By Robert A. Holden, Senior Vice President

A little known provision in the federal health care law has achieved a much higher profile as the potential for higher costs and reduced services for employers and consumers now becomes clear.

Even as state legislatures tackle how they will create new health care benefit exchanges, the details of federal health care reform have states asking for time to preserve their current health insurance markets.

On April 29, Kansas became the latest state to request a waiver from federal Medical Loss Ratio (MLR) requirements under the Patient Protection and Affordable Care Act (PPACA). The MLR requirements under the PPACA, while debated for some time by the insurance industry and consumer advocates, have heretofore gone largely unnoticed by the broader business community.

That is about to change.

What is MLR?

Intended to reduce administrative costs and excess insurance industry profits, the PPACA established new federal MLR requirements on health insurers, limiting the profits and administrative costs of an insurer to a specific ratio based on the amount of medical expenditures made by the insurer. Prior to the PPACA, states determined how much insurers could spend on expenses not related to medical expenditures. While many states have established MLR requirements, the federal MLR requirements are more stringent than those now in place. Federal MLR requirements limit the amount of administrative costs and profit that insurers can make to 20% of premiums for individual and small group coverage and 15% for large groups, when state limits allowed 25% or more. Based on claims information that carriers will report in 2011, insurance carriers will be required to issue rebates to customers if they do not spend 80 to 85% of their revenue on health care or quality improvement costs.

Potential for Higher Costs

As costs vary between states due to a variety of factors, insurers may cease to do business in some states rather than pay significant rebates. An incentive will also exist to offer more expensive plans that cover more conditions and offer more services. While this may be desirable for some consumers, these plans will also be more expensive.

Further, tighter MLR requirements and the move to an exchange market have states concerned also about the ability of insurance agents and brokers to serve individuals and employers. Under current rules, agent and broker commissions paid by health insurers will be calculated as administrative costs. Carriers are anticipated to move their offerings to online resources and direct sales in response to MLR and in anticipation of exchange implementation. Industry groups like the National Association of Insurance and Financial Advisors (NAIFA) and The Council of Insurance Agents & Brokers (CIAB) oppose the categorization of commissions in this way, noting that insurance agents are significant employers in many states, act as consumer advocates for their customers, and can reduce consumer protection and oversight burdens in states where administrative agencies are already stretched.

The State Reaction

The MLR issue was a concern last year when the National Association of Insurance Commissioners (NAIC) made rule recommendations to the Health and Human Services Department following contentious discussions of what constituted “administrative” or “quality improvement” costs and how the MLR would be determined. Since that time HHS has issued interim final rules for their implementation based on the input they received from the state insurance commissioners, while the state insurance commissioners have directed the NAIC Health Insurance and Managed Care Committee to address the role of the insurance agent in their markets. One possible avenue exists under the PPACA, as the law provides for health care “navigators” that would fill some of the roles currently filled by agents.

Ten states including Florida, Georgia, Iowa, Kansas, Kentucky, Louisiana, Maine, Nevada, New Hampshire, and North Dakota have formally applied for waivers from the pending requirements so that they can maintain carriers in their health insurance markets. Maine has already been granted a waiver to adjust their MLR standard to 65% and the nine other waivers are still under review.

Congress too is discussing this issue. House Bill 1206, introduced in March and sponsored by Rep. Mike Rogers (R-MI), would carve agent commissions out of the MLR calculation. While the bill has bi-partisan cosponsorship in the House, Sen. Jay Rockefeller (D-WV) has been a strong proponent for a strict exclusion of administrative costs from the MLR computation and this position is also strongly supported by provider groups like the American Medical Association.

State health benefits exchanges will change the way individuals and employers purchase health insurance, but they depend on a healthy market to provide options through the exchange framework. Ultimately, states will be seeing considerable changes in their existing health insurance markets leading up to 2014, not only in the way that health insurance is purchased, but in the underlying market that the exchanges will access. While it remains to be seen if states can address all of the details effectively prior to that date, it is clear that Governors and state legislatures will continue to seek flexibility as they address health insurance in their jurisdictions.

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