State regulators recommend new health insurance rules

Kaiser Health NewsOctober 21, 2010 

WASHINGTON — State insurance regulators on Thursday unanimously recommended controversial rules that govern how much insurers must spend on patients' medical care, and they chose not to adopt any of several amendments that consumer advocates had feared would gut key provisions.

The rules, which involve an important part of the new health care 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 that involved 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 that Congress approved in March requires insurers to spend at least 80 percent of their revenue on direct medical care starting next year and to issue rebates to consumers if they fail to hit the target.

During the debate that led 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 and running customer service call centers. The final recommendations are narrower, which is what consumer groups had urged.

For example, the commissioners would allow 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 the 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.

On Thursday 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," Karen Ignagni, the president and CEO of America's Health Insurance Plans, said in a statement.

"It's a good day for consumers," said Timothy Jost, National Association of Insurance Commissioners consumer representative and a law professor at 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."

Jost doesn't expect that 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 said.

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

"It will only lead to more market concentration," said 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 meet 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 a letter Oct. 8, one of many comments received during the debate over the recommendations.

Under the recommendations, Jost said, the smallest plans would be allowed to spend as little as 66 percent of revenue on medical care, which he said would be enough for most.

Laszewski and others disagree, saying that some smaller insurers will have trouble.

Sales brokers, who'd pushed to have their commissions excluded from the calculations, weren't successful: Commissions paid to sales agents will be considered part of an insurer's administrative costs. Members of the National Association of Insurance Commissioners will form a special committee to work with HHS, however, to consider other ways to address the brokers' concern that the new law threatens their business.

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

The recommendations also say that 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 that some policyholders wouldn't get rebates even though their plans failed to meet the target spending.

(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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