At first blush, the mandate in the new health-care law sounds simple:
Starting next year, health insurers must use at least 80 to 85 percent
of the premium dollars they collect to pay medical bills or otherwise
improve their customers’ health.

But deciding which expenses insurers can include has been proving a
monumental and controversial task for the National Association of
Insurance Commissioners, an independent body made up of state insurance
commissioners that the law tasked with advising the federal government
on the issue.

Write the "medical loss ratio" rules too expansively, consumer advocates
warn, and insurers will subvert the spirit of the law by passing off
overhead and administrative expenses as activities that benefit patient
health. Write the rules too narrowly, insurers counter, and plans may be
squeezed out of business or forced to cut back initiatives that are
genuinely helpful to patients.

For months, NAIC officials have been holding hours-long conference
calls, poring over hundreds of public comments and revising draft upon
draft of their suggested guidelines.

Now the NAIC has entered the homestretch. As soon as Oct. 14, the last
committee charged with signing off on its proposed regulations could
hold its final vote, likely enabling the NAIC as a whole to approve its
completed recommendations to the Department of Health and Human Services
at its meeting in Orlando this month.

HHS officials aren’t obliged to adopt the commissioners’ advice, but HHS
Secretary Kathleen Sebelius has indicated that, for the most part, she
will follow it closely.

Among the top issues still in play is the question of taxes. The law
allows insurers to remove federal and state taxes and regulatory and
licensing fees from the medical loss ratio calculation. But what does
that cover? Over the summer, several Democratic members of Congress
involved in drafting the law wrote a letter to Sebelius stating that
their intent had been to exclude only federal taxes and fees "that
relate specifically to revenue derived from the provision of health
insurance coverage that were included" in the law. That would force
insurers to count as administrative expenses whole categories of taxes,
such as those they pay on investment income and capital gains. Insurers
cried foul, accusing Democrats of trying to illegally rewrite the law
after the fact.

In a portion of the draft rules the NAIC signed off on in August,
commissioners used an expansive definition of the taxes that insurers
can exclude.

Consumer advocates are hoping that the commissioners or Sebelius will
ultimately opt for a stricter interpretation, said Carmen Balber,
Washington director of the nonprofit group Consumer Watchdog.

"At the end of the day, how much money health insurers are able to
exclude from the amount they have to pay on health care will determine
whether or not the health law’s mandate that more money go to patient
care is really enacted," she said.

Still, on most other questions, Balber said she was pleased with the
NAIC’s direction. For instance, the current draft requires insurers to
meet the medical loss ratio for each separate plan they offer, rather
than allowing them to lump all plans across states or types together in
one aggregate calculation.

Similarly, in the related draft rules finalized this summer, the NAIC
decided that insurers must count as administrative much of the cost of
their anti-fraud efforts, as well as compliance with the law’s mandate
that insurers vastly simplify how procedures are coded.

Karen Ignagni, president of America’s Health Insurance Plans, one of the
insurance industry’s most prominent trade groups, said she hopes the
NAIC or HHS will revisit both issues. Fraud detection, she noted, can
involve tracking doctors who prescribe inappropriate and even dangerous
medications and tests. Simplified coding offers not only insurers but
doctors a more complete picture of a patient’s treatment history as they
consider how to move forward.

"These are issues that are very much associated with how we improve and maintain quality," Ignagni said.

Insurers are also pushing the NAIC and HHS to come up with more-specific
guidelines to exempt certain plans from the medical loss ratio
requirements or phase them in more slowly than called for by the law.
Otherwise, all plans created after the law’s adoption – with the
exception of those fully funded by employers – will be required to
comply starting Jan. 1 and send rebate checks to their customers in 2012
for any profits or non-health expenditures above 15 to 20 percent of
premiums they collect in 2011.

Several state insurance commissioners have already indicated that they
believe waivers will be necessary to keep insurers in their markets
viable.