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Maine Seeks Exemption from Medical Loss Ratio Requirement

By Rebecca Adams, CQ HealthBeat

July 12, 2010 -- Private insurance companies are concerned about federal rules that will force them to direct most premium money toward benefits, instead of other items such as profits or administrative costs. Now insurers say that an unlikely ally is helping to make their case that the rules could be overly burdensome.

Maine insurance commissioner Mila Kofman is a strong proponent of the overall health care legislation that President Obama signed this spring. Kofman, who was appointed by a Democratic governor, even appeared at a White House ceremony last month celebrating the 90-day anniversary of the act. But she also holds the distinction of being the first commissioner in the nation to request that Department of Health and Human Services officials exempt her state from the rules governing the so-called medical loss ratio, or MLR, that could limit insurance companies' profits.

"Absent a waiver, I believe that the federal MLR standard may disrupt our individual health insurance market," Kofman wrote to HHS Secretary Kathleen Sebelius.

Kofman explained in her letter that she believes that Maine's situation is already tightly regulated and that the market is fragile, with only two private insurers in the state currently offering coverage to new customers. "Loss of one of the two insurers would have a serious destabilizing effect in our individual market," Kofman wrote.

However, officials in other states may not see the environment in Maine as unique.

"Insurance markets are very different in each of the states. Since there are a lot of unknowns with respect to how health care reform will impact these markets, if there were a relatively simple waiver authority available, I imagine a lot of states might be interested in that," said Matt Salo, health policy director at the National Governors Association.

The medical-loss ratio rules are set to affect plans' rates starting Jan 1. This month, the National Association of Insurance Commissioners (NAIC), a group of state regulators, is hoping to meet a requirement for them to develop recommendations for the regulations. HHS officials had originally asked NAIC officials to report back recommendations by June 1, but the association said that it needed more time because the issue is so complex.

The rules will flesh out requirements in the health care law (PL 111-148, PL 111-152) that, starting in January, large group plans must 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. Small group and individual plans can spend 80 percent on premiums and 20 percent on other costs.

Plans that do not meet the minimum standards will have to provide rebates to customers.

Part of the reason that the regulations have been delayed is that NAIC officials are having a tough time sorting out which costs should count as related to medical expenses and which as administrative.

Last month, at a meeting on the issue conducted by the Robert Wood Johnson Foundation's Changes in Health Care Financing and Organization initiative, participants estimated that up to one-fourth of people who buy their insurance in the individual market might be at risk in the short term of losing or needing to change their coverage in the initial years after the regulations take effect. The participants included market analysts, industry representatives, actuaries and regulators. Eventually, most analysts said that many of the largest insurance companies will be able to meet the medical-loss thresholds but some insurers may leave the market because they will not be able to comply.

An administration official said that HHS is working to develop a process for reviewing waiver requests. He declined further comment.

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