Watchdog Warns White House to Resist “Bully Tactics” of Insurers As Regulations Are Written, or Risk Losing Control of Health Reform

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Letter to HHS Chief Sebelius Cites Lobbying, Legal Tactics of Insurers, and Premium Inflation by Wellpoint, Aetna in Advance of New Regulations

Washington, DC — Consumer Watchdog today asked Health and Human Services Secretary Kathleen Sebelius to turn back health insurance industry lobbying against a chief early benefit of the new health reform law, a requirement that insurers spend more on patient care and less on administration, overhead and profit. Consumer Watchdog noted that current investigations of Wellpoint and Aetna premium increases in California found that both companies’ proposed rate increases were significantly higher than they should have been, because of mathematical errors in the insurers’ favor.
“The California rate scandal shows that insurers cannot be trusted with a hand calculator, much less the language of health regulation,” said Judy Dugan, research director of Consumer Watchdog.
As regulations are written to enforce the new patient care ratio law, the industry seeks to reclassify administrative functions as “health quality improvements,” and to exempt many health policies sold to individuals from the spending limits, Consumer Watchdog said in a letter to Sebelius.
“The administration has to push back hard on these early regulations, or risk losing control of the whole health reform process,” said Carmen Balber, Washington Director for Consumer Watchdog. “If the insurers win these early battles, they will bulldoze every attempt in the new law to cut health costs and provide better health, even as all Americans are required to show proof that they are insured.
See the letter at:

The letter says:
“The insurance industry is lobbying now for loopholes in regulatory language that would make it unnecessary for insurers to make mathematical “errors” in order to meet the law’s requirement that they spend 80% to 85% of premium dollars on health care.
“Regulations to implement the law’s minimum 80% to 85% patient care ratio, also known as the “medical loss ratio,” (MLR) are at serious risk. If insurers get away with bully tactics on this early implementation, the rest of the health reform law will be increasingly difficult to implement in ways that curb costs and protect consumers.
“The most egregious example of interference is a June 4 letter[2] from the law firm representing United HealthCare to the National Association of Insurance Commissioners (NAIC). The letter, by the Washington firm of Alston and Bird LLP, implicitly threatens a legal assault on the new federal patient protections unless insurers are allowed to include whole categories of claims administration and legal costs as patient care.
“Draft regulations regarding minimum spending on patient care (Section 2718 of the Patient Protection and Care Act, or PPACA) will be proposed to you by the NAIC, whose top officials have long had revolving-door relationships with the insurance industry. However, the final regulations will be up to you and your agency, and you must prevent any corporate end-run that weakens or destroys this early consumer protection.
“The insurance industry’s proposed redefinitions of “patient care,” “administrative costs” and allowable tax exclusions from the calculation would pad the amount they appear to be spending on patient care by amounts that would not require any changes in their business model. They seek to remove any demand that would make the industry more efficient.”
The letter defines four categories in which insurers are seeking to pad their numbers, to evade the law’s attempt to push down administrative and overhead costs for private insurance:
Inclusion of broad administrative expenses in the patient care ratio. Insurers seek to include expenses in any way related to claims, such as review and denial of claims, legal costs of fighting claims, and settlements for wrongly denied claims, in the patient care ratio–known in the industry as “medical loss ratio.” Insurers currently list all such costs as administrative overhead.
Inclusion of vaguely defined, primarily cost-cutting and often largely administrative programs as “health quality improvement” in the patient care ratio. Previously, for non-HMO plans, the medical loss ratio consisted only of claims paid to health professionals. The PPACA allows inclusion of insurer “health quality improvement” programs. Insurers seek to riddle this category with loopholes, for instance including insurer claims reviews, and information technology costs unrelated to health care–for instance billing programs and legal department IT.
Deduction of unrelated taxes from premium revenue. The PPACA allows for deduction of some federal and state taxes. Insurers seek to include property, investment and other taxes unrelated to premium revenue. This would boost the MLR without requiring any effort by the insurer to become more efficient in handling administrative costs.
Exclusion of many individual insurance policies from 80% patient care spending requirement. The industry argues, without presenting evidence, that insurers will stop selling individual policies if not initially exempted from the 80% requirement. However, in most markets, and for virtually all large insurers, only newly issued policies would have ratios far below 80%, while older policies would (or should) have higher ratios. Since the MLR will be measured by an average of all of one company’s individual plans in any state, not on the basis of individual policy types, threats of large-scale defections of insurers from the individual market should be regarded with extreme suspicion.
The letter continues with specific insurance industry demands in each category. It also notes that no matter what the NAIC working committees recommend to HHS, the NAIC board of directors will have the final say on the regulatory draft submitted to Health and Human Services.
“The NAIC has detailed knowledge of insurance but it is also closely tied to the insurance industry,” said Dugan. “Its president and board are drawn from state insurance commissioners, who often come from the insurance industry and whose common “next job” is in the executive suites of the insurance industry. It is not a recipe for tough regulation of the industry.”
The Consumer Watchdog letter concludes:
“The health insurance industry, like the financial industry, cannot be allowed to regulate itself, for good reasons:
* A 2009 Congressional investigation of Wellpoint’s policy rescissions found that the insurer gave employees “points” and financial rewards for canceling policies of individuals who fell seriously ill.
* An independent actuarial review of premium increases by Blue Cross of California this year found serious calculation errors in favor of the insurer. A second review found similar errors by Aetna.
* A Congressional investigation found that the Blue Cross rate hikes of up to 39% in California had also been padded by 5% to account for possible government demands that the increase be reduced.
* United Healthcare repeatedly sought to coerce employees, on company time and with company assistance, to lobby against key elements of health care reform.
“These are not the actions of willing partners in reform.
“Any ambiguity in the medical loss ratio regulations will be an invitation to health insurers to write their own definitions. With these early regulations, you and HHS can prove that someone is capable of saying “no” to health insurers, and meaning it.”

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Consumer Watchdog is a nonpartisan consumer advocacy organization with offices in Washington, D.C. and Santa Monica, CA. Find us on the web at:

Consumer Watchdog
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Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

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