part of ObamaCare, the federal government will impose strict new
spending rules on health insurers. How it does so could have a sweeping
impact on the industry and patient care.
Supporters say these new "medical loss ratio" regulations could
provide better value for consumers. Critics argue that they could
decrease innovation and competition .
An MLR is the share of health premiums spent on medical costs. A 75%
ratio means that 75% of premiums are spent on medical care. leaving 25%
for things like salaries, advertising, fraud prevention and profits.
Starting in 2011, insurers serving the individual or small-group
market — i.e., companies with 100 employees or less — must have MLRs of
at least 80%. For large groups, it’s 85%. Violate those minimums and an
insurer must rebate the difference to policyholders.
Liberals Vs. Bureaucracy
"The idea of the MLR law is that insurance companies will become more
efficient in managing their administrative expenses," said Judy Dugan,
research director at the liberal Consumer Watchdog. "They’d be more
willing to think twice about some of the most excessive executive
salaries and train Wall Street to expect a little less in the way of
constantly increasing profits."
Wall Street does like to see lower MLRs as a sign of profitability. Industry profit margins typically range between 3% and 5%.
Others suggest the MLR regulations will harm consumers.
"What we need is lots of creativity and innovation in payment
processes and new ways of managing care," said James Capretta, fellow at
the conservative Ethics and Public Policy Center. "Instead, what we’re
getting is a regulatory process that is ratcheting down on creativity
and innovation in a way that is dangerous."
State Officials Delay
The Department of Health and Human Services tasked the National
Association of Insurance Commissioners with making recommendations on
implementing the MLR rules. The state officials were supposed to finish
by early June but told HHS they needed more time.
The "medical loss ratio and rebate program in (ObamaCare) have the
potential to destabilize the marketplace and significantly limit
consumer choices if the definitions and calculations are too
restrictive," NAIC said in a letter. It added that definitions could be
"useless" if overly broad.
There’s been buzz that NAIC will release recommendations at this
week’s annual meeting. But a spokesperson told IBD on Monday that "there
is no timeline."
As NAIC noted, defining an expense as medical or administrative is key.
"If the MLR definition is too restrictive it could turn back the
clock on efforts to improve the quality and safety of care," said Robert
Zirkelbach, spokesman for America’s Health Insurance Plans, an industry
He said efforts to avoid fraud or deter inappropriate treatments —
thus reducing other costs — should be counted as a medical expense. The
AHIP also wants patients’ appeals process and nurse hotlines counted as
Liberal groups aren’t impressed.
"We believe that insurance companies will get enough goodies out of
the new MLR law that they will not have to do business any differently,"
said Consumer Watchdog’s Dugan. "If a nursing line is something where a
nurse can advise a patient on treatment, sure, that may be a medical
expense. But if it is just to determine if a patient needs to see a
doctor, that’s just cost containment."
Under ObamaCare, insurers can exclude "Federal and State taxes and
licensing or regulatory fees" from administration expenses, making it
easier to comply with the MLR rules.
Last week, six Democratic congressmen told HHS in a letter that most
"federal income taxes or payroll taxes were not intended to be
excluded." Sens. Max Baucus, Tom Harkin and Chris Dodd, and Reps. Henry
Waxman, George Miller and Sander Levin all chaired panels crucial in
"What we’re witnessing is the very first sign of the dangers of
federalizing insurance regulation," said Capretta. "It becomes
arbitrary; you have politicians writing letters after the legislation is
done that contradict what is in the actual law."
Some states set minimum MLRs, but few are as high as the new federal
floors. According to data from NAIC and AHIP, just New Jersey and Ohio
impose 80% MLRs on both their small-group and individual markets.
Minnesota imposes it only on parts of its small-group market.
According to a letter by Sen. Jay Rockefeller, D-W.Va., in 2008 the
average MLR was 86% for the large-group market, 82% for the small-group
market and 79% for those in the individual market.
That’s close to the ObamaCare standards. Yet those numbers mask a great deal of variation.
For example, in 2008 at least five companies in the small-group
market in Minnesota had MLRs below 80%, with the lowest being 66%. From
2003-2006 in Texas, the average MLR in the small-group market was 72%,
with some companies going as low as 22%.
"A blind move toward an 80% MLR would effectively terminate the marketplace in large segments of the country," said Capretta.
Noting NAIC’s delays, he added, "People who have a realistic
understanding of the marketplace are pushing back and saying you have to
have more flexibility here, otherwise it’s going to backfire and you’ll
have the perverse consequence of having less choice, less options and
"The only place where that makes the least bit of sense is very small
insurance in very small markets," she said. "For most insurers who say
they can’t meet those ratios, it’s an excuse, not a reason."