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NAIC Rebuffs Insurers on Rule Setting Minimum Medical Payouts for Insurance Policies

By John Reichard, CQ HealthBeat Editor

October 21, 2010 -- The National Association of Insurance Commissioners (NAIC) on Thursday concluded months of intense deliberations on a key rule establishing minimum medical payouts under the health care overhaul law by rejecting arguments that would have given insurers much greater flexibility to meet the standards.

The recommendations agreed to by the NAIC were hailed by the Obama administration and blasted by the insurance industry.

The nation's largest health insurance lobby—America's Health Insurance Plans (AHIP)—issued a statement predicting that a number of insurers would be forced to drop out of the market as a result of NAIC's action and that others would pare back their spending to improve the quality of care and prevent fraud.

The recommendations, which NAIC will forward to Health and Human Services (HHS) early next week, "will reduce competition, disrupt coverage, and threaten patients' access to health plans' quality improvement services," said AHIP President Karen Ignagni.

HHS Secretary Kathleen Sebelius hailed the NAIC recommendations as a victory for consumers. She said they would not imperil the availability of coverage.

"Not only do they ensure consumers receive better value for their health care dollar, they recognize special circumstances in different markets to preserve market stability and employee coverage," Sebelius said in a statement on NAIC's unanimous vote.

NAIC was responsible under the law for recommending how various types of spending by insurers should be counted—whether as "medical" or "administrative"—under a "medical loss ratio" (MLR) rule setting minimum percentages of premium income insurers must pay for medical care.

The law requires that policies sold to individuals and small groups pay out at least 80 percent of premiums for medical care. In the case of policies sold to larger groups, the minimum is 85 percent. To the extent insurers fall short of the standards, they must issue rebates to purchasers of the policies.

HHS is expected to issue a regulation within weeks based on the NAIC recommendations. The standards take effect Jan. 1. Insurers will have to issue rebates in 2012 in the amount they fall short of the standards in 2011.

Aggregation Rejected
Insurers had hoped to persuade NAIC that their medical payouts could be "aggregated" across the various states in which they operate to calculate a national average. That would have made it easier to meet the standards than having to meet them in each state in which they do business. But the NAIC rejected the idea of having a national average.

Another issue that the NAIC tackled was compensation of insurance agents. Agents did not want their commissions treated as administrative expenses because insurers likely would trim those payments if they were counted that way. But NAIC decided it did not have the flexibility under the law to count commissions as anything other than administrative spending.

Commissioners did agree, however, to ask HHS to establish a working group to address agent compensation. The National Association of Insurance and Financial Advisors issued a statement praising the commissioners for that action.

NAIFA President Terry K. Headley said that "while disappointed the NAIC did not believe it has the authority to modify the MLR definition to accommodate agent commissions, NAIFA is hopeful that the NAIC and HHS will side with consumers by recognizing that agents need to be compensated for the vital assistance they provide consumers in managing day-to-day health care issues."

Insurers Wanted Transition
Ignagni said that the recommendations would undermine the key goal of the overhaul law, improving access to insurance while minimizing disruption to the existing insurance market. "We are concerned that the current draft proposal will create unintended consequences," she said.

AHIP also emphasized the importance of having NAIC suggest regulations establishing transition periods to ease compliance burdens and complained that the recommendations took too narrow a view of what constitutes quality improvement spending that can be counted under the MLR rule as medical care.

At a press briefing after the vote, one key commissioner said the NAIC knows fully that some insurers may have a tough time meeting the standards being set.

"This is placing on [insurers] some pretty stringent requirements," Kansas Insurance Commissioner Sandy Praeger said. Praeger chaired one of two main NAIC committees overseeing the development of the recommendations.

"There are some companies that probably in the current environment operate below these new established standards," Praeger added. "I think that most [commissioners] feel that the large group market is not going to have much difficulty complying with the 85 percent, but in the individual and small group market where you have a really small book of business there might be some difficulty."

A longtime health insurance executive who requested anonymity in order to speak more freely predicted that Sebelius, who earlier in her career served as the insurance commissioner in Kansas, would ease the impact of the rule on markets where a it looked like a significant number of insurers would drop out.

NAIC "did not issue transition regs, but on the other hand, the secretary has flexibility to issue waivers," the executive said. "It's highly unlikely she would ignore waiver requests where the insurance commissioner or the governor said: 'We need a waiver or the market could be severely disrupted.'"

"She's a former insurance commissioner and really understands these issues, the source said. "On the other hand, she's going to make states justify such requests."

Praise for ruling
Sen. John D. Rockefeller IV, who authored the MLR portion of the overhaul law, and Health Care for America Now (HCAN), a consumer group, praised the NAIC decision.

"Because of this strong standard, health insurance companies across the country will not be able to take advantage of people in states with weaker consumer protections,'' Rockefeller, D-W.Va., said in a statement. "And, those companies that fail to meet the benchmark will be held accountable—if they are overcharging, they will be required to increase benefits, lower premiums, or pay rebates directly to consumers.''

The senator pointed to a report last week by Citigroup Investment Research health analyst Carl McDonald who estimated that had just the minimum MLR rule been in effect for 2010, consumer rebates would have totaled nearly $900 million.

HCAN Executive Director Ethan Rome called the NAIC decision "an important milestone in the implementation of the Affordable Care Act.

"After HHS adopts the commissioners' recommendations, the formal rule will end the insurance companies' practice of spending too few premium dollars on actual medical services even as they deny people the health care they need and charge us more and more."

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