Health Insurance Report™ helps you track and analyze legal, legislative, and regulatory developments affecting the health-insurance industry throughout implementation of the Affordable Care Act...
By Sara Hansard
Republicans and a Democrat on a House Small Business subcommittee Dec. 15 expressed concerns that a key insurance requirement of the health care reform law will reduce competition and harm health insurance brokers.
Also on Dec. 15, the Department of Health and Human Services denied Florida's request for an adjustment to the medical loss ratio requirement.
On Dec. 19, HHS denied a similar request from Michigan (see related item in this issue).
“We want quality health care and affordable insurance premiums,” said Rep. Mike Coffman (R-Colo.), chairman of the Subcommittee on Investigations, Oversight and Regulations, which held a hearing, “New Medical Loss Ratios: Increasing Health Care Value or Just Eliminating Jobs?”
The Patient Protection and Affordable Care Act‘s medical loss ratio (MLR) provision, which requires insurers to spend at least 80 percent of premiums on medical claims or quality improvements in the individual and small group markets and at least 85 percent in the large group market, is likely to deter small insurers from entering the market and lead to established insurers leaving the market, Coffman said. Insurers that do not meet the ratio must refund the difference to policyholders beginning in 2012.
“Instead of protecting consumers, the MLR may dissuade insurers from making investments in anti-fraud, anti-waste, customer service, and transparency tools because they are considered administrative, and those costs must be kept low,” Coffman said. “The MLR is an incentive for insurers to increase, not reduce, premiums, because they will need to improve their medical ratio and forgo administrative tools that can ultimately save money,” he said.
Rep. Kurt Schrader (D-Ore.), the only Democrat on the subcommittee, said that while he is “not so sure the medical loss ratio is altogether in itself a bad piece of policy, I am concerned about its effect on our agents and our brokers. That was never our intent, I don't think, in passing the medical loss ratio.”
Health insurance brokers for small businesses “are absolutely critical,” Coffman said. “These folks are absolutely essential to make sure the small businesses keep their health care costs down,” he said. “We want to really work with the group out here and see if we can modify some of the rules that are coming out.”
Mitchell West, an independent health insurance broker in Centennial, Colo., testified that the MLR has resulted in a 50 percent decrease to his earnings as all eight major health insurance carriers that he works with have reduced commissions to keep their administrative costs down.
The approximately 1 million health insurance brokers operating in the United States are necessary to help people make the best choices and help them understand how to use their plans, West said. “The health insurance environment has never been more complex and confusing, and they've never been more in need of professional assistance,” he said.
Many agents have left the business, and “the current situation is not sustainable in the long run” for remaining agents, he said.
Legislation has been introduced in the House by Rep. Mike Rogers (R-Mich.) that would remove brokerage commissions from the MLR, which would make it easier for insurers to continue paying commissions. The bill (H.R. 1206) has 147 co-sponsors.
Grace-Marie Turner, president of the Galen Institute, a free-market think tank, said the MLR is pushing carriers out of the small group and individual markets. Companies that sell in the individual and small group markets have higher marketing costs and higher customer service expenses, which makes their MLR lower, she said.
The rule will particularly hurt low-cost, high-deductible plans, she said. The MLR only counts payments made directly by insurers as medical expenses, she said. When individuals pay for services to meet the high deductibles, the expenditures do not count toward the MLR, she said.
“One of the perverse effects of the MLR rules likely will be higher health care costs” because the requirement is eliminating competition, and because costs for preventing fraud must be counted as administrative costs, she said.
But Timothy Jost, a law professor at Washington and Lee University in Lexington, Va., and a consumer representative to the National Association of Insurance Commissioners, testified that of all PPACA‘s provisions, the medical loss ratio will be “the most beneficial for American small businesses.”
Some $450 million in rebates would have been paid to nearly 16 percent of small businesses and 23 percent of all employees had the rule been in effect in 2010, Jost said. The amount may be larger based on 2011 MLRs, he said.
The MLR “produces a strong incentive for insurers to reduce their administrative costs, and thus their premiums,” he said. “Medical cost inflation in fact has fallen precipitously in the last couple of years, and as medical inflation declines the MLR will force insurers to pass the savings directly to consumers,” he said.
Jost cited recent premium decreases of 3.2 percent to small groups in Connecticut by Aetna. He also said Mountain State Blue Cross in West Virginia announced Dec. 14 that 4,200 small businesses in that state will be getting an average reduction in premiums for December of $2,500, a 72 percent reduction.
Most insurers were already operating at 80 percent MLRs before the rule took effect in 2010, and the HHS rules provides special treatment for new market entrants, small plans, high-deductible plans, limited-benefit plans, and expatriate plans, Jost said. Fraud recoveries can be excluded from the ratio and insurers can get credit for quality improvements as well as the full cost of converting to the International Classification of Diseases, 10th Revision (ICD-10), he said.
It is not clear that commission cuts to brokers should be blamed on the MLR, Jost said. If Congress excluded commissions from the MLR under the Rogers bill, “insurers would probably not raise commissions. They would simply take the money for profit,” he said.
In addition, Jost said, the MLR will drive premiums down, which will cause tax subsidies for employer-sponsored health insurance to go down and thus reduce the deficit.
Meanwhile, HHS denied Florida's request for an MLR adjustment. The Florida Office of Insurance Regulation in March requested that the MLR for its individual market be lowered to 68 percent, 72 percent, and 76 percent for 2011, 2012, and 2013, respectively (see previous article).
Florida said applying the 80 percent MLR would reduce the number of issuers in its individual market and that the MLR would eliminate agent involvement in the individual market and cause “a severe problem for consumers.” Florida's adjustment request was the largest to be decided so far by HHS.
Steve Larsen, director of the Center for Consumer Information and Insurance Oversight at HHS, said in the denial letter that “the evidence presented does not establish a reasonable likelihood that the application of the 80 percent MLR standard will destabilize the Florida individual market.” About 840,000 people have individual coverage in the state.
In a statement, the Florida Office of Insurance Regulation said it was “disappointed” that the adjustment request was denied. “The office believes the evidence obtained during the two public evidentiary hearings in 2010 supports the assertion that an immediate imposition of the MLR ratio will destabilize the individual market in Florida.”
Health Care for America Now, a consumer group, issued a statement supporting the HHS decision. “This action prevents consumers from being robbed of $145 million in health insurance rebates due under the health care law,” the group said.
Eighteen states and Guam have applied for adjustments to the individual MLR. HHS has approved adjustments for six states and denied them for five.
HHS's denial of Florida's MLR request is available at http://op.bna.com/hl.nsf/r?Open=shad-8pkr93 .
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