The new federal health care law requires that insurers spend at least 80% of customers’ premiums on medical care in the individual insurance market, and 85% in the employer/group market. Starting in 2011, insurers that don’t meet these requirements will have to issue rebates to consumers “based on the amount insurers’ spending falls below these minimums.” Yesterday, a new report released by the Senate Committee on Commerce Science and Transportation found that while many of the nation’s largest insurers “modestly increased the percentage of premium dollars they spent on medical care in 2009,” the disparities “in medical spending between market segments remained larger than ever.
Health insures, in other words, still view the individual and small group markets as their most profitable sectors and they continue to spend a smaller percentage of premium dollars on actual medical care — shifting a significant amount towards administrative expenses and profits. For example, while the largest insurers used about 15 cents out of every premium dollar for administrative expenses in the large group market, “they used more than 26 cents out of every individual premium dollar for administrative expenses,” the report notes. [Note: the original report says "medical expenses" rather than "administrative expenses." I contacted the staff and they said that this was a mistake.]
Some insurers are already meeting the new federal requirements, while others will have to spend more on medical care to comply with the law:
The analysis found that the largest for-profit health insurers spend a lower percentage of their customers’ premium dollars on patient care than other health insurers. The analysis also found that in the individual and small group markets, health insurers spend a significantly smaller portion of each premium dollar on medical care than they do in the large group market.
The problem will come when insurers that fall short, try to meet the new minimums. The ratio is closely monitored by Wall Street investors and so insurers will have every incentive to continue spending less on care and increasing profits. They may try to artificially inflate their MLR by reclassifying administrative costs as ‘medical care.’ Already, WellPoint — the nation’s largest insurance company — announced that it has reclassified some of its administrative costs as medical spending in order to increase its medical loss ratio. As the report notes, “By reclassifying these expenses as medical benefits, the executives projected that WellPoint’s 2010 medical loss ratio (which the company calls its “benefit expense ratio”) would increase by 170 basis points, or 1.7%. Because WellPoint expects to collect more than $30 billion in premiums from its commercial health care customers in 2010, this “accounting reclassification” means that the company has converted more than a half a billion dollars of this year’s administrative expenses into medical expenses.”
Health and Human Services Secretary Kathleen Sebelius has written a letter to the National Association of Insurance Commissioners (NAIC) requesting their assistance in defining medical loss ratio (MLR) standards in the new health care law and has issued two formal requests for public comment on how best to define the term. Since the MLR requirements are one of the few ways to prevent insurers from earning outrageous profits before most of reform’s provisions kick in, HHS “and state insurance commissioners will have to remain vigilant and focused on ensuring that consumers get the benefit of the new federally mandated medical loss ratios.” These definitions, in other words, have to be air tight to ensure that companies can’t simply reclassify their expenses.