New Rule: Insurance Companies Must Use Premiums to Pay Medical Bills

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While there’s been a lot of talk about how health care reform did little to rein in rising premiums, there’s at least one provision that could help – and it’s happening soon.

One component of the Affordable Care Act that’s slated to take effect on Jan. 1, 2011, requires health insurance companies to spend at least 80 to 85 percent of the premium money they take in on medical care, leaving no more than 15 to 20 percent for overhead, administrative expenses, and profit: Otherwise, they have to issue refunds to their customers.

From a recent press release issued by the Department of Health and Human Services

New regulations issued today by the Department of Health and Human Services (HHS) require health insurers to spend 80 to 85 percent of consumers’ premiums on direct care for patients and efforts to improve care quality. This regulation, known as the “medical loss ratio” provision of the Affordable Care Act, will make the insurance marketplace more transparent and make it easier for consumers to purchase plans that provide better value for their money.

“Thanks to the Affordable Care Act, millions of Americans will get better value for their health insurance premium dollar,” said HHS Secretary Kathleen Sebelius. “These new rules are an important step to hold insurance companies accountable and increase value for consumers.”

Today, many insurance companies spend a substantial portion of consumers’ premium dollars on administrative costs and profits, including executive salaries, overhead, and marketing. Thanks to the Affordable Care Act, consumers will receive more value for their premium dollar because insurance companies will be required to spend 80 to 85 percent of premium dollars on medical care and health care quality improvement, rather than on administrative costs, starting in 2011. If they don’t, the insurance companies will be required to provide a rebate to their customers starting in 2012.

In 2011, the new rules will protect up to 74.8 million insured Americans and estimates indicate that up to 9 million Americans could be eligible for rebates starting in 2012 worth up to $1.4 billion. Average rebates per person could total $164 in the individual market.

Also starting in 2011: Insurance companies will be required to to publicly report details of how they spend the money they take in.

The insurance industry doesn’t like the new rules

It probably comes as no surprise that the insurance industry isn’t looking forward to meeting the new requirement. Currently, many states have no rules regarding medical loss ratios, while others require as little as 40 percent of premiums taken in by health insurers be used to provide health care.

Here’s an excerpt from a recent letter (PDF) from Karen Ignagni, president of America’s Health Insurance Plans to the National Association of State Insurance Commissioners …

The need for a transition strategy is related to the fact that most states currently have MLR (Medical Loss Ratio) standards that are based on “lifetime ratios” and are significantly lower than those established by PPACA (Patient Protection and Affordable Care Act). To address these issues, a transition plan that provides for an orderly progression to 2014 is essential. The consequence of not providing for an effective transition is a potential disruption of coverage for millions of Americans and reduced competition prior to implementation of the 2014 market reforms.

In other words, according to this lobbying group representing health insurers, the new rule should be phased in from 2010 to 2014, instead of going into effect on Jan. 1. Otherwise, some companies might go out of business, leaving millions of Americans uninsured.

Whether that implied threat is merely self-serving or partially reflects reality, it may be having an effect. While individual insurance companies can’t apply for a waiver of the new regulations, states can apply for a waiver on their behalf, and some are. But HHS Secretary Kathleen Sebelius has the final word on whether a waiver will be granted.

Since the final regulations were just issued by HHS, the jury is still out as to how many insurance companies will be forced to comply, how many carriers won’t be able to stay in business, and most important, how the change will show up in escalating health insurance premiums. But if nothing else, maybe the CEO of my insurance company – United Health Care – won’t be able to raise my premiums 40 percent, then pocket $100 million dollars in compensation. That’s exactly what he did this year: see
Insurance Outrage: Hike Prices, Pay CEO $100,000,000.

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