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Public Policy Analysis & Opinion

MLR—Repeal or not—that is the question

New officers and old fights over producer compensation in a human terrarium

By Kevin P. Hennosy

The National Association of Insurance Commissioners (NAIC) took its insurance public policy road show to the hamster warren known as the Gaylord National Resort and Convention Center at National Harbor, Maryland.

The Gaylord Hotel chain was a favorite of former NAIC Executive Vice President Cathy Weatherford, and thanks to multi-meeting contracts signed under her discredited regime, NAIC meeting attendees are still paying premium prices for "the charm" of Gaylord institutions.

For example, while The Gaylord National advertises its location as "near Washington D.C.," the physical location of the sprawling property is far enough away from the city that this year's meeting attendees were forced to purchase meals and incidentals at prices unfettered by the pressure of price competition.

According to sources close to NAIC leadership, attendance numbers at the Gaylord-based meetings has not met obligations under the Weatherford-era contracts. As a result, the NAIC extended the contract with Gaylord Hotels by two meetings in order to avoid paying the penalty.

Once again, the NAIC and its meeting attendees are paying for the mismanagement of Cathy Weatherford—the gift that keeps on giving.


At the National Harbor meeting, the NAIC elected its cabal of officers for 2012. As introduced by an NAIC statement, those officers are:

NAIC President Kevin M. McCarty is the commissioner of the Florida Office of Insurance Regulation. McCarty became Florida's first appointed insurance commissioner in January 2003. He is responsible for Florida's insurance market, including oversight of company solvency, policy forms and rates, market investigations and new insurance business. McCarty began his career in public service in 1988, becoming an expert in workers compensation issues with the Florida Department of Labor and Employment Security.

President-Elect James J. Donelon was appointed Louisiana Insurance Commissioner in February 2006 and has been elected three times to the position. A retired state judge advocate for the Louisiana Army National Guard, Donelon now serves the Department of Insurance as chief deputy commissioner and executive counsel. He is also a former parish council chairman and state representative where he chaired the Committee on Insurance.

Vice President Adam Hamm was appointed North Dakota Insurance Commissioner in October 2007 and was elected to a four-year term in November 2008. He currently serves as chair of the NAIC Life Insurance and Annuities Committee, and chair of NAIC's Audit Committee. Prior to becoming commissioner, he served as a prosecutor for the Cass County State Attorney's office. Hamm also worked as an attorney in private practice specializing in commercial litigation, administrative agency law and transportation law.

Secretary-Treasurer Monica J. Lindeen was elected Commissioner of Securities and Insurance, Montana State Auditor in November 2008. Lindeen is vice-chair of the NAIC Health Insurance and Managed Care Committee, and chair of the NAIC Designation Program Advisory Board, as well as a member of the NAIC Executive Committee and Audit Committee, and serves on a number of task forces related to implementing health insurance reform. Lindeen served in the Montana House of Representatives from 1999-2006. From 1994-1996, she was a part-time faculty member in the Montana State University (MSU) Billings English Department and taught simultaneously as a graduate assistant in the Department of Educational Foundations.

In the absence of major indictments and/or punitive incarcerations, the NAIC officers advance through the leadership ranks serving one-year terms in a sequential fashion beginning with secretary-treasurer and ending with president.

In his opening address as NAIC President, Commissioner McCarty expressed his devotion to the Anti-Federalist cause, which chooses to look past the Constitution of 1789 and 223 years of American jurisprudence: "Over the next year we must confront several important challenges. Whether it is Dodd-Frank or the Affordable Care Act, the federal government has become increasingly involved in the insurance arena. As your president, I intend to vigorously defend the role of state-based regulation, highlight our accomplishments, and continue to work for regulatory modernization and national uniformity to create an insurance framework that benefits both consumers and the insurance industry."

MLR repeal

In what attendees describe as an otherwise quiet gathering of the NAIC, commissioners and lobbyists engaged in an active effort to reverse Association policy on Medical Loss Ratios (MLR) under the Patient Protection and Affordable Care Act. The MLR as defined by federal law requires health insurers to spend at least 80 cents of every premium dollar on medical claims payment.

As a point of reference, traditionally private insurers have spent 60% of premiums on claims while retaining 40% on overhead and profits. The Medicare program spends 97% of premiums on medical claims and 3% on overhead.

In October 2010, in the face of vigorous lobbying from producer and company trade associations, the NAIC approved recommendations for the MLR formula for the Department of Health and Human Services that included producer compensation in the formula to assess medical expenses. These recommendations classify producer compensation as company overhead.

These recommendations were consistent with the well-established tenet of Agency Law, which defines agents as an extension of the principal in any contract. In the case of insurance, agents represent the insurance company. In short, insurance companies have agents, not insurance consumers.

Opponents of the MLR as written argued that agent and broker commissions should be accounted for as a consumer benefit, rather than corporate overhead. On March 17, 2011, the Independent Insurance Agents and Brokers of America (IIABA or Big "I") issued a statement which explains: "Agent compensation is passed-through by the insurance carrier from the consumer to the agent and is only collected as part of the premium as a convenience." (Robert Rusbuldt, Big "I" president and CEO.)

In June 2011, the NAIC Professional Health Insurance Advisors Task Force chaired by Commissioner McCarty voted to support federal legislation that would remove agent compensation from the MLR formulas altogether. The task force endorsed federal legislation, HR 1206, the "Access to Professional Health Insurance Advisors Act of 2011," introduced in March by Reps. Mike Rogers (R-Mich.) and John Barrow (D-Ga.).

Following the task force vote, PIA National Assistant Vice President David Eppstein, who represents PIA at the NAIC, "expressed appreciation to Task Force Chairman and Florida Insurance Commissioner Kevin McCarty as well as Mississippi Insurance Commissioner Mike Chaney, who made the motion to endorse HR 1206."

Since his days as an insurance department staffer, Commissioner McCarty has earned a reputation for being a dogged advocate for his policy proposals at NAIC. There is little doubt that Commissioner McCarty never would have called the question at the task force he chairs, if he did not support the resolution endorsing HR 1206.

On November 4, Consumers Union issued a statement announcing that the consumer organization "strongly opposes" an NAIC resolution. Consumer advocates who attend the NAIC meetings believe Commissioner McCarty tried to force a vote on the resolution in the early days of his term as NAIC president.

One reason why the proponents of the resolution may have adopted a stealth approach to lobbying was consumer groups' ability to generate public response. "When the NAIC took up a similar recommendation, more than 10,000 consumers wrote to their insurance commissioner expressing disappointment and opposing the effort," according to Consumers Union.

"This would be a big loss for consumers," said NAIC Consumer Representative and Consumers Union Senior Policy Analyst Lynn Quincy. "The NAIC's own figures estimate health insurance customers would miss out on over $1 billion in rebates."

Furthermore, according to Consumers Union, "Earlier this year, Aetna announced that it would reduce premiums for Connecticut policy holders by 10% on average, citing the MLR rule."

Consumer groups have long questioned the use of commissions as a means of compensation in insurance sales. The belief is that commission compensation introduces reverse competition into insurance markets: The products with higher commissions, and usually higher prices, are more competitive because producers tend to present and promote the more expensive product.

As noted, the new NAIC president's allegiance to the repeal proposal is not subject to reasonable doubt; however, just prior to the NAIC meeting, trouble arose back home in Florida that would make it politically difficult for Commissioner McCarty to take a public lead for repeal of the producer compensation component.

On October 24, Consumer Watchdog, a public interest advocacy group, e-mailed a letter to the Department of Health and Human Services, which challenged Florida's application to receive a waiver from complying with the current MLR rules.

Florida phase-in

Florida's waiver application requests permission to phase in the compensation elements of the MLR formula over three years—as opposed to the proposed complete repeal of that element that Florida supported at the NAIC task force.

The call for repeal of the NAIC's policy on MLR is counter to the policy of the Obama Administration and seeks to go around the Executive Branch by petitioning congressional action. This effort comes at the same time that Florida is asking administration officials for special treatment, so it is understandable that Commissioner McCarty might not want to lead the rhetorical charge on the NAIC repeal effort.

The written challenge to the Florida waiver request from Consumer Watchdog further complicates Commissioner McCarty's life by raising the profile of his request for special treatment.

The Consumer Watchdog letter alleged, "Florida's waiver request represents a line that the Department of Health and Human Services should not cross. As a large state with a broad and competitive market in relation to most other states, its application for a blanket waiver is a political, not an economic, act."

The letter questions the validity of a hearing conducted by the Florida department to receive testimony on whether application of the MLR formula, which includes producer compensation data, should be delayed. Consumer Watchdog charges:

• The Insurance Department hearing for which a transcript was provided was a show conducted to bolster the waiver demand and invited only industry testimony.

• Department officials in that hearing asked only questions that amplified the demand.

• The department record shows no consumer organizations or any other critical voices invited into the process and no non-industry comments recorded.

• The factual material ultimately provided by the Florida DOI fails to support the waiver demand.

The Florida Department of Insurance argued in its waiver application that including producer compensation as a component of MLR will force producers to leave the business.

Consumer Watchdog challenged this argument using strong language. "The Florida DOI argues, without a shred of evidence, that brokers will quit their businesses or leave Florida in large numbers as insurers cut their commissions for the purpose of reaching the MLR requirement of 80%. The DOI argues that consumers will be left wandering, helpless, in a sea of insurance choices. However, both experience and logic argue against this declaration."

To add insult to injury for the new NAIC president, the consumer group used an NAIC report to counter many of the arguments presented to the Department of Health and Human Services by the Florida Insurance Department. The report was originally presented to the Health Insurance Advisors Task Force chaired by Commissioner McCarty last summer. The Consumer Watchdog letter highlighted the following NAIC findings:

• A thorough study this year of the broker issue, by the National Association of Insurance Commissioners, found no evidence that consumers would lack brokers' assistance even if commissions were cut.

• States that already have MLR requirements near or at the ACA [Affordable Care Act] levels told the NAIC study group they had heard no complaints—not one—that broker assistance was scarce.

• Brokers stand to gain substantial new clients nationwide from the ACA's consumer insurance mandate, and are likely to make up in quantity whatever they may lose in individual commissions. The policy clarity and simplifications required by the ACA will also make both brokers' and consumers' jobs easier.

• The NAIC study found no definitive evidence that insurers are even cutting broker commissions because of the MLR. Some insurers, notably United Health Group, were moving to flat-rate payments rather than commissions well before passage of the ACA, as a business decision. This has apparently not hurt the insurer's ability to work with brokers.

The hard line taken both by producer groups and consumer groups puts Commissioner McCarty between the proverbial "rock and a hard place." Such is the lot of being NAIC president.


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