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Consumers in Individual Insurance Market Benefit from MLR Requirement

By Caitlin McGlade, CQ Staff

December 5, 2012 -- Insurers in the individual market reduced their overhead expenses by $560 million in 2011, which was more than those in the small- and large-group sectors. Those plans that did not meet the health care overhaul's medical loss ratio (MLR) paid customers about $394 million in rebates, according to a report by The Commonwealth Fund.

The research team, which released the report last week, sought to discover whether insurers met their MLRs in 2011 by reducing administrative costs without increasing corporate profits and by restraining premium increases rather than taking actions that would benefit their bottom lines.

Their conclusion was that in order to get insurers to pass along savings to consumers and slash administrative costs across the board, stronger rate regulation, tighter loss ratio rules or stronger competitive pressures are necessary.

The health care overhaul (PL 111-148, PL 111-152) requires insurers to spend at least 80 percent or 85 percent of their premium dollars on medical care, limiting the share that insurers may spend on overhead and for profits. Companies must rebate their subscribers if they don't make the mark, and the first round of rebates went out in August.

According to the report, insurers handled the mandate by executing one of three scenarios. Under one, companies lowered administrative costs, profits and premiums and avoided paying rebates. In a second example, insurers did not reduce administrative costs and profits enough to meet the MLR standard and again had to pay rebates. Under a third scenario, insurers shifted any administrative cost savings into profits and used those increased profits to pay rebates. The third scenario, the report authors said, was the most common among small- and large-group insurers.

"Potentially, and we didn't measure this, we're speculating, that maybe they were doing this to subsidize those plans that offered an individual product," said Michael McCue, report author and professor at the Department of Health Administration School of Allied Health Professions at Virginia Commonwealth University. "Maybe they were trying to offset those losses of the individual insurer."

Individual-market insurers reduced both administrative costs and profits despite increasing enrollment by almost a quarter of a million people in 2011, making consumers of such insurance "benefit substantially" under the medical loss ratio rule.

Large-group market insurers that did not meet the minimum medical loss ratio paid about $386 million in rebates and devoted an increased amount of premium revenue to overhead costs. The report states that this group was able to boost its profits by $959 million.

Small-group market consumers collectively received about $321 million in rebates. While administrative costs in this market did drop significantly, insurers in this market chose to use those savings to increase their profits rather than passing them on to consumers in the form of lower premiums, according to the report.

As of September 2011, non-grandfathered plans seeking to raise premiums by at least 10 percent had to start publicly disclosing their proposed increases and the justifications for them. McCue said this requirement should deter insurance companies from drastically raising premiums.

"They're trying to embarrass plans to keep their rates low, by embarrassing them so to speak, because a lot of these state regulations don't have a lot of teeth to hold those rates down," McCue said.

According to an emailed statement from America's Health Insurance Plans, the medical loss ratio is an "arbitrary cap on what health plans can spend on a variety of programs and services that improve the quality and safety of patient care."

AHIP has taken the position that the ratio prohibits insurance companies from spending money on many services that are not related strictly to medical costs, which cuts back on developing partnerships with providers such as Accountable Care Organizations, credentialing health care providers and providing patients with online and mobile access to claims history and Personal Health Records.

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