Regulator Gives Insurers Good News

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Initial Study Shows Health Overhaul Won’t Have the Profit Impact They Feared

A first look at how a key provision in the federal health overhaul could be implemented suggests that insurers’ profits won’t take the hit that the industry had feared.

At issue is something called the medical-loss ratio, or MLR, which under the new law requires insurers in the large-group market to spend 85% of the premiums they collect on medical expenses, as opposed to administrative expenses and profit-taking. Insurers in the more costly individual and small-group markets must spend 80% on medical claims.

Rick Diamond, a Maine actuary tasked with helping the National Association of Insurance Commissioners define MLR, wrote in a draft document posted on the commission’s Web site that most insurers can meet the loss-ratio requirements of the new law. That can be accomplished by deducting taxes and regulatory fees from the premium expense insurers must report and by adding efforts to improve health-care quality to the amount paid out in claims, the draft document said.

Those adjustments could allow many small-group and large-group plans to meet the new law’s requirements, the draft said. "The situation is less clear in the individual market," the draft said. "Some issuers would likely have MLRs well below 80% even after the adjustments, while others would be well above the minimum."

Attempts to influence what constitutes medical versus administrative expenses have reached a fever pitch in recent weeks. Regulators at the NAIC are rushing to come up with a common set of definitions to meet a June 1 deadline set by the Department of Health and Human Services. Mr. Diamond’s draft document offers a look at how those regulators’ thinking is taking shape on possibly the most critical issue for the insurance industry’s future.

Mr. Diamond couldn’t be reached for comment. Kim Holland, Oklahoma’s insurance commissioner and NAIC’s secretary and treasurer, said Mr. Diamond’s draft was for the purpose of gathering information only and the group is in the early part of its deliberations. The draft document says it reflects Mr. Diamond’s views only.

Some in the insurance industry worry that they will have to increase the amount spent on medical care to meet the higher MLRs, which would leave less room for profit and might drive companies—especially smaller plans—out of the market.

America’s Health Insurance Plans, the industry’s trade group, supports moving any expenses that improve health quality into what members can count as medical expenses, said Robert Zirkelbach, a spokesman.

Sen. John D. (Jay) Rockefeller (D., W.Va.) was a critical player in making sure medical-loss ratio requirements were in the law, and he says he is on top of regulators seeking to define what constitutes that ratio. "My goal [was to] make sure that insurers spend most of the money consumers pay for health insurance on actual health care," the West Virginia Democrat said.

The topic is likely to arise again Wednesday when WellPoint Inc., the country’s biggest insurer by members, reports earnings. WellPoint is the largest player in the individual and small-group insurance markets and unilaterally reclassified the way it accounts for expenses such as nurse hotlines earlier this year. By moving such expenses from administrative to medical, it boosted the loss ratio it reports to Wall Street by roughly 1%.

WellPoint said at the time that it reclassified the expenses to better reflect the work it does to manage medical care for its policyholders, including nurse hotlines and smoking-cessation treatments.

A spokeswoman said the changes are allowed under generally accepted accounting principles. The company will comply with regulators’ definitions of what constitutes a medical versus an administrative expense, the spokeswoman said.

Consumer Watchdog, an advocacy group, is pushing to keep "medical management" expenses as administrative because insurers often use "medical management" personnel to deny payment for expensive medical services, said the group’s Jerry Flanagan.    

Consumer Watchdog
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