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Public Policy Analysis & Opinion

Wrangling over the medical loss ratio flares up in Congress

Federal rate review begins as California launches ballot initiative

By Kevin P. Hennosy

In early February, U.S. Senator Mary L. Landrieu (D-La.) introduced legislation aimed at amending the Patient Protection and Affordable Care Act (PPACA) to exclude insurance agent and broker commissions from the calculation of administrative costs. Senators Johnny Isakson, (R-Ga.), Ben Nelson (D-Nebr.) and Lisa Murkowski (R-Ark.) signed on as co-sponsors of the bill.

The cost calculation is vital to the computation of new pricing rules under the PPACA, which require carriers to establish premium rates based on a Medical Loss Ratio (MLR). The MLR measures the expenses of insurance carriers and forbids non-medical payment expenses to exceed 20% of premiums charged.

As Secretary of Health and Human Services (HHS) Kathleen Sebelius explains on her blog: "The law's 80-20 Rule requires insurers to spend at least 80 cents of each premium dollar on actual health care services and activities that improve health care quality, rather than administrative costs and CEO bonuses. If insurers don't abide by this rule, they will be required to give you a rebate."

The Landrieu-Isakson bill would exclude agent and broker commissions from being computed as an administrative expense of the company. The legislation would overrule an interpretation issued by the HHS, which deemed commission compensation as an administrative expense of the company.

Senator Landrieu said, "I am concerned that HHS's interpretation of the health care law threatens the ability of insurance agents and brokers—many of whom are one- or two-person small businesses—to continue providing essential services to consumers who depend on them to assist with coverage or claims problems. Many brokers are being forced to reduce client services or close their doors altogether due to unintended consequences of these regulations."

Senator Isakson said, "Our legislation will allow health insurance agents and brokers to continue assisting consumers in finding the best health coverage to meet their needs. Our proposal is a commonsense, bipartisan solution that will go a long way in benefitting the American health care system."

As if to underline the integration of the sponsoring senators' interests with that of several insurance trade associations, a news release issued jointly by the two legislators' offices contains praise from the National Association of Health Underwriters (NALU) and the Independent Insurance Agents and Brokers of America (IIABA).

"We urge both Senate and House leadership to quickly act on the Landrieu-Isakson legislation and the companion Rogers-Barrow legislation that is pending in the House of Representatives," said Robert Rusbuldt, IIABA president.


Consumers Union rhetorically hammered the Landrieu-Isakson bill as soon as it hit the hopper. A Consumers Union statement charged that the bill "jeopardizes nearly $900 million in estimated health insurance refunds or lower premiums for consumers." In addition, the consumer advocates said the bill "guts a key protection for consumers that purchase health insurance on their own or receive coverage from a small employer."

Furthermore, and most interesting from the perspective of insurance producers, Consumers Union points out what the Landrieu-Isakson Bill does not do: "The legislation, which eliminates insurance broker commissions from the calculation of administrative costs, doesn't ensure that insurance companies direct the savings back to brokers." In other words, the carriers could still hold on to the money,

"In just a few short months insurers must pay back consumers for wasting their money on inefficient overhead and excessive profit. But this bill would just put that money back into the hands of insurance companies," said Lisa Swirsky, Policy Analyst with Consumers Union. "This is a giveaway to big insurance and a significant loss for consumers struggling to afford health insurance."

The Consumers Union statement recalls a study conducted by the National Association of Insurance Commissioners (NAIC), which found that "altering the rule to remove broker compensation will result in a loss of more than 60% of forthcoming rebates for consumers."

The NAIC has been treating that report as the proverbial ugly stepchild in recent months. Following the issuance of that report, the NAIC endorsed inclusion of commission expenses in the MLR. Then, the NAIC leadership made noises prior to the association's winter meetings suggesting a change in policy, but in the face of negative press they did not take action at the meeting,

Oddly enough, without amending, correcting or repudiating the report findings, the NAIC reversed its position in November 2011. The resolution said, in part: "Congress should expeditiously consider legislation amending the MLR provisions of the PPACA in order to preserve consumer access to agents and brokers. The Department of Health and Human Services should take whatever immediate actions are available to the Department to mitigate the adverse effects the MLR rule is having on the ability of insurance producers to serve the demands and needs of consumers and to more appropriately classify producer compensation in the final PPACA MLR rule."

The IIABA welcomed the "about-face" maneuver by the NAIC, which the agents' association had lobbied hard to achieve. Rusbuldt opined, "The IIABA applauds the NAIC for its recognition of the detrimental impact the MLR calculation has had on independent insurance agency small business owners, consumers, and their agents and brokers,"

Furthermore, Rusbuldt warned: "If the MLR formula is not corrected soon, consumers will suffer the prospect of losing the professional, licensed guidance of insurance agents during this time of great change in the health insurance market."

The consumer group known as Consumer Watchdog called NAIC's credibility to question. "The NAIC cannot survive after this vote as a trusted advisor to all of the states on insurance laws and regulations," said Judy Dugan, research director of Consumer Watchdog, in a statement.

"For years it billed itself as a data-driven consensus organization, sometimes to the detriment of consumers. Now, on an issue that is blatantly pro-industry, and of certain harm to consumers, a bare majority has tossed caution and consensus overboard," said Dugan.

Federal review

For the first time in the nation's history, the term "federal health insurance regulators" crept into use in January 2012. The PPACA requires federal review of health insurance rate increases of more than 10%.

In truth, review is not regulation; however, companies and state regulators now have a federal office looking over their shoulders and willing to discuss regulatory policy in public.

HHS Secretary Kathleen Sebelius used a blog posting to announce that her department had deemed "Trustmark Life Insurance Company has unreasonably raised health insurance premiums in: Alabama, Arizona, Pennsylvania, Virginia, and Wyoming—which would affect nearly 10,000 residents across these five States."

Secretary Sebelius explained, "In each instance, Trustmark raised rates by 13% or more over the last year. For small businesses in Alabama and Arizona, when combined with other rate hikes made over the last 12 months, rates have increased by 27.2% and 18.1%, respectively." She continued, "These increases are unreasonable and it's time for Trustmark to immediately rescind the rates, issue refunds to consumers or publicly explain their refusal to do so."

The dynamics of this action are interesting when considered in the context of a famous comment uttered by former Massachusetts Governor Willard "Mitt" Romney. During the campaign leading up to the Republican Primary in New Hampshire, Romney was discussing insurance companies when he observed:

"I want individuals to have their own insurance. That means the insurance company will have an incentive to keep you healthy. It also means that if you don't like what they do, you could fire them. I like being able to fire people who provide services to me. You know, if someone isn't giving the good service, I want to say, I'm going to go get someone else to provide this service."

In fact, this is exactly the dynamic being employed by the PPACA. The HHS is providing expert analysis of extraordinary health insurance price increases to the public. When the law is fully implemented, institutional and individual consumers will be able to consider the information in a competitive marketplace. That is not an option in the existing non-competitive health insurance system. If consumers resent doing business with a company that tried to gouge them, the health insurance exchanges will allow them to "fire" the offending company and "hire" a new company. I guess that is why the PPACA framework used to be known as "Romney-care."

In the states

Also, in announcing the Trustmark decision, Secretary Sebelius highlighted several state-based regulatory actions:

• In New Mexico, the state insurance division denied a request from Presbyterian Healthcare for a 9.7% rate hike, lowering it to 4.7%.

• In Connecticut, the state stopped Anthem Blue Cross Blue Shield, the state's largest insurer, from hiking rates by a proposed 12.9%, instead limiting it to a 3.9% increase.

• In Oregon, the state denied a proposed 22.1% rate hike by Regence, limiting it to 12.8%.

• In New York, the state denied rate increases from Emblem, Oxford, and Aetna that averaged 12.7%, instead holding them to an 8.2% increase.

• In Rhode Island, the state denied rate hikes from United Healthcare of New England ranging from 18% to 20.1%, instead seeing them cut to 9.6% to 10.6%.

Consumer Watchdog launched a ballot initiative campaign in California, which seeks to enact reforms to health insurance rate regulation in the Golden State. The initiative campaign seeks to place The Insurance Rate Public Justification and Accountability Act on the November 2012 ballot. The initiative offers three major reforms to California health insurance rate regulation:

• Require health insurance companies to open their books and justify, under penalty of perjury, proposed rate changes before taking effect.

• Require public hearings and approval by the insurance commissioner before health insurance company rate increases can take effect.

• Prohibit health insurance, auto insurance and home insurance companies from charging based on prior insurance history or credit score.

Proponents argue for the need for stricter rate regulation by pointing to a study conducted by the California Healthcare Foundation. The study found that the price of California health insurance has increased 153% since 2002, which is five times the general rate of inflation (29%) in the same time period.

Consumer Watchdog seeks to force regulators to consider not only the expenses borne by the company, but the growth of expenses borne by insured patients. According to a statement released by the group in January 2012:

"The initiative also requires insurance companies to justify rates in relation to proposed changes to patient out-of-pocket expenses, including deductibles and co-pays. The CHCF survey found that copayments for office visits increased substantially since 2007, the number of workers in small firms with high deductibles more than tripled since 2006, and annual out-of-pocket limits grew significantly since 2005."

On February 2, 2012, Consumer Watchdog announced that U.S. Senator Dianne Feinstein was the first person to sign the ballot initiative petition.

The author

Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide Insurance Cos. and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.­


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