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Medical loss ratios will control health insurance company profits

medical-loss-ratiosStarting this year, health insurance companies must spend 80 to 85 cents on health care for every dollar they collect in premiums. Individual and small-group health plans are subject to the 80 percent rule, while large-group health plans must spend at least 85 percent on care. Health insurers that spend more will have to provide rebates to their customers.

The rule, known as the "medical loss ratio," has been one of most hotly debated provisions of health care reform.

Under the Affordable Care Act, health insurance companies in the individual and small-group markets must spend at least 80 percent of premium dollars, and insurers in the large-group market must spend at least 85 percent of premium dollars on medical care and quality improvement. Insurance companies that don't meet the spending requirement will have to pay rebates to customers starting in 2012.

The provision is designed to reduce health insurance rates by limiting how much insurers can spend on administration, such as marketing and executive salaries, and collect in profit.

In 2010, more than 20 percent of individual health insurance customers were in plans that spent more than 30 cents of every premium dollar on administrative costs, and another 25 percent of consumers were in plans that spent between 25 and 30 cents of every premium dollar on administrative costs, according to the U.S. Department of Health and Human Services (HHS). In the most extreme cases, some plans spent more than 50 percent of premiums on administration.

The department estimates up to 9 million Americans could be eligible for rebates worth up to $1.4 billion starting in 2012. The average rebate per person could be as much as $164 in the individual health insurance coverage market.

Contention surrounding medical loss ratios

Although the medical loss ratio is simple enough in principle, the practical application is complicated. What exactly should be counted as "medical care" and "health care quality improvement"?

That question became the heart of debate once the Affordable Care Act was passed and regulators began considering definitions. The National Association of Insurance Commissioners was tasked with proposing rules for the medical loss ratio. Not surprisingly, the insurance industry lobbied hard for loose definitions for medical care and health care quality improvement, while consumer advocates pressed hard for the strictest definitions possible.

The rule issued by HHS in November closely follows insurance commissioners' recommendations. Reactions to the new rules ranged from disappointment from some insurance trade groups to guarded praise from consumer advocates.

In a press statement after the rule was issued, the Independent Insurance Agents & Brokers of America (the “Big I”) warned of "severe market disruption" in the individual and small-group markets because the formula counts agent and broker commissions as part of “administration.” Brokers and agents are worried they could take a big financial hit; some insurers have already cut commissions to help put administrative costs within the ratio limits.  The Big I says commissions should be left out of the formula entirely. 

Throughout the debate, America's Health Insurance Plans, a trade group, argued that too narrow of a definition of health care quality improvement could discourage innovation. The group says costs for programs to fight fraud and to modernize systems for coding claims – now counted as administration -- should be counted toward quality improvement. Improved claims coding helps health plans share clinical data among clinicians for better coordination of care, insurers say.

"HHS has a tough job ahead of it, monitoring both the national corporate behavior of the insurance industry and varying levels of enforcement of the MLR regulations in the states," said Consumer Watchdog Washington director Carmen Balber in a press statement. "Insurer lobbies know that public attention to these rules will fade, and will be waiting to pounce. But the consumer benefit in the regulations is already razor-thin, so HHS cannot give an inch."

More from Barbara Marquand here

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