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'Loss Ratio' Debate Proves Again That Rulemaking Is as Hard as Lawmaking

By Jane Norman, CQ HealthBeat Associate Editor

June 25, 2010 -- Democrats outraged by insurance company profits designed a piece of the new health care law to force insurers to direct most premium money toward benefits. But severe birth pangs are afflicting the process of spelling out this concept in regulations.

The law (PL 111-148, PL 111-152) requires that, beginning in 2011, large group plans spend 85 percent of premiums on clinical services and activities related to quality of care. Only 15 percent can go to other items, such as administrative costs, advertising and profits. For small group and individual plans, it's 80 percent premiums and 20 percent other costs.

Although Congress set the "medical loss ratio," as it is called, at 85-15, the law was otherwise fairly vague about what counts as medical claims and what counts as administrative costs.

That is where the difficulty comes in. The National Association of Insurance Commissioners (NAIC), a group of state regulators directed under the law to develop recommendations on the rule, has been deluged with comments. For insurers, the stakes are high because the decision could directly—and in some cases adversely—affect companies' profits.

But many questions surround the group's final recommendations to the Department of Health and Human Services. The group missed a June 1 deadline requested by HHS because of the complexity of the deliberations. "This is still really in motion," said Janet Trautwein, chief executive officer of the National Association of Health Underwriters, whose members design health care plans.

Sandy Praeger, the Kansas insurance commissioner and chairwoman of one of two main NAIC committees overseeing the recommendations, said she's aiming for the work to be completed by the end of July. "This is a big deal" to get done by then, she said, because insurance plans will soon need to know what rules they'll be operating under for 2011. Essentially, what NAIC recommends will become the regulation, unless for some reason it is determined that the commissioners didn't follow the law, she said.

Proponents of the standard say it will force insurers to spend more on services to consumers. But critics contend it will be to drive individual and small group plans that can't meet the standard out of the market—lessening the competition that's needed to keep prices low. "I really think this is the most significant part of the health care law, pre-2014," said Robert Laszewski, a health policy consultant and former insurance executive.

The Business Roundtable and Business Council said in a recent letter to Office of Management and Budget Director Peter R. Orszag that consequences could include poorer quality of care, higher premiums and reduced competition. If companies can't meet the standard, they will have to issue rebates to customers, under the law—though how is another issue for the NAIC.

Defining the Gray Areas

Perhaps the biggest battle is over what to define as clinical services and what is quality of care. Members of a health information technology coalition, for example, wrote to HHS raising concerns that care coordination and wellness programs often rely on health IT to succeed. However, if that technology is defined as administrative in nature, it could lead insurance plans to abandon spending on such programs.

And what about other insurance company services that could be in that gray area between medical and administrative care, such as 24-hour nurse hotlines? Are they a way to steer patients away from emergency rooms or an improvement in care?

One issue that seems close to settled is whether companies operating in the individual market will have time to meet the 80 percent standard. Some are far from it, with ratios as low as 65 percent, according to a study by the Senate Commerce Committee. Under a draft proposal, the NAIC recommends that the Health and Human Services secretary consult with the insurance commissioner in each state to determine whether to adjust the 80 percent standard in the individual market from 2011 through 2014, considering whether a lower ratio would destabilize the market in that state.

Marketing for such plans is more expensive and labor-intensive, said Praeger. "We want to get everyone to that 80-20, but we don't want to put companies out of business," she said.

Democratic Sen. John D. Rockefeller IV, who pushed hard for the standard during the Finance Committee markup of the overhaul, said it is designed "to find some way to corral them into doing what they're meant to be doing, and not focusing as much on profits and perhaps, radically enough, to even think about trying to help people and provide medical services for people."

The intent of the standard is to be "a great benefit to those who cannot continue to pay skyrocketing premiums," said Rep. Nita M. Lowey, D-N.Y.

She and other proponents of the standard are watching, and warning that insurers can't be allowed to game the system by tucking administrative costs into "quality of care" categories. That is the scenario predicted by some industry analysts even as HHS tries to figure out how to draw a bright line between the two.

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