Reuters is reporting that shares of Aetna and Wellpoint “slid on Wednesday and weighed on industry peers despite the fact that both posted strong quarterly earnings and raised their 2010 forecasts.” “A main reason for the industry’s uncertainty about the impact of the U.S. healthcare overhaul is that rules determining how much the health insurers must spend on medical costs have yet to be determined. Those details are expected to be ironed out in the next couple of months.”

Wellpoint, the nation’s largest insurer by membership, “reported a 4% increase in profit for the second quarter that helped generate earnings of $1.6 billion since the beginning of the year – a 26% increase over the same period in 2009″ and Aetna said its “second-quarter profits rose 42 percent, with a net income of $491 million, compared with $346.6 million for the same quarter last year.”

Both companies also reported lower medical-loss-ratios, as enrollment numbers declined. Kaiser Health News has this breakdown:

For the quarter, Aetna’s combined medical-loss ratio for its commercial, Medicare and Medicaid businesses was 81.8 percent, compared with 86.8 percent in the same quarter last year. The ratio for its commercial business declined to 80.1 percent for the second quarter from 85.9 percent for the same quarter in 2009…[Wellpoint] said it spent 82.9 percent of customers’ premiums on medical care during the second quarter, down from 83.9 percent during the same quarter a year ago. For all of 2010, WellPoint now expects its so-called medical loss ratio to be 83.9 percent, down from its April forecast of 84.3 percent.

In other words, insurers earned more partly because they spent less on medical care and some Democrats in Congress are already arguing that these profits should preclude insurers from raising premiums next year. “Wellpoint and Aetna are on track for great years with multi-billion dollar profits. Now it’s time for them to return those windfalls to their enrollees in the form of reduced premiums. With business booming, there is no excuse for any premium hikes or benefit cuts next year by Wellpoint or Aetna in their private sector or Medicare Advantage plans,” Rep. Pete Stark (D-CA), Chairman of the Ways and Means Health Subcommittee said in a statement.

The MLR indicator is closely watched by Wall Street investors as a sign of insurer profitability and companies have spent years strictly defining “medical care” to ensure that the so-called “loss” to profit is not too great. But now that the health care law will require insurers to spend at least 80 percent of premiums on medical care, and 85 percent for large group plans, insurers are lobbying to expand the definition to include services they had previously classified as “administrative.”

It’s unclear why insurers’ medical loss ratios are decreasing just as the government is preparing to issue new, presumably more stringent regulations. Are beneficiaries spending less on health care during an economic downturn or are insurers dropping sicker patients, stashing cash away in reserves, and investing in other business activities? The lower the MLR rate today, the more insurers would have to spend on medical expenses to meet the new requirements (if they’re at 80% today, they’ll have to jump 5 percentage points to get to 85%, which is far more difficult than starting at 84% and moving just 1 point to the new requirement). But this lower starting point gives insurers the opportunity to whine about “unreasonable” government regulations and could even convince the Secretary to use her discretion to lower the target rates. If she doesn’t of course, it could all backfire.

On Monday, Rep. Charles Boustany (R-LA) introduced a bill “that could block implementation” the health law’s long term care benefits program,” known as the CLASS Act. Boustany’s bill would require the government to shut down the long-term care insurance program “if government actuaries said the program was unsound.” It’s a radical solution to a very real concern that could probably be addressed with some smaller tweaks to the current law.

First, some background. CLASS is a voluntary, government long-term care insurance program that will provide medical and non-medical services like dressing, bathing, and using the bathroom to adults who become severely functionally impaired. Working adults who enroll in the program will be able to receive the benefit — approximately $50 a day — after paying into the program for five years.

Long-term care proponents contend that the current system of financing long-term care is unsustainable. Americans spend more than $200 billion a year on long term care services in nursing homes, at home, or in assisted living facilities. “Medicaid is now the largest single provider of long-term care costs — it spent more than $100 billion last year, over one-third of its budget” and “paid more than 40 percent of the nation’s total long-term care bill.” Families and senior citizens (and Medicare to a lesser extent) pick up the rest of the tab, often spending down to “$2,000 in financial assets” to qualify for Medicaid coverage. By mid-century, the Congressional Budget Office predicts that the nation will have to spend 16% of anticipated federal revenues on Medicaid to fund care for the baby-boom generation.

So the question becomes, how do we fix this system? How do we create a system that can both relieve the burden on families and relieve this burden on government? Republicans argue that the program will be overrun by sick people who desperately need long-term-care benefits, increase costs, and push out healthier enrollees. “Health economists call this an ‘adverse-selection death spiral,’ and it would likely end in program bankruptcy,” the Heritage Foundation’s Brian Riedl noted in yesterday’s Washington Times, predicting that the government would have to consistently bail out the program with taxpayer dollars “to keep premiums low and pay out all benefits.”

But rather than repealing the program, as Boustany suggests, Congress should address some of its shortfalls. I spoke with Howard Gleckman, a resident fellow at the Urban Institute and author of “Caring For Our Parents.” He admitted that the current CLASS Program has its pitfalls and suggested several solutions to keeping it sustainable over the long term:

- Make the program mandatory: If you have a mandatory program, you accomplish two things. The first is you of course eliminate the adverse selection problem, because everyone is in the program, and the other thing is, you are able to push down rates to level where they are pretty easily affordable for most of the population.

- Include CLASS in employer cafeteria plans: The tax deduction is not so important, but including long-term insurance insurance with other benefits raises its profile.

- Provide HHS with more money to market CLASS: The law only allows 3 percent of premiums for all admin costs. That is not enough and, in the run-up to initial sales, there are no premiums.

- Redesign premiums: In CLASS, they are fixed at the age at which you first enroll. Unless all premiums are raised (because the program is deemed insolvent) you always pay the same premium. Instead, they could adjust premiums for inflation. This would allow premiums to start very low (especially for young workers) and rise with their incomes.

As Gleckman noted just yesterday, “Fiscal conservatives such as Capretta and Riedl ought to be looking for ways to improve CLASS, rather than demanding its repeal. The millions of Americans who will need personal assistance, their families, and taxpayers would all be better off for it.” Those principles should outweigh whatever pressure Republicans are receiving from the long-term-care insurance lobby — which sees CLASS as a competitor to their private insurance product. (When in reality it may compliment the existing market place in which private insurers will be able to market supplemental “Medigap”-like coverage to CLASS beneficiaries.)

The New York Times’ Kevin Sack has an interesting report about how states that are publicly opposing health care reform are still working to implement the measure:

In Austin, legislative hearings and agency planning sessions proceed despite Gov. Rick Perry’s vow to fight “on every front available” against a law that he characterizes as “socialism on American soil.” Bureaucrats apply for federal grants and collaborate with the Obama administration at the same time that Attorney General Greg Abbott strategizes to eviscerate the law in court.

“Sometimes it seems a little schizophrenic,” acknowledged State Representative John M. Zerwas, a Republican who favors the law’s repeal but also leads a House committee that seeks to maximize its benefits to Texas. “There are plenty of laws out there that I might not agree with. But if the law of the land says we have to do it, the last thing I want is for Texas to not be prepared or not put things in place to comply.” [...]

State agency leaders said politics had not interfered to date with that task, or with new requirements to create a health insurance exchange and oversee strict regulations on health insurers.

“I don’t have any sense that I’m being held back in any way,” said Billy Millwee, the state Medicaid director.

That view was echoed by Thomas M. Suehs, the commissioner of health and human services, who said the governor “expects me to implement the federal law in the most cost-effective, efficient manner.”

Reformers have long worried that the law’s state-based implementation structure would allow red states to sabotage reform, but Sack’s piece suggests that the anti-reform states can apparently walk and chew gum at the same time.

On some level, political leaders have to appreciate the additional federal dollars the law will bring to the state (even if most of it will only last a couple of years) and protect the state’s flexibility in implementing the measure. After all, any state resistance will invite federal interference. For instance, by opting out of the interim high-risk insurance pool, Texas has already forced the federal government to implement the measure and will trigger further federal action if it fails to establish the exchanges in 2014. As one Democratic State Representative put it, “[y]ou can’t run around saying the federal government wants to take over Texas, but then when we have an opportunity to do it ourselves leave it to the federal government.” This is true enough, but one can’t shake the notion that a “schizophrenic” government — one that opposes the law publicly but is also moving forward with implementation — is not the best system for adopting such complex reforms or policing and regulating the system.