Aaron Carroll, who just recently joined Austin Frakt as a contributor to the Incidental Economist, has a post that reiterates the importance of pushing back against insurers’ attempts to water down the regulations in the new health care law. As Carroll demonstrates, if regulators don’t put their foot down on the most obvious regulatory loopholes (like the new MLR standards), they’ll only contribute to the industry’s ongoing attempt to circumvent regulations and attract a higher profit.

In the 1990s, private HMOs began competing for beneficiaries with traditional Medicare. Under the rules, the private HMO operated on a community rating basis and could not discriminate against applicants or cherry pick the healthiest individuals. Theoretically, the two pools should have had similar risk profiles, but when researchers looked closer, they found that the private HMO always managed to steal way healthier (read: more profitable) beneficiaries from the Medicare program and push them back into traditional Medicare once they became sick (read: less profitable):

What did the researchers find? People who wound up joining the (private) HMOs used 66% less care before joining than those who stayed in the (public) Medicare group. Somehow the private insurance HMOs figured out a way to get the healthy people to jump ship out of the another plan into theirs!

Not only that, but people who left the (private) HMOs and went back to the (public) Medicare used 180% more care after leaving than the people who stayed. Somehow the private insurance HMOs figured out a way to convince the sicker people to jump ship back to the public plans.

Carroll concludes that this research holds lessons for the exchanges: “So we had a system where plans were in an exchange like environment. Regulations prevented cherry-picking. And yet, the insurance companies figured out a way to preferentially cover healthy people. And this was competing with a giant government program.”

Indeed, “[i]nsurance companies are very, very good at what they do” and if federal regulators drop the ball on these early MLR rules or fail to give states enough resources to go up against the industry, then we may as well pronounce reform a failure. Any sign of weakness will only seen as an opportunity to ignore the intent of the law.

Sen. Mike Johanns (R-NE)

Before health care reform became law, the government required businesses to fill out a 1099 tax form if they made payments of more than $600 to vendors for services they received. The government used these forms to monitor compliance with the tax code, because vendors are notorious underreporters of income. The IRS estimates that sole proprietors pay taxes on less than half of their income or underreport their income by some 57%. Consequently, “the GAO, the IRS, and the Treasury Departments of both President Bush and President Obama all recommended strengthening the reporting requirement to remedy this problem” and accordingly, Democrats included a provision in the health law that requires small businesses “to report payments of more than $600 to corporations and payments for goods and property (as well as for services).”

Conservatives and their small business allies (namely, the NFIB) have reacted with outrage, claiming that the expanded reporting requirement would add tremendous paperwork burdens. Democrats have largely agreed, but were slow to engage on the issue. Now, Sen. Mike Johanns (R-NE) and Bill Nelson (D-FL) have proposed competing amendments to alter the 1099 measure, but as Edwin Park and Chuck Marr point out in this new CBPP report, Johanns’ approach of completely eliminating the expanded reporting requirement leaves much to be desired:

Repeal would also cause the loss of $17.1 billion in revenue over ten years (the amount of revenue that otherwise would be collected, due to the improved tax compliance that would result from the provision of the Affordable Care Act). To make up for this loss, the Johanns amendment would strip $11 billion in Affordable Care Act funding for critical investments in health prevention and related activities and would seriously weaken other aspects of the health reform law. [...]

The Johanns amendment would eliminate all funding for the Prevention and Public Health Fund for fiscal years 2010-2017, taking away investments that could help reduce the incidence of chronic illness and infectious disease, improve overall health, and contain costs. [...]

The mandate has an exemption for people who would have to pay excessive amounts to purchase insurance — it allows people who would have to pay more than 8 percent of their income on premiums to remain uninsured without incurring a penalty. The Johanns amendment would lower the threshold to 5 percent of income. This change would exempt large numbers of additional people from any penalty if they remained uninsured, and would lead to substantially fewer healthy people enrolling in coverage until they became sick, thereby driving up premiums and increasing the number of uninsured people.

In other words, the GOP is seizing on what most wonks agree — including many Democrats — is a tangible concern about the 1099 to weaken the health care law. Tellingly, Johanns’ amendment does not address the problem of underreporting income; it strips the 1099 provision and allows vendors to underpay their taxes, and shift that burden to all of us.

It’s unclear how the 1099 language was included in the health care law in the first place. Some sources have suggested that Democratic staffers were bullied into accepting the amendment by Peter Orszag and had initially resisted such broad language; others believe that the provision provided a much needed spending offset to the law’s coverage provisions. Either way, the issue has provided Republicans and Democrats with a rare moment of agreement — only the GOP seem more interested in neutering reform and preserving a tax loophole. For details on Nelson’s solution and more on the 1099 controversy, be sure to read the CBPP’s full report HERE.

The American Public Health Association has also started a petition protesting Johann’s cuts to prevention.

Today, the Department of Health and Human Services announced that 45 states and the District of Columbia “will receive $1 million in grant funds to help improve the review of proposed health insurance premium increases, take action against insurers seeking unreasonable rate hikes, and ensure consumers receive value for their premium dollars.” The $46 million are part of the $250 million in rate review grant dollars authorized by the new health care law. “Money is going out the door today and tomorrow,” HHS Secretary Kathleen Sebelius said on a conference call with reporters. “We got the proposals in from the states, we essentially gave them a laundry list of possible applications, figured out that these 45 states and the District met that criteria. So we’re sending out the resources right away.”

According to HHS, “15 States and the District of Columbia will pursue additional legislative authority to create a more robust program for reviewing or requiring advanced approval of proposed health insurance premium increases to ensure that they are reasonable” and “21 States and the District of Columbia will expand the scope of their current health insurance review.” “If the states that have said they are seeking legislation, get that legislation passed, a very large majority of states” would have the authority to review and deny unreasonable grants,” Jay Angoff, Director of the Office of Consumer Information and Insurance Oversight said on the call. Currently, “just 19 states have complete authority to do this in both the individual and small-group markets.”

“We are very optimistic that these first batch of grants are going out the door with almost full participation, very thoughtful proposals. So people are seriously interested in expanding capacity on the ground, expanding technical expertise,” Sebelius said. They are, indeed. According to my count, 19 of the 22 states that are suing the federal government over the constitutionality of the health care law applied for the grants. Below is a sampling:

– ARIZONA: “The State intends to improve their filing review process by hiring an actuarial consultant to review 95% of submissions for compliance and make recommendations regarding whether filings are unjustified or excessive.”

– VIRGINIA: “Virginia will expand the information required to be submitted with rate filings and will develop a procedures manual for the review of rate filings.”

– FLORIDA: “The State will expand the scope to include large group and out-of-State products.”

This disconnect highlights the growing gap and differing approaches of state politicians running for office and state insurance commissioners and health departments, many of which are moving ahead with implementation of reform, despite the rhetoric about repeal and nullification.

Just five sates — Alaska, Georgia, Iowa, Minnesota and Wyoming — did not apply for the rate review grants, meaning that insurers operating in those areas would have to justify premium increases to HHS. “I think that the fallback position is, here at the Department, there will be a requirement — based on some definitions that are still under discussion — that companies will have to justify unreasonable increases to the Department of Health and Human Services,” Sebelius said. “I think the more that can be done on the ground, understanding the markets locally, understanding the solvency issue which are an important piece of the puzzle, the better off we are.” Indeed, while the health law gives the federal government the authority to review premium increases, only states are able to reject or deny unreasonable hikes.

As the National Association of Insurance Commissioners (NAIC) prepares to submit its medical loss ratio (MLR) recommendations to HHS, 65 Democratic members of Congress are asking the group to develop a strict definition of ‘quality improvement measures’ — a new category established by the health care law that allows insurers to count expenses that ostensibly improve health quality, as medical costs.

After decades of trying to lower their medical loss ratios and please Wall Street investors, insurers are now frantically trying to inflate that number to meet the new MLR provisions. The industry sees the category of ‘quality improvement expenses’ as an opportunity to reclassify certain expenses as medical costs, thus inflating insurers’ medical loss ratio percentage without improving efficiency. “This definition should recognize the full range of health plan activities — both directly and indirectly related to patient care — that have the primary purpose of improving patient outcomes,” AHIP argued in a letter sent to HHS in May, and provided a long list of services like “nurse call lines,” “quality research and reporting programs,” and “consumer education programs” that it believes should be included in the “quality” category.

But the lawmakers in this letter are calling on NAIC to follow the spirit of the health care law and only include those services that actually improve health quality:

As you continue to work with your colleagues from the National Association of Insurance Commissioners (NAIC), we ask that you consider the strictest definition of “quality improvement expenses” when implementing the mandatory medical loss ration standards set forth in the PPACA….insurance companies are urging regulators to pursue lax definitions of ‘quality improvement expenses’ that include operational and administrative costs, which would render requirements weak and frustrate the goals of this landmark law.

While insurance companies have claimed that some of the costs that they wish to include are for the purposes of patient protection, they offered little evidence that specific services do provide improved quality. It is misguided to assume that these costs are specifically for the benefit of health and well-being of the patient, as intended in the law.

Indeed, while some services can certainly improve health care quality, others, are simply administrative costs in ‘quality’ clothing. ‘Nurse hotlines, for instance, “may offer advice to individual policyholders, but also work with a stated goal of cost containment by preventing calls to doctors and visits to their offices.” ‘Utilization review’ is an administrative function designed to restrict treatment and activities related to disease management and health/wellness promotion programs “are not directly related to quality improvement for particular patients and should be excluded.” As the Federation of American Hospitals has pointed out, “the inclusion of a separate category specific to activities that improve health care quality is not as common, and requires a close focus by federal regulators to avoid becoming a “catch-all” into which a wide variety of expenses not directly related to patient care and clinical service quality may arbitrarily be placed.” Bottom line is: the insurer must provide credible scientific evidence that the function improves the health quality of individual policyholders, before any particular service is included in the quality definition.

This letter is a good start, but placing pressure on the NAIC and insurers is politically advantageous and relatively painless. Convincing HHS to reject the group’s recommendations however, and adopt more stringent rules — should that be necessary — will probably be more difficult for Democrats to accomplish. Fortunately, Sen. Jay Rockefeller (D-WV) is already paving the way.