Getting Insurers to Behave

Now that the Patient Protection and Affordable Care Act is law, the Obama administration has to translate the law's requirements into specific rules, particularly for the health-insurance industry. The act requires insurers to do a lot of things they haven't done before, like making sure all plans cover at least a basic array of services and limit out-of-pocket expenses. But under a so-called grandfather clause, plans already in existence are exempt from many of the new requirements. How the administration has interpreted "grandfathering" -- one of its first rule-making decisions -- may be an indication of things to come.

The exemption exists because of the president's promise that people who already have insurance can keep their current coverage if they like it. But from a policy perspective, the grandfather clause is dangerous. An employer eager to slash its benefit costs could try to exploit the exemption to whittle away coverage in a plan it currently offers.

The Affordable Care Act left it to the secretary of health and human services to determine the precise rules for when plans lose grandfather status. Under the interim rule that Secretary Kathleen Sebelius and her staff issued in June, employers can make modest adjustments to their workers' plans and remain exempt from most of reform's requirements. But if an employer tries to reduce coverage significantly -- say, by suddenly bumping up deductibles by more than $1,000 per person -- the plan becomes subject to the full protections of the Affordable Care Act. Insurers and employers didn't much like the decision, which discourages them from reducing benefits, but consumer advocates were delighted.

For the new law to fulfill its promise, it must change how insurers behave. But as with the grandfather clause, it's up to the administration to turn the law's general language into clear regulations. The challenges are political as well as technical: Plenty of conservatives see the regulatory process as a chance to re-litigate health reform and perhaps roll it back. If they succeed, they could undermine much of what reform is supposed to achieve.

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First, the good news: The most important new restrictions on insurance-company behavior are also the most straightforward. These are the rules guaranteeing that people who represent high medical risks because of their personal characteristics or pre-existing conditions have access to policies at the same prices as healthy people do. For the most part, this is already true for people who get insurance through large companies -- but not for people who buy on their own or through small businesses. As of 2014, under the law, insurers that sell to these markets will have to practice "community rating" (charging everybody the same rate for a given policy) and "guaranteed issue" (selling policies to anybody willing to pay the premiums).

The Affordable Care Act leaves relatively little to chance here. The law spells out the requirement unambiguously, allowing insurers to vary rates only by geographic area, tobacco use, and age (on a three to one ratio between old and young). In 2014, the prices for all policies will be publicly listed on the new insurance exchanges, where people can sign up for them. Enforcing the rule will be a simple matter of checking what insurers are charging for policies and investigating any reports of discriminatory pricing in policies sold outside the exchanges.

But community rating and guaranteed issue alone won't be sufficient to change the behavior of insurance companies. Even if insurers are required to take all comers at relatively nondiscriminatory prices -- "relatively" since age can be a rough proxy for medical condition -- they'll still have financial incentives to restrict care. This isn't entirely a bad thing: Given the evidence of rampant overtreatment in American medicine, insurers should exercise some check on the use of technology, drugs, and other resources, for the sake of the patients as well as the insurers' bottom line. But because insurers sometimes deny even necessary care, just to increase profit margins, the law seeks to limit the insurers' authority -- most obviously, by opening up treatment denials to outside appeal.

The idea sounds simple enough: Allow patients convinced they've been wrongly denied care to make their case to independent experts with authority to overrule the insurer. But who are the experts? How quickly must they rule? And what's to stop insurers from ignoring the recommendations? The Obama administration has to write regulations answering all of those questions. A viable, working model exists: The National Association of State Insurance Commissioners has a framework, similar to what's already in place in several states. HHS will consult those guidelines in devising a new scheme. The model is not perfect, but with sufficiently strong regulations it could give consumers significant new leverage.

Like the restrictive reading of the grandfather rule, an appeals process with teeth isn't likely to sit well with many insurers and employers. But, as of the early summer, an even bigger concern for insurers and some employers was a regulation that governs how insurance carriers spend their money. The Affordable Care Act sets a minimum threshold for what's known as the "medical loss ratio" -- the percentage of premium dollars that go into medical care (a "loss" from Wall Street's view) rather than into overhead or profits. For plans sold to small businesses or directly to individuals, that ratio must be at least 80 percent; for plans sold to large groups, it must be at least 85 percent.

For big insurance companies that sell predominantly to big employers, the medical loss ratio shouldn't be hard to meet. With their economies of scale, these insurers and employers together provide coverage at relatively low administrative cost (although, it should be noted, Medicare's overhead is even lower). But smaller insurers that deal primarily with individuals or small businesses will have a tougher time. Among other things, they typically lose 8 percent of premiums on commissions to agents and brokers who sell policies on their behalf. (Once the insurance exchanges exist, much of that cost will disappear.) These are also the insurers most likely to bilk consumers, since individuals buying coverage on their own typically lack the knowledge -- or ability -- to bargain as shrewdly as corporate benefits managers do. (The exchanges should also help with improved information and bargaining leverage.)

There's leeway in the rule in two key places. The law doesn't dictate a precise formula for calculating the medical-loss ratio. It's up to the administration which "care management" activities count as medical care, whether taxes should be part of the calculation, and the extent to which carriers can average out the ratio among different plans. And while the law calls for the requirement to take effect starting in January 2011, the Department of Health and Human Services has the authority to phase it in; Sebelius could, for instance, set the floor at 70 percent for 2011 and then gradually ratchet it up until 2014. Some insurance and employer lobbyists have urged the administration to move slowly, lest insurers unable to meet those requirements go out of business. Then again, insurers that can't meet those requirements are, by definition, less efficient.

For all of the attention medical-loss ratios have gotten, it's an open question just how important they will be. If the exchanges work as planned, competition among insurers will winnow out the least efficient plans, which won't be able to offer the same combination of quality and price as their more efficient counterparts. But for that competition to take place, the buyers of insurance need information that they can understand. That's why some of the most important regulations the administration has to write will detail the kind of information insurers must disclose -- and how that information will get to consumers.

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The Affordable Care Act directs HHS to set up an Internet portal to provide basic information about different insurance policies. But, once again, the law isn't that specific about what information to include. Just benefits and price? Medical-loss ratios? Some kind of consumer scorecard? The administration's request for information from insurers has made them nervous because it includes not just basic plan information but percentage of claims denied and other details.

The aggressive push for information isn't surprising: The person in charge of the Web portal is Karen Pollitz, a highly respected former Georgetown professor who spent much of her academic career documenting insurance-company abuses in the individual market. And Pollitz seems to be typical of the talent the administration has attracted. Jay Angoff, who is in charge of the insurance division, served as insurance commissioner of Missouri and also has a reputation for strong consumer advocacy. In Missouri, Angoff won a key battle when the state's Blue Cross plan sought to convert to for-profit status. One of Angoff's new deputies, Steven Larson, blocked a Blue Cross conversion as insurance commissioner of Maryland.

What's more surprising, perhaps, is the response from insurers. Republican leaders and conservative ideologues haven't stopped trying to repeal the Affordable Care Act. But insurers have proved relatively cooperative, according to many administration officials and congressional staff: While the carriers have raised objections, they also seem to have made peace with the law, at least for the moment.

All of that could change quickly: Interest groups, including the insurance industry, have been known to send out friendly signals -- and then turn hostile. (That's more or less what happened in the debate over reform in Congress.) And just because the administration is hiring aggressive regulators doesn't mean those regulators will get the job done. They'll have to fight many battles, sometimes even within the administration. Many of the regulatory issues are truly complicated, and the administration will have a tough time balancing the need to change the system with the need to reassure Americans nervous that change will mean giving up something they value. But the early signs are certainly encouraging. There's much work to be done, yes. But the work so far looks pretty good.

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