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Despite Best Intentions, New Ratios Creating Problems

Under the health reform overhaul, HHS will require insurers to meet new minimum medical-loss ratios — the percentage of total premium dollars that should be spent on direct health care services or activities that improve health care quality. The provision is part of the new reform law’s broader regulations on the health insurance industry and received significant support as the overhaul was debated in Congress.

However, policymakers are encountering delays and challenges in trying to determine what activities and services should count toward the new MLRs, and analysts are split on whether setting nationwide standards remains feasible or a “fool’s errand.”

Historic ‘Patchwork’ of Rules

Roughly half of the nation’s states mandate some form of MLRs, although just a few do so in both individual and group markets. In addition, consumer advocacy group Families USA notes that a “patchwork” of rules that vary widely from state to state govern whether insurers must meet a minimum floor for MLR — or even if insurers must report their spending breakdown.

While most private payers spend at least 75% of premiums on patient care, according to the advocacy group NJPIRG, some insurers are significantly below that mark, even in states with required MLRs. Minnesota, for example, requires that insurers in the small-group market maintain a MLR of at least 82%. While most small-group plans in 2008 exceeded that floor — their average MLR was 87% — two plans were below 70%, forcing them to pay additional compensation.

Under the Knox-Keene Act, California prohibits insurers from incurring “excessive” administrative costs but only requires companies to explain if they spend more than 15% of premiums on administration. California also has no limit on insurer profit-taking, save in the individual market (where insurers are required to post a 70% MLR). The ill-defined threshold has allowed some state plans to dramatically shift their spending. Between 2003 and 2007, Great-West Healthcare of California annually lowered its MLR from 85.8% to 69.1%, while its profit margin surged from 0.5% to more than 10%, according to NJPIRG.

Plans in states without regulations can be even greater outliers. For example, two of the 10 largest insurers in Missouri’s individual market — Aetna and American Family Medical — in 2009 spent less than 60% of their premiums on health care.

The Obama administration and congressional Democrats, however, sought to curb such variations under their health care overhaul.

Regulations Still in Progress

Under the new law, large health plans beginning on Jan. 1, 2011, will be required to spend at least 85% of premiums on medical services and quality improvement. Individual and small-group health plans’ MLR must be at least 80%. The new law would require insurers to pay a rebate to customers if their MLRs fall below the new limits.

HHS had asked the National Association of Insurance Commissioners by June 1 to generate recommendations on how to define medical and administrative spending under the MLR rules. NAIC has since missed the deadline, warning that the task is highly complex and requires an “open and deliberative process” to avoid unintended consequences.

In the interim, a handful of states are stepping up efforts to regulate MLRs. New York this month passed legislation that took effect immediately and requires state insurers to spend 82% of health premiums on medical care, up from 75% among small-business health plans and 80% among individual plans.

A pair of bills before the California Assembly — SB 316 and SB 890, both by Sen. Elaine Alquist (D-Santa Clara) — also contain provisions to increase plan regulation. For instance, SB 316 would require insurers to disclose their MLRs to individual purchasers.

Is a Standard Achievable?

NAIC’s delayed efforts have renewed debate over whether setting a standard MLR is a feasible element of the overhaul.

Karen Davis, president of the Commonwealth Fund, says that planned MLR requirements are “reasonable and achievable,” suggesting that insurers will face less administrative complexity as reform provisions take effect. For example, Davis cites new regulations limiting insurers from varying premiums based on age, gender or health, which should reduce underwriting costs. Davis also notes that BlueCross BlueShield Association spent nearly 10% of its premiums on administration for its plans in 2008, compared with just 5.4% on administration for its standard option offered to federal employees, which could foreshadow similar savings once insurers begin offering standard benefit packages.

However, other analysts caution that regulating administrative spending can rely on arbitrary assumptions and should not be a goal of health reform. While commending NAIC for taking an exhaustive look at MLRs, Robert Laszewski, president of Health Policy & Associates, says that the organization’s efforts underscore the difficulty of focusing on cutting health costs rather than boosting quality. According to Laszewski, “it’s really a fool’s errand.”

Perverse Incentives Might Plague Regulation

As a result, the attempt to regulate MLRs plays like a game of policy whack-a-mole: pushing down one segment raises challenges from another area.

For example, Sen. Jay Rockefeller (D-W.Va.) blasted insurers after a Senate Commerce Committee report found that WellPoint recently reclassified certain expenses, including nurse hotlines and wellness programs, as “medical” rather than “administrative.” According to Rockefeller, WellPoint’s efforts reflect private payers’ attempt to “game” the new MLR regulations.

However, insurers argue that spending on health information technology and programs that reduce unnecessary medical care should qualify as “improving quality of care” and thus count toward the minimum MLR levels. If lawmakers disagree, insurers could simply abandon these efforts to reform care delivery and stick to “processing claims” to achieve high MLRs, says Paul Ginsburg, president of the Center for Studying Health System Change. According to Ginsburg, this would be “the last thing” that policymakers should want from the MLR provisions.

Meanwhile, NAIC warns that suddenly implementing the MLR levels in January could “destabilize” some markets by prompting insurers to cancel certain policies or even withdraw altogether.

Looking Ahead

As a result, NAIC has requested that the federal government allow a three-year transition in states with insurance markets that could be most affected by new MLR requirements, which could include California. Conveniently, that’s when planned health insurance exchanges come online, which could render much of the MLR debate moot, according to Ginsburg. Having plans compete for customers via the exchanges will make their spending on patient care more uniform and transparent, he says, adding that “any need for MLR regulation will clearly be lower starting in 2014 than it is today.”

NAIC now says it will submit its recommendations to HHS next month, and California Healthline will be sure to track any new MLR developments. In the meantime, here’s a look at key health reform stories from across the nation.

Rebutting and Reacting

  • The Department of Justice last week filed a motion asking a federal judge to dismiss the lawsuit submitted by 20 states seeking to challenge the constitutionality of the new health reform law. According to DOJ’s arguments for dismissing the lawsuit, the individual mandate falls within Congress’ tax and spend constitutional power (AP/Boston Globe, 6/18).
  • Although U.S. residents remain divided over the new health reform law, 45% say they support the overhaul, which is the highest percentage since the law’s April passage, according to an Associated Press-GfK poll released last week. Although 42% still oppose the new reform law, the increase of support is significant compared with May, when just 39% of U.S. residents favored the overhaul and 46% opposed it (Alonso-Zaldivar/Tompson, AP/San Francisco Chronicle, 6/17).

In the States

  • Connecticut on Monday became the first state to expand Medicaid eligibility to certain unmarried and childless adults under a provision of the new health reform law. The overhaul requires state Medicaid programs by 2014 to cover childless adults whose annual incomes are up to 133% of the federal poverty level, or $14,400 in 2010. However, states can voluntarily expand Medicaid eligibility before the requirement takes effect, and the government will pay a larger share of patient claims. Connecticut estimated that 45,000 low-income residents will be eligible for the new coverage (Sturdevant, Hartford Courant, 6/21).

On the Hill

  • More than 130 children and family health advocacy groups on June 16 sent a letter to lawmakers urging them to swiftly confirm Donald Berwick as the next CMS administrator. Despite the advocacy groups’ support, Berwick’s confirmation could be complicated by Senate Republicans, who have accused him of supporting health care rationing and may use the hearing to revive arguments from the health reform debate. Senate Finance Committee Chair Max Baucus (D-Mont.) has said Berwick’s hearing likely will be slated for after the July 4 recess. (Ethridge, CQ Today, 6/18).
  • Congressional Democrats are worried that upcoming cuts to the Medicare Advantage program, which are intended help finance the health reform overhaul, will cost them votes from seniors in this year’s midterm elections. The MA program has proved popular for some seniors because it offers extra benefits, including vision and dental care. However, the health reform law calls for CMS to first flatten and then begin cutting spending on the MA program, part of a larger shift that “will slice $400 billion from Medicare over the next decade” (Reichard, CQ HealthBeat, 6/18).

Enacting the Overhaul

  • HHS on June 16 announced that it will dedicate $250 million from a public health fund established under the health reform law to help produce 16,000 new primary care physicians, physician assistants and nurse practitioners by 2015 (Norman, CQ HealthBeat, 6/16). HHS says the investment will help address the PCP shortage, which is growing because of an aging population and fewer medical students pursuing primary care. The Association of American Medical Colleges predicts the nation will have a shortage of approximately 21,000 PCPs by 2015 (HHS release, 6/16).
  • HHS on July 1 is scheduled to launch, a website designed to provide customers with information about health insurance plans. The portal will serve as the “most tangible link” to the new health reform law for many U.S. residents, according to Politico. The reform law stipulates that the site must be launched by July 1 (Kliff, Politico, 6/22).
  • Some insurers say that the new health reform law will make it harder for them to offer high-deductible health insurance plans that are linked with health savings accounts. Starting in January 2011, consumers with HSAs no longer can use their accounts’ funds tax-free to pay for over-the-counter medications, unless they have been prescribed by a physician. In addition, consumers will face a 20% penalty charge for using their HSA funds for nonmedical expenses, up from the current 10% penalty (Andrews, Kaiser Health News/Washington Post, 6/22).
  • The new reform law stipulates that Medicare Advantage plans with four- or five-star ratings will receive a 1.5% bonus in Medicare payments beginning in 2012, and 5% bonuses by 2014, with some plans possibly even getting higher payments. However, experts have identified several issues with using the rating system to determine bonuses, with one expert noting that just 15% of Medicare beneficiaries enrolled in MA plans live in counties where four- to five-star plans are offered. Further, studies conducted by Kaiser Family Foundation and Avalere have shown that more than 40% of plans have no rating because they are too new or small (Jaffe, Kaiser Health News/Washington Post, 6/15).
  • More than three-quarters of large companies are preparing to apply for a program designed to offset the cost of health benefits for early retirees, according to a recent Hewitt Associates survey of 245 large employers. The federal health reform law created a $5 billion fund that would reimburse employers up to 80% of certain health care costs for retirees between ages 55 and 64 until 2014. Some companies are preparing to apply for the program as soon as possible because of concerns that the funds will run out before 2014 (Adamy, Wall Street Journal, 6/16).

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