Don't look away. The still-fragile Affordable Care Act (ACA) gives the public a fighting chance at reining in health insurance premiums. But we're going to have to wrestle with the insurance industry every step of the way -- and occasionally also the drug, hospital, medical supply industry, and yes, doctors. As the National Association of Insurance Commissioners (NAIC) convenes in Seattle today, the public has the imperative to stick up for ourselves. Here's what's at stake in this round.
Starting in September, health insurance plans are required to spend at least 80-85% of the premium we pay them on actual health care. Executive bonuses, administration, marketing and profits are limited to the other 15% (in large plans) to 20% (in small plans). This is supposed to incentivize the insurance industry to operate efficiently and to negotiate assertively with health care providers. rather than simply passing on cost increases to consumers. (These rules are in effect til 2014, when the insurance exchanges kick in.)
The $2.5 trillion dollar question is this: how do you define actual health care? The Secretary of Health and Human Services defines this figure, known as the Medical Loss Ratio (MLR), after consulting with the NAIC. And the insurance industry has not been shy.
The insurance industry is asking the NAIC to define the MLR to its advantage, by counting marketing programs, including those with public health themes, as medical expenses, rather than the administrative expenses they clearly are.
The aims of the relevant section of the law (Sec. 2718) -- low cost care that offers value to consumers -- conflict with the financial imperatives of the health insurance industry, to maximize profits and returns to shareholders, as well as administration, including executive compensation. Proposals by the insurance industry call for calculating the MLR in a way that will frustrate the aims of the law. The MLR is a ratio, with all medical claims (in the numerator), divided by total premiums (in the denominator). A high MLR means that the insurance company is spending a relatively higher share of premium income on its members' medical care and less for administration and profit. A low MLR means that the insurance company is returning less in medical care benefits to its members while retaining more for executives and shareholders; this can also signal a solid opportunity for investors.
To fairly achieve an 85% MLR, a company would have to show that the amount spent on medical claims (in the numerator) is high relative to premiums. But companies can frustrate the intent of the law by defining medical claims to include other expenses, including expenses typically considered part of administration.
The Senate Commerce Committee has documented that, "At least one company, WellPoint, has already 'reclassified' more than half a billion dollars of administrative expenses as medical expenses, and a leading industry analyst recently released a report explaining how the new law gives for-profit insurers a powerful new incentive to 'MLR shift' their previously identified administrative expenses."
The ACA standard for including expenditures for non-clinical care as a medical expense (that is, in the numerator) is that it must "improve health care quality." It's hard to imagine this test will be met by the few occasions of insurance companies' co-sponsoring visible public health events, nor do they justify skewing the MLR in ways that would raise premiums, or requiring the additional administrative effort to determine whether or not it is in itself an administrative or medical expense.
In our letter to the HHS and NAIC, the EQUAL Health Network urged, "The NAIC and HHS should discourage efforts by insurance companies to create and benefit from insubstantial programs that masquerade as clinical treatments. These programs should be properly counted as the administrative expenses that they are. Otherwise, a proliferation of such programs, if regarded as clinical care, would have the exact opposite of the intended effect of the measure: it would cause health care expenditures to balloon, and dilute value for consumers."
What About Their Investments?
The ACA standard applies only to insurers' premium revenues. Yet patients and payors should be equally concerned about how an insurer uses income from its investment of the sums it extracted from previous years' patient premiums. A more appropriate standard would measure the share of insurers' total revenues devoted to care, as some analysts have urged.
NAIC committees have been working largely outside of the public's view to draft standards. In our letter, the EQUAL Health Network urged, "It is vital that rate review and other pressures be strong enough to prevent insurers from simply raising premiums in order to offset the limit on their administration/profit share. It will also be important to create an ongoing public process to set and review the initial regulations which are required to begin in September, 2010. Public comment on this system's achievements and limitations will provide assessments of the system's success, and offer the groundwork for constructive and equitable adjustments to the rules."