HHS spells out final medical-loss ratio rules

Quality improvement and patient care are in; health plans' fraud and abuse expenses, network and contracting fees, and agent and broker commissions are out.

By — Posted Dec. 6, 2010

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The Health and Human Services Dept. issued final regulations on Nov. 22 on what health insurers must do to meet medical-loss ratio requirements as part of the new health system reform law.

Starting in January 2011, if health plans don't spend enough of their premium dollars on medical care and quality improvement, they must provide a rebate to customers in 2012.

Insurers will need to report publicly how they spend premium dollars beginning next year, according to the new rules. The regulations also specify that insurance companies in the individual and small-group markets need to spend at least 80% of the premium dollars they collect on medical care and quality improvement activities; those in the large-group market must spend at least 85%.

The Patient Protection and Affordable Care Act mandated that HHS issue the regulations and implement them by Jan. 1, 2011.

"Thanks to the Affordable Care Act, millions of Americans will get better value for their health insurance premium dollar," said HHS Secretary Kathleen Sebelius, who hosted a news conference Nov. 22 in Washington, D.C., to unveil the regulations. "These new rules are an important step to hold insurance companies accountable and increase value for consumers."

HHS officials say the regulations will help rein in a substantial portion of insurance company spending on services unrelated to medical care, such as executive salaries, underwriting, marketing, advertising and other administrative costs.

"These overhead costs contribute little or nothing to the care of patients and the health of consumers," Sebelius said. "While some level of administrative cost is certainly necessary, we believe they have gotten out of hand."

Supporters welcome regulations

The American Medical Association applauded the new measures. "Patients deserve to get the maximum value from their health insurance premiums, and requiring that at least 80% of the patients' premium dollars be spent on medical care can help accomplish this goal," said AMA President Cecil B. Wilson, MD.

Dr. Wilson said the AMA worked closely with the National Assn. of Insurance Commissioners in helping to draft the measures.

The health system reform law President Obama signed into law in March required NAIC to develop uniform standards and methodologies for calculating insurance companies' medical-loss ratios.

In an effort to promote patient care, administrative expenses such as certain fraud and abuse expenses, network and contracting fees, agent and broker commissions and other unrelated activities were excluded from the "quality improvement" calculation of the final rule.

Draft proposals initially included language for broader health information technology expenses, but the final language is much narrower, the AMA noted. In addition, the AMA worked with NAIC to include standards that limit double-counting expenses in multiple categories, thus saving costs and promoting administration simplification.

Dr. Wilson said the AMA was pleased that HHS did not let administrative expenses be counted as medical losses, artificially inflate the medical-loss ratio "or calculate their ratios at the national level."

"The AMA supports HHS' decision to adopt the NAIC recommendations in full and urges HHS to keep the health insurance industry from diverting premium dollars away from medical care."

Nancy LeaMond, AARP's executive vice president, said the organization is pleased that "consumer-friendly" medical-loss ratio rules have been adopted. "Coupled with new benefits under the health care law, these regulations ensure consumers will receive better value for their health care dollars," she said.

LeaMond hopes HHS will monitor the effects of the new regulations and make adjustments as needed so that consumers have access to affordable health coverage and quality care.

The American Cancer Society called it a "strong rule" that assists patients by rejecting requests by large insurers to aggregate the medical-loss ratio of their plans on a nationwide basis, a move that would have let insurers offset high-quality plans sold in one region with lower-quality plans in another region. "By instead limiting aggregation to plans sold within a given state, the regulation will help to reduce the potential for abuse and ensure that consumers receive information that is accurate and useful for plans in their market," said Stephan Finan, senior director of policy for the Cancer Action Network, the society's advocacy affiliate.

The medical-loss ratio rules also garnered support on Capitol Hill.

Senate Finance Committee Chair Max Baucus (D, Mont.) said the regulations ensure that premiums are "spent on quality care, not insurance company profits." Increased transparency helps end insurance companies' abuses such as unjustified premium increases, and it brings long-awaited relief to consumers, he said.

America's Health Insurance Plans had criticized earlier drafts of the regulations, but said the final rules came after following a "substantive, collaborative process."

"These regulations acknowledge the potential for individual insurance market disruption and take a first step toward minimizing such disruptions," said AHIP President and CEO Karen Ignagni.

However, Ignagni added, "The potential for disruption to employer-provided coverage should also be acknowledged and addressed."

AHIP noted in a comment letter to HHS that large employers in particular could face challenges, because they often have employees in many states. Consequently, carriers generally don't report medical-loss ratios on a state-by-state basis. Requiring carriers to calculate that number for large groups using the same rules as individual and small-group coverage could mean significantly higher administrative costs for health plans at a time when they are being required to hold down these expenditures, the letter said.

"More consideration needs to be given to the cost of federally mandated investments in modernizing claims coding and the value of health plans' programs to prevent fraud," Ignagni said.

The new regulations require insurance companies to report their medical-loss ratios to the HHS secretary by June 1 of each year. The first such report will be due in 2012.

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More transparency

Beginning in 2011, insurance companies that issue policies to individuals and small and large employers must publicly report this information in each state in which it does business:

  • Total earned premiums.
  • Total reimbursement for clinical services.
  • Total spending on activities to improve quality.
  • Total spending on all other nonclaims costs excluding federal and state taxes and fees.

Source: Health and Human Services Dept.

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