A key provision of the Patient Protection and Affordable Care Act forces insurance companies to devote more of the premiums they collect from customers to actual clinical care. For consumers, that makes sense: What they think they're buying with each dollar they spend on health insurance is the care they receive at doctor's offices and hospitals they visit.
Starting this year, insurers must spend 80 percent on individual and small-group plans, and 85 percent on large-group plans on medical services. The aim is to encourage either better reimbursement for doctors or lower premiums for consumers. Larger carriers generally meet these minimums already and many states have similar rules, but others do not. Those that fail to meet the minimum this year will have to reimburse customers by the amount of the shortfall by August 1, 2012.
The industry has a special term for the amount of money it spends on patient care and not on administrative costs or stockholder dividends: "medical loss ratio." The term indicates a lot. For an insurer, a dollar spent on medical care for their customers is a dollar lost (sometimes the industry calls it a more benign-sounding "care" or "benefit" ratio). It's no surprise then that insurance carriers are squirming to get out of this. In some cases, state insurance commissioners are seeking temporary waivers from the rule, which the Affordable Care Act authorizes the Secretary of Health and Human Services to grant them to prevent a mass exodus of companies from state markets. Nevada, New Hampshire and Maine have received waivers, and 10 other states are seeking them.
Even discounting for industry bluff, there is a real reason for concern, particularly in the individual market, where carriers devote the lowest proportion of premium dollars to patient care. The Congressional Budget Office warned in 2008 that requiring companies to meet high ratios too quickly could force some carriers out of the market. A more recent study by University of Minnesota health-care economists Jean M. Abraham and Pinar Karaca-Mandic, commissioned by the Robert Wood Johnson Foundation and published in the American Journal of Managed Care, estimates that carriers representing 32 percent of total individual-plan enrollment could fail to meet the 80 percent minimum, and that their withdrawal from the individual market could pose coverage disruptions for as many as 190,000 people who are otherwise uninsurable because of poor health.
HHS waivers could reduce some of this vulnerability, but they could also cost consumers who would have received rebates. Citigroup estimates that if the law had been in effect in 2009, Florida consumers would have received $60 million in rebates. If the rule had taken effect in 2010, customers could have received an estimated $2 billion.
But insurers don't need waivers to get out of spending money on patient care. One handy tactic is known in the industry as "MLR shift." Insurers simply reclassify some expenses as clinical care in order to meet the minimum ratio.
The Affordable Care Act opened the door for this sidestep by creating an expense category called "quality-improving activities" that count as clinical spending. Insurers can count, for example, improvements in health-information technology, without providing any increase in actual clinical care. Depending on who's counting, the shift could boost the ratio by as many as seven percentage points, which means companies get that much closer to meeting the law without actually improving patient care.
There's a limit to how many of these costs companies can plausibly rebrand as medical expenses, but another tool is to write certain costs out of the equation altogether. It's little wonder insurers are backing a House bill introduced by Mike Rogers, a Republican from Michigan, that would exclude from the ratio calculation the commissions paid to brokers and agents who sell and manage policies. Industry-wide, companies devote $6 to $9 for every $100 in premium income to these commissions.
Brokers and agents are especially eager for the Rogers bill to pass to keep their commissions from being compressed by insurers scrambling to reduce overhead. For the brokers' lobby group, the National Association of Health Underwriters (NAHU), which supports the Rogers bill, this is an about-face on how commissions should be treated: Having long defined commissions as "part of a premium,", it now claims that insurers are just a conduit passing along the money to brokers.
Likewise, the National Association of Insurance Commissioners, whose voice weighs heavily with HHS and which supported the inclusion of commissions in last year's rule-making, revised their stance this year and came close to endorsing the Rogers bill at a national meeting in March. For now it has delayed a vote on the matter.
The Rogers bill, says Consumer Watchdog's Judy Dugan, "is about as anti-consumer as you can get, because it would essentially gut" the rule, weakening any incentive for insurers either to operate more efficiently or cut premiums.
Yet another House proposal, by Georgia Republican Tom Price, would repeal the rule on ratios altogether. Of course, the ratio is an imperfect metric. How accurately it reflects quality of care depends on many variables, such as how plans and providers apportion administrative costs or whether an HMO employs its own doctors. But there's evidence it's already working. Citigroup reported last year that premiums for plans from companies with the lowest ratios were already coming down. Aetna says the rule was "a factor" in its decision to cut premiums on individual policies in Connecticut, a move the state's insurance commissioner approved in May.
However flawed the regulation, the insurance industry's response to it is yet more confirmation of the fundamental conflict between the profit-making goals of carriers and the public-health goals at the heart of health care reform.
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