Forcing Insurers to Spend Enough on Health Care

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Until Senate Majority Harry Reid decided to scrap a government-run insurance plan in order to get the 60 votes needed to pass health care reform legislation, Sen. Jay Rockefeller was one of the chamber's most ardent public option supporters. Without a public option, the West Virginia Democrat feared, insurers — fattened by billions of dollars in new government subsidies and a new requirement that most Americans purchase insurance — would run rampant, jacking up prices and padding profits and executive salaries. But Rockefeller and several other Democratic senators also had their eye on a different way to keep insurer profit margins within reason: setting strict minimums on what proportion of premiums must be spent on health care.

Insurance companies have a very technical term for this proportion — "medical loss ratio" (MLR) — and critics say the terminology itself illustrates the callousness of the health insurance business. Companies that sell coverage consider revenues that go to pay for medical costs "losses,"; minimizing these losses by dropping sick customers and cherry-picking healthy ones is one way insurers currently stay profitable. But thanks to a provision inserted into the Senate health care bill at the last minute, the federal government may soon require insurers to "lose" 80% of premiums collected in the large group market and 85% in the individual and small group market. Insurers who don't operate at or above these thresholds would have to send rebates to customers. (MLRs are generally higher in the large group market because selling and administering one policy for many people at once requires much less overhead than designing, marketing and carrying out policies on an individual basis.)

The original Senate bill called for lower thresholds — 75% and 80% respectively — while the House bill calls for an 85% limit across the board; crucially, both of those bills would have ended the requirement in 2013, the year much of health reform only begins to take effect, while Reid's new provision would maintain the regulation in perpetuity. Former Democratic National Committee Chairman Howard Dean, who had advocated killing the public option-less Senate bill, said Monday on MSNBC that of the last-minute changes to the Senate bill made by Reid, the strengthening of the MLR regulations was "the most important thing of all ... It requires insurance companies not to take quite as much off the top of your premiums as they have in the past." MLR regulations are just one of the discrepancies, including the public option and abortion funding, between the House and Senate bills that would have to be reconciled in conference committee before a final piece of legislation could be voted on and sent to President Obama. Rockefeller intends to fight hard in conference to ensure the final legislation includes the new Senate provision.

"Insurance companies can do whatever they want with premiums unfortunately, so the medical loss ratio is a superb instrument," Rockefeller said in an interview with TIME, adding that customers have a right to know how much of their premiums are spent on administrative costs like marketing, salaries and profit. "If you buy a gallon of milk and you end up with half a gallon, you're not really happy about that. But in that case, you can take it back to the store and get mad."

Rockefeller had been pushing for a 90% threshold, but the Congressional Budget Office said such a requirement would severely limit companies' flexibility and "make such insurance an essentially governmental program." Many states currently have MLR requirements, but most are below the federal level that would be established under Democratic health reform. The existing minimum baseline, established in non-binding guidelines from the National Association of Insurance Commissioners, says that MLRs must be at least in the 50-60% range, depending on what other regulations are in place.

Earlier this year Rockefeller — who is chairman of the Senate Commerce, Science and Transportation Committee — launched an investigation into MLRs. According to Rockefeller, in 2008, insurers in the individual market spent an average of 74% of premiums on health care, compared with 80% in the small group market and 84% in the large group market; some insurers cited in the final report spent as little as 66% of premiums on actual care. CIGNA, one of the insurance companies cited, says investigators erred in calculating the company's medical loss ratios. Where the report said CIGNA spent 87% of premiums in the individual market on care, the company says it actually lost money in that category of customers, spending 120% of premiums collected on health care expenses. America's Health Insurance Plans, the lobbying group that speaks for private insurers, says the industry MLR average is 87%, a figure that Rockefeller says is overstated. "They don't always do it accurately," says Rockefeller, calling the insurance industry "the major evil player in the whole health care system." Whatever the actual MLR figures are, the House and Senate bill would represent the first federal regulations of this kind. "The point is to get rid of the high 60s and the low 70s and get it all up into the 80s," says Rockefeller.

Following the commerce committee investigation, one of the country's largest insurers — Aetna — admitted it had misreported its revenues in a way that overstated its MLR in the small group market. The company recently amended its filings to indicate that it had incorrectly categorized $4.9 billion of premiums; the revised figures changed its MLR average in the small group market from 82% to 79%, a significant change.

But setting a new national MLR floor is not the end of the equation. The CBO, in its report on the regulations, said insurers might react to new thresholds by "cutting back on efforts to restrain benefit costs through care management." Translation: Anything that doesn't count as "medical costs" may be on the chopping block, including exorbitant executive salaries but also programs to keep patients healthy. There is also a fear among health policy experts that some insurers could raise premiums in reaction — higher premiums means more money spent on health care, but also more left over for profits. Another unintentional consequence might be insurers overpaying for some health services to keep their MLR averages high. All of this means the efficacy of MLR regulation — like so much of what's contained within the House and Senate health reform bills — will hinge on implementation and oversight, subjects that have garnered almost no debate this year.