an average of 87 cents of every premium dollar on direct medical care, says the industry's trade lobby, America's Health Insurance Plans. Other estimates, including some from Wall Street analysts, put the average in the low 80s.

Regulation of what industry analysts call "medical loss ratios" has long been controversial. Insurers oppose it, saying it could prompt some health plans to cut administrative costs by reducing prevention and wellness programs, along with investments in computer systems, electronic medical records and other efforts that could save money.

Others have concerns about how the legislation would be implemented. Key details, such as the definition of medical costs and how insurers would be required to calculate them, would be drawn up after the legislation is approved.

The House bill calls for the secretary of health and human services to write those rules, while the Senate amendments specify the National Association of Insurance Commissioners, which represents state regulators. Those regulators, who in either event would be responsible for applying the restrictions, would have to scramble to put them into effect as early as next year in the House bill and in 2011 in the Senate bill.

How medical care is defined is crucial. Would disease management programs be considered medical care or an administrative cost? How about gym memberships offered to policyholders?

"Insurers can make their (medical care numbers) look pretty darn good if they add in some things we might not consider part of claims" for medical expenses, said Sandy Praeger, the Kansas insurance commissioner.

States' experiences offer clues to the possible impact of the proposed regulation. Nationally, at least 15 states have set medical-spending requirements for insurers that sell policies to individuals, ranging from 50 percent to 80 percent of premium revenue, according to the insurance industry.

Fourteen states set a similar range of limits for policies sold to groups, and five of them require rebates to consumers if insurers fail to meet the rules.

One of those states is Maine, where insurers must spend an average of 78 percent of premium revenue on medical care. If they don't, they must rebate excess amounts to policyholders. Last year, $6.6 million was returned to small businesses and more than $4.6 million to individuals.

State regulators, however, say those limits aren't sufficient to slow rate increases. In New York, regulators want legislation that empowers them to review premium increases before they go into effect and to reject excessive ones. That oversight was lost in late 1999, when new laws allowed insurers to raise rates without review so long as they spent at least 75 percent of their premium revenue on direct medical care.

Premium increases, which had averaged 5 percent to 7 percent a year from 1996 to 1999, jumped to an average of more than 13 percent from 2000 to 2008, according to a report from New York's Insurance Department.

"Based on our experience, we have found (the limits) alone are subject to abuse and don't necessarily help everyone they are intended to," said John Powell, the department's assistant deputy superintendent for health.

To be truly useful to consumers, the limits need to be coupled with strong oversight of premium increases and with additional information such as how often insurers deny claims, according to Lembo and some other policy experts and regulators.

For the most part, however, stronger oversight of premiums wouldn't occur until after the exchanges open several years from now — which is just as the spending limits are scheduled to end under the House bill.

"I see more good than harm if it's done thoughtfully," Lembo said of the restrictions in the House and Senate bills. "A lot goes back to the definition (of what's included in medical expenses), who is monitoring it and how aggressively they do so."

Once the exchanges open in 2013 or 2014, additional regulation of insurers would begin, including rules barring them from rejecting applicants because of health conditions and increased oversight of their annual premium increases.

Under the House bill, a federal health commissioner would have the power to reject premium increases that the government deems excessive. The Senate proposal would require the new exchanges to consider premium increases when deciding which insurers to accept.

"The thought is that the exchanges will create real competition that will drive out insurers" with inadequate spending on medical care, said John Rother, the AARP's executive vice president of policy and strategy.

While that remains to be seen, Rother said, Democrats have a strong selling point when they push insurer spending requirements.

"If you're going to talk with the public about cost control, then upping the medical loss ratio (the amount spent on care) is a powerful way to communicate that," he said.

(Kaiser Health News, an editorially independent news service, is a program of the Kaiser Family Foundation, a nonpartisan health care policy research organization that isn't affiliated with Kaiser Permanente.)

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