The National Association of Insurance Commissioners (NAIC) — the insurance industry funded group tasked with making recommendations to HHS about the medical-loss ratio standards in the new health care law — released a new draft report Monday, suggesting that the Secretary should exempt plans in the individual health insurance market from spending 80% of premium dollars on actual medical expenses. The provisions, known as medical-loss ratio percentages (MLR), are intended to prevent insurers from registering unreasonable profits between 2010 and 2014 and require issuers in the individual market to spend 80% of premium dollars paying for claims, while companies in the small and larger group markets have to meet a requirement of 85%. The law also allows the Secretary to adjust the percentage if she believes that “application of the 80 percent standard may destabilize the individual market in that State, and/or 2) on account of the volatility of the individual market due to the establishment of State Exchanges.” Significantly, insurers that don’t meet these minimum standards will have to issue rebates to customers.

The draft NAIC warns that the rules may be “too strict for some individual policies,” leading some customers to lose coverage. The group argues that newer individual policies could not meet the 80% requirement because the risk pool is specifically selected to weed out sicker people, ensuring that its healthier applicants don’t begin filing claims until later in the life of the plan. Unable to spend 80% of its premiums on claims — since few claims are coming in — the insurer would have to lower premiums to avoid issuing rebates, potentially destabilizing the company. In that case, the NAIC warns, individual policies could leave the market, leaving customers stranded:

2. What criteria do States and other entities consider when determining if a given minimum MLR standard would potentially destabilize the individual market? What other criteria could be considered?

The primary factor is the extent to which issuers would be unable or unwilling to meet the standards and would therefore withdraw from the market and terminate existing policies. In the worst case, this could lead to a lack of available coverage, but even if coverage remains available, those with health conditions who are terminated by withdrawing issuers could be left with no access for up to six months because in most states, issuers will be permitted to medically underwrite until 2014. In that case, they may have to remain uninsured for After six months, when they would qualify for the new federal high risk pools.

Consumer advocates and progressive lawmakers have stressed that regulators must ensure that the new MLR standards don’t allow issuers to re-classify administrative expenses as medical expenses (to artificially inflate their MLRs) or hide lower MLR rates behind larger aggregate numbers. As the NAIC’s consumer board said in a recent report, “insures should be prohibited form grouping their plans together to mask the low MLRs of some of their plans” (insurance-related data may be aggregated at the policy form level, by plan type, by line of business, by company, by State.)

In this case, as long as insurers aren’t reclassifying expenses or aggregating their MLRs to conceal lower numbers, the Secretary may want to consider their request. After all, if the newer policies in the individual market are not exempt from the MLR requirements, then younger and healthier people would receive the bulk of the rebates. The devil, though is still in the details and regulators will need to pay close attention to the final NAIC recommendations. Insurers should not be given an exemption for newer plans and the ability to protect their most profitable plans from MLR rebate requirements. This early document presents a refreshingly thoughtful explanation, suggesting that regulators may want to show MLR rates at plan level for reporting purposes but show more aggregated date for rebating.

But consumer advocates I spoke to cautioned that this is only a preliminary draft and that the NAIC has until June 1 (or later if they push back the deadline) to submit its final recommendations to HHS. The public has until this Friday to submit its comments.

Yesterday, our old friend and former McCain campaign adviser Douglas Holtz-Eakin wrote an editorial distancing the former presidential candidate from the high-risk insurance pools in the new health care law. President Obama has argued that the program — a temporary measure designed to provide coverage for individuals who are uninsured for at least six months — was modeled off of McCain’s proposal to cover every American with a pre-existing condition in state-based high-risk policies, and has touted the provision as an example of the Republican ideas contained in the health care bill.

Under the law, a state can meet the new HRP requirements (the pools have to cover at least 65 percent of costs, have limited out-of-pocket expenditures, have no exclusions for pre-existing conditions and cost no more than a standard rate for a standard population) by 1) improving the affordability standards in its existing program, 2) building a new pool that meets the federal requirements or 3) allowing the federal government to enroll its residents into a national program. Holtz-Eakin takes exception to the notion that this has anything to do with what his boss was proposing on the campaign trail:

In contrast, McCain’s GAPs would have emphasized best practice as a condition for federal assistance — including permitting GAPs to band together with other states’ GAPs to enlarge pools, purchase coverage across state lines and lower overhead costs.

It would have provided incentives for use of innovative tools to reduce health care costs. As a condition of federal assistance, states would have permitted a broad range of insurance, including preferred-provider organizations and health savings accounts. McCain’s GAPs would have addressed both cost and coverage, improved competition in insurance markets and expanded the quality of insurance offerings.

In addition, McCain’s plan would have put serious money behind the needs of those with costly conditions. How much? More than $20 billion annually, according to Lewin Group estimates.

There is a clear bottom line: Obamacare marches into a state with no regard for the existing high-risk strategy and no attempt to coordinate to achieve sensible coverage, competition and budgetary outcomes. In return, states get a temporary program with a 2014 expiration date.

Thus, at its best, it is a bandage that won’t foster market reforms.

I’m not going to deny that there are some differences here, but I also don’t believe that the Democrats were under any kind of obligation to adopt McCain’s “GAPs” since the senator ultimately voted against the measure, along with every other Republican. The final provision was a compromise between McCain’s proposal and Democrats’ principles but the basic concept is the same incredibly expensive proposition: bring all the sick people together, put them in a single risk pool and see how much that costs you. Holtz-Eakin says that McCain would have put “serious money” behind the proposal, more than $20 billion annually. But during the campaign, he suggested that far less would be needed.

“When Mr. McCain unveiled his high-risk pool proposal, his chief domestic policy adviser, Douglas Holtz-Eakin, the former director of the Congressional Budget Office, estimated the federal cost at $7 billion to $10 billion. Mr. Holtz-Eakin said five million to seven million uninsured people would be singled out for coverage,” the New York Times reported in July of 2008. “But in a recent interview, Mr. Holtz-Eakin emphasized that the projections “could change dramatically” depending on how the program was structured.”

The point of all this is to say that HRP are just a very expensive way of doing business, no matter whose version you consider. The states that are choosing to opt out of the program are arguing that $5 billion over three and a half years is not nearly enough and who’s to say that they would be satisfied with the kind of funding McCain was proposing? According to a 2008 report from the Tax Policy Center, using high-risk pools “to prevent large losses in insurance coverage among the sick and needy” would require far more than $100 billion over 10 years. The real cost would be “on the order of $1 trillion over ten years given projected health care costs.”

No matter how much better Holtz-Eakin believes McCain’s proposal was at containing costs, he can’t possible agree that the GAPs were sustainable over the long term. Obama’s approach is an interim measure which may require more funding, but at least it ends once the exchanges begin.

Legislators in Missouri have approved a tea party inspired ballot measure that would allow voters to decide if a patient, employer or health care provider should be compelled “to participate in any government or privately run health care system.” Missouri’s vote will occur on August 3, “the same day as its primary elections and will be the first such state referendum since passage of the federal health care law in March,” the Associated Press notes.

The text of the resolution aims to protect individuals from paying fines if they pay for their health care outside of the insurance system and shield providers from the nonexistent threat of accepting direct payments from patients:

1. No law or rule shall compel, directly or indirectly, any person, employer, or health care provider to participate in any health care system.

2. A person or employer may pay directly for lawful health care services and shall not be required by law or rule to pay penalties or fines for paying directly for lawful health care services. A health care provider may accept direct payment for lawful health care services and shall not be required by law or rule to pay penalties or fines for accepting direct payment from a person or employer for lawful health care services.

3. Subject to reasonable and necessary rules that do not substantially limit a person’s options, the purchase or sale of health insurance in private health care systems shall not be prohibited by law or rule.

Like the referendum efforts in several other states — Arizona is the only one to successfully place an initiative on the November ballot — the Missouri initiative will be overridden by federal law. Democrats in the state believe that the measure could prove a valuable organizing tool for Republican voters, however, and refused to support the measure until the bill’s sponsors moved the date of the referendum from November to August. Ultimately, 22 Democrats joined Republicans in support the referendum.

Missouri legislators have also introduced a bill that “Calls on the Attorney General to file an independent lawsuit or join 13 state attorneys general in their lawsuit challenging the constitutionality of the federal health care reform legislation,” while Missouri Lt. Gov. Peter Kinder is still seeking private funding to launch a separate legal challenge to the law.

See our updated map of sate efforts to repeal the bill here.