The First Victims of Health Care Reform

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Michael McRaith, director of the Illinois Department of Insurance, believes brokers and agents can survive implementation of the health reform law but says their payment structure will change dramatically. Gone will be percent commissions based on premiums; he predicts they will be replaced with flat fees. "Benefit plans will still have nuance," says McRaith. "Counseling advice is still needed."

Small insurers also watched the medical loss ratio rulemaking with trepidation, aware that many will need to re-examine their business models if they are to survive under the new regulations. These smaller companies typically spend more money on administrative costs than large insurers and are more likely to tailor risk pools to exclude the sickest people. Some small insurers will be able to adjust to "the new paradigm" of health care reform, says Sabrina Corlette, a research professor at Georgetown's Health Policy Institute. New 2014 regulations like guaranteed issue (requiring insurers to sell policies to everyone) and community rating (varying premiums based only on age) will simplify the health-insurance underwriting business and may make it easier for small insurance companies to standardize their processes. Others, however, "have a business model where they turn away sick people and offer skimpy benefits," says Corlette. Some of these companies sell limited insurance policies that won't comply with the minimum benefit packages required by the Affordable Care Act that kick in by 2014; others are careful to cherry-pick customers and sell only to people least likely to incur high medical costs.

"Congress intentionally decided it wasn't necessary to save every player in the market," says Timothy Jost, a law professor at Washington and Lee University who studies health policy. The medical loss ratios are meant to keep insurance profits under control, but also to eliminate insurers that don't provide good value to consumers. "It's inevitable that you've got some plans that weren't offering real insurance anyway," says Jost. "Some will be lost — good riddance. And some are good plans that are really inefficient, and hopefully they can become more efficient."

Small insurers will be allowed more flexibility under the medical loss ratio rules than larger employers, says Jost. Lawmakers, he says, allowed for this, aware that small insurers provide much-needed competition to bigger players in the marketplace.

Despite this flexibility — still-to-be-written regulations might allow small insurers to transition gradually to comply with the new rules — some states nonetheless worry their insurance markets won't be competitive under health reform. Maine's insurance commissioner, who supported the health-reform effort, has already asked HHS to exempt one of its smaller insurers from new medical loss ratio requirements.

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