The National Association of Insurance Commissioners is inching closer towards defining the regulations that would require insurers to spend 80 to 85% of their premium dollars on health care. As The Hill reports, NAIC “approved model medical loss ratio regulations on Thursday” and sent Health and Human Services Secretary Kathleen Sebelius “a letter outlining several factors that need to be addressed as the guidelines are implemented.” Throughout the process, the key concerns have revolved around how to define medical services, which federal taxes can be excluded from the calculations, and whether or not companies can aggregate the ratios across different plans.

Insurers have waged a strong campaign to loosen the reporting requirements, leading Sen. Jay Rockefeller (D-WV) — who has led the charge in pressuring the NAIC to live up to the letter of the law and hold insurance companies accountable to its spirit — to write a letter to the NAIC urging the panel to “reject the health care industry’s eleventh-hour lobbying campaign to erode key consumer protections—protections that will help Americans finally get the care they pay for and deserve“:

In particular, the large for-profit insurers are asking you to ignore the plain-language definition of “health insurance issuer” in the ACA and other federal statutes, and allow insurers to aggregate their large group medical loss ratio data across state lines and business entities. As I discussed in my May 7 letter, allowing insurers to aggregate their medical loss ratio at a national level deprives the consumers of individual states of the new medical loss ratio law’s most important protections. Under the health insurance companies’ proposal, consumers in a state with medical loss ratios falling below the law’s new requirements would have no right to rebates, as long as the health insurance company’s overall national average remained above the law’s new requirements.

As regulators charged with implementing the ACA’s medical loss ratio provision, you have proceeded in good faith and through a transparent process to make sure that consumers and businesses get a better value for their health insurance premium dollars. Medical loss ratios aggregated at the state and entity level reflect the actual market conditions consumers and businesses in your state face when they are trying to buy health insurance. Insurance companies should not have the carte blanche to avoid paying rebates to consumers in states where they sell low-value plans.

The draft guidelines require issuers to break them down and account for the MLRs separately at every business unit in every state preventing them from obscuring some low MLR plans. The NAIC is preparing to vote and send their final recommendations to Sebelius sometime next week.

McDonald’s is denying reports that it plans to cancel health insurance for almost 30,000 workers unless federal regulators loosen requirements for plans to spend 80 to 85 percent of premium dollars on health care costs. “Media reports stating that we plan to drop health care coverage for our employees are completely false,” a McDonald’s spokesperson told Politico’s Pulse. “These reports are purely speculative and misleading.”

But according to the Wall Street Journal, a senior McDonald’s official informed “the Department of Health and Human Services that the restaurant chain’s insurer” won’t meet the new requirements, called medical-loss ratios (MLR), since they are “unrealistic” for the kind of mini-med plans the company provides to many of its hourly restaurant workers. The plans, which often restrict the number of covered doctor visits or impose a relatively low maximum on insurance payouts in a year, have “high administrative costs owing to frequent worker turnover, combined with relatively low spending on claims“:

McDonald’s, in a memo to federal officials, said “it would be economically prohibitive for our carrier to continue offering” the mini-med plan unless it got an exemption from the requirement to spend 80% to 85% of premiums on benefits. Officials said McDonald’s would probably have to hit the 85% figure, which applies to larger group plans. Its insurer, BCS Insurance Group of Oak Brook Terrace, Ill., declined to comment. [...]

“Having to drop our current mini-med offering would represent a huge disruption to our 29,500 participants,” said McDonald’s memo, which was reviewed by The Wall Street Journal. “It would deny our people this current benefit that positively impacts their lives and protects their health—and would leave many without an affordable, comparably designed alternative until 2014.”

The law allows companies to apply for exemptions from the MLR requirements — which are still being drafted — and HHS “says it has already given the carrier for McDonald’s and others the chance to seek exemption from new annual limits on benefit payouts.” “This story is wrong,” HHS spokeswoman Jessica Santillo told Pulse. “The new law provides significant flexibility to maintain coverage for workers. Additionally, this story is premature as guidance on the new medical loss ratio rules has not even been issued. The Administration is working closely with businesses like McDonald’s that are committed to providing health benefits to protect health coverage for their employees.”

Indeed, insurance commissioners met with President Obama last week to request that certain plans in the individual market be allowed several years to comply with the MLR standard and at least two states Maine and Iowa, have also “asked for a waiver from the rules until 2014 to give health insurers more time to adapt.” Exempting mini-med plans in order to protect the (limited) benefits of some 30,000 employees may make sense, particularly since these policies will probably end by 2014. Then, workers could enroll in more comprehensive health coverage through the Exchanges since mini-med plans would not meet the actuarial value of creditable coverage.

And as Aaron Carroll points out, that’s probably a good thing. After all, mini-med plans only work for healthy individuals and usually don’t provide enough coverage for anyone with a serious medical condition. “One of the things the ACA does is try and eliminate under-insurance. It tries to regulate the insurance companies so that you can’t get sold a plan that provides too little coverage when you need that. That costs money,” Carroll concludes.

Yesterday, the National Association of Insurance Commissioners (NAIC) released draft guidelines for how insurers should calculate their expenditures to meet new regulations that require issuers that don’t spend 80 to 85 percent of premium dollars on health care expenditures to send rebates to their customers. These percentages are calculated from a ratio of “health expenditures” to other expenses and since reform became law, insurers have pressured the NAIC to calculate include certain administrative expenses as medical costs, exclude all federal taxes from their revenue (the denominator in the MLR ratio), and allow insurers to aggregate the ratio across plans and markets.

Consumer advocates I’ve spoken to tell me that yesterday’s draft regulations — which are now in an open comment period until October 4 — are somewhat of a mixed bag for all parties involved. On the crucial issues:

- TAXES: NAIC rejected the Congressional Committee chair’s statement that they only meant to allow issuers to deduct those taxes that are specifically related to the Affordable Care Act. It ruled that issuers can exclude all federal taxes but those on investment income.

- DEFINING HEALTH COSTS: NAIC rejected insurers’ suggestion that services like anti-fraud and “utilization review” be included in the definition of “medical expenses,” included other services that have not been traditionally classified as “medical,” and required issuers to substantiate why certain services improve care quality.

- AGGREGATION: Insures wanted the NAIC to calculate their MLRs across different units and markets. This would have allowed insures to group their plans together to mask the low MLRs of some of their plans. The draft guidelines would require issuers to break them down and account for the MLRs separately at every business unit in every state.preventing them from obscuring some low MLR plans.

Insurance commissioners also met with the President on Wednesday to ask that plans in the individual market be allowed several years to comply with the new MLR requirements, something the administration could allow if it believes that immediate compliance could lead to serious market disruption. A large concern here is the state of insurance brokers, whose salaries make up a large portion of non health care related spending. Similarly, two states Maine and Iowa, “have asked for a waiver from the rules until 2014 to give health insurers more time to adapt.”

The regulators hope to finalize the rules at an Oct. 21 meeting in Orlando, Fla., and then the Department of Health and Human Services will have the final say.

Insurers became the target of the White House’s attacks in the closing days of the health reform debate and so perhaps it’s no surprise that they’re “backing Republicans with campaign donations by an 8-to- 1 margin, favoring the party that’s promised to repeal President Barack Obama’s health-care overhaul if it wins back Congress.” Bloomberg’s Drew Armstrong has the scoop:

WellPoint, along with Coventry Health Care Inc. and Humana Inc., gave Republican candidates $315,000 from May through July, according to U.S. Federal Election Commission records. That compares with $41,000 given to Democrats by the three companies as the parties near November elections that will determine who controls the U.S. House and Senate next year.

While Republicans aren’t likely to win the large majorities necessary to override a presidential veto and repeal the health law Obama signed in March, they may be able to slow or stall its implementation, said James Morone, a political science professor at Brown University in Providence, Rhode Island. At the same time, the turn to strongly favor Republicans may anger Democrats who had been receptive to insurers’ concerns, he said.

Recall that after initially coming to the table and supporting Obama’s efforts, insurers turned against reform, even after the public option had been taken off the table. They criticized the weak individual mandate and argued that the bill would lead to higher premiums for average Americans.

Since passage of the law, the administration and the President have reached out to insurers, inviting them to meetings with Obama and HHS Secretary Sebelius and weighing their concerns about the forthcoming regulations and the implementation process. But through it all, issuers — while nominally agreeing to assist the administration with implementation — have understood which party has its interests in mind. Issuers have watched as Democrats — led, most recently by the six Democratic Committee chairman with jurisdiction over health care — argued that insurers should have to abide by a strict interpretation of the law and spend 80 to 85% of premium dollars on health care and contrasted that approach to the likes of conservatives like Douglas Holtz-Eakin, who have gone to the mat to weaken the regulations.

Therefore, this donation imbalance shouldn’t be interpreted as an industry endorsement of the GOP’s repeal efforts or its attack on the individual mandate — which could make the industry millions. The industry is turning to the Republican party not so that it could repeal the entire law — that seems highly unlikely — but so that it can push for favorable regulations that don’t cut into industry profits. The want to ensure that Republicans hold their line, like they always have.

Former McCain campaign aide, CBO Director, and current GOP policy intellectual Douglas Holtz-Eakin has a provocative editorial in Kaiser Health News in which he completely dismisses the notion that health insurers should be prohibited from deducting taxes that have nothing to do with providing health care services before calculating their medical loss ratios. To step back, the ‘federal tax’ issue has become what some consumer advocates have described to me as the defining battle in the MLR debate. Under the new health care law, insurers are required to spend 80% to 85% of premiums on health care and issue rebates to consumers if they fail to meet this threshold.

Insurers have seized on a single mention of “federal taxes” in Section 2718 of the health law — the section that deals with MLR — to argue that they should be allowed to exclude all federal taxes from their revenue (the denominator in the MLR ratio), a move that would save issuers millions of dollars and allow them to meet the MLR requirements without necessarily spending more on care. Democrats are disputing their claim and insisting that they did not intend for issuers to exclude all federal taxes — only those that pertain to health care. Judging by the tone of his op-ed, Holtz-Eakin believes that this is simply untenable:

To begin, there is no defense for including taxes in any measure of available resources as part of an MLR. Whether used to measure dollars available for payments for medical expenses or devoted to administrative costs, taxes are simply not available for those purposes and must be excluded – six chairmen notwithstanding.

Worse, including taxes raises the threat of damaging and inappropriately double taxation. Most health plans are required to pay federal income taxes as well as payroll taxes. If these taxes paid to the federal government are not excluded from the premium revenue, the health plans’ MLR will be paying a potential double tax or rebate on the same net income: first paying taxes to the federal government and then a rebate to consumers using the same dollars. Double taxation is wrong in principle and in practice may be the death knell for smaller insurers.

During the election, Pat and I closely monitored Holtz-Eakin’s television appearances and joked that, judging by the veracity of his answers, the man was about to implode and was in desperate need of a vacation. I think, regrettably, that the same may be true now.

First of all, broad taxes were not part of the MLR prior to the health law and using investment taxes as a subtraction from premium revenue is just a way to circumvent the intent of the law — which is to keep insurer profits in check until 2014 — without improving efficiency. Secondly, an MLR rebate Is not a tax. It is the act of returning money to the consumer that was not spend on providing health care services — the opposite of a tax.

Further in his piece, DHE complains that the law “federalizes the MLR and employs a blunt one-size-fits-all approach that does not permit review and fine-tuning of its impacts.” But this too completely ignores the fact that the National Association of Insurance Commissioners (NAIC) — the organization tasked with defining the MLR — has gone out of its way to fine tune the MLRs to deal with smaller plans and different plans and has allowed a wide variety of quality improvement expenses and a procedure for adding more!

Finally, DHE argues that in order to satisfy the new MLR requirements, insurers would have to take steps that “may disqualify policies’ grandfathered status and violate the Obama administration’s promise” of keeping what you have if you like it. But again, this too demonstrates a complete misunderstanding of the MLR. The easiest way to meet the new standards is by lowering cost-sharing, which actually increases the likelihood of retaining grandfathered status.

Yesterday, the National Association of Insurance Commissioners (NAIC) adopted relatively robust draft definitions for calculating the medical loss ratios (MLR), prohibiting “insurance companies from considering costs related to fraud prevention and detection, utilization review, and individual wellness promotion (among others) when calculating their medical loss ratios (MLRs).” The insurance industry, which has been lobbying the NAIC to include a broad range of activities as medical expenses, criticized the document and warned of “unintended consequences” if certain practices could not be classified as “quality improvement.” Under the new health care law, insurers are required to spend 80% to 85% of premiums on health care and issue rebates to consumers if they fail to meet this threshold. But consumer advocates who attended the NAIC conference tell me that the real battle will now focus on whether issuers will be able to deduct all federal taxes before calculating the MLR, an issue the NAIC punted during its conference.

Insurers have seized on a single mention of “federal taxes” in Section 2718 of the health law — the section that deals with MLR — to argue that they should be allowed to exclude all federal taxes from their revenue (the denominator in the MLR ratio), a move that would save issuers millions of dollars and allow them to meet the MLR requirements without necessarily spending more on care.

Democrats are now disputing their claim. In a letter to HHS Secretary Sebelius, the six Democratic committee heads with jurisdiction over health care argued that they did not intend for issuers to exclude all federal taxes — only those that pertain to health care:

As the NAIC works to craft proposed definitions, we are writing to clarify legislative inent as it pertains o the exclusion of Federal taxes from revenue calculations. Section 2718 sets forth the computation of MLR for the purposes of computing annual premium rebate. Section 2718(b)(1)(A) defines the denominator of the MLR for this purpose as “the total amount of premium revenue (excluding Federal and State taxes and licensing or regulatory fees…).”

“Federal taxes and fees” in this context is meant to refer only to Federal taxes and fees that relate specifically to revenue derived from the provision of health insurance coverage that were included in the PPACA. Thus, the Federal taxes and fees that fall into this category are: (1) the annual free imposed by section 9010 based on each health insurer’s market share based on net premiums written; (2) the annual fee imposed by section 6301 on each health insurance policy (based on the average number of people covered under the policy), and (3) the tax imposed by section 9001 on high-cost employer-sponsored health coverage. Federal income taxes or payroll taxes were not intended to be excluded from the denominator.

Similarly, NAIC consumer representative and Washington & Lee Law Professor Timothy Jost argues in this brief that issuers’ insistance on a very literal translation of the statute is transparently self serving and hypocritical. Throughout the definition making process, Jost argues, the NAIC “have consistently eschewed a literal approach to interpreting the statute, trying practically to effectuate the intent of Congress while accommodating the practical realities of insurance regulation.” “Time and again insurers have supported definitions that deviate from the literal language of the statute when following the literal language of the statute would be to their disadvantage.”

Ultimately, allowing insurers to deduct all federal taxes would frustrate the intent of the law — it would make the companies’ income appear to be lower than it actually is and deprive consumers of possible rebates. For now, the industry is determined to get its way and has, according to some sources, even threatened to go to court over the matter.

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.

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 Tuesday, the National Association of Insurance Commissioners — which has already issued a series of interim reports — officially notified the Department of Health and Human Services that it would not meet the agency’s deadline for submitting recommendations for the new medical loss ratio (MLR) requirements and promised to “complete this project as soon as possible.”

The new health care law tasks the NAIC with establishing “uniform definitions and standardized methodologies for calculating the medical loss ratio and rebates outlined in the law,” subject to the Secretary’s certification. It also “permits health insurers to add their costs for “activities that improve health care quality” to their costs for “reimbursement for clinical services provided to enrollees” for purposes of calculating their MLR under the PPACA.”

During the open comment period, the health insurers asked for fairly broad provisions that would allow insurers to reclassify certain costs as “activities that improve health care quality”, thus inflating insurers’ medical loss ratio percentage without improving efficiency. Now, the American Hospital Association is using the delay to its advantage and urging the NAIC to issue recommendations that would prevent insurers from counting past administrative expenses as medical costs. In a letter to the group, the lobby argued that “costs and expenses that are classified as activities that improve health care quality need to meet specific criteria“:

We would caution that the addition of the health care quality component should not be construed to permit health insurers to reclassify as health care quality costs that the insurers historically considered to be the administrative costs of doing business.

The MLR regulations must clearly define which activities do and do not improve health care quality and restrict the ability of health insurers to subjectively make such a determination. The AHA recommends that resulting regulations require that the activity be performed by a professional licensed to perform the service or activity, and employ a decision tree analysis to distinguish between an activity that is intended to limit services or reduce expenditures (e.g., utilization management) or to improve health (e.g., a diabetes management program, care coordination or shared-savings programs).

Before health care reform became law, insurers had every incentive to limit the growth of their medical loss ratio, which is closely monitored by Wall Street investors as an indicator of profitability. In other words, insurers used to keep strict definition s of medical expenses to deflate their MLR and please investors. Now, they’re looking to shift the gameby announcing to Wall Street, ‘our MLR is going to go up by a couple of points but don’t worry we’re shoving administrative costs into it.’

In reporting on the new medical-loss ratio provisions in the health care law, I’ve expressed concern that the law could allow insurers to reclassify administrative costs as medical expenses, artificially inflating their ratios without improving care efficiency or quality. But over at the National Journal’s National Experts Blog, Paul Ginsburg worries that tight MLR restrictions could discourage insurers from investing in improvements like payment reform:

One of the major purposes of health insurance exchanges is to make the health insurance market for individuals and small groups more competitive. Exchanges do this by facilitating consumers’ process of gathering information about plans and making informed comparisons. In contrast, MLR regulation is designed for situations where competition is not possible and approaches more suitable to public utilities must be used. Any need for MLR regulation will clearly be lower starting in 2014 than it is today.

A second contradiction concerns innovation in the organization and delivery of care. Recognizing that we do not have the answers today about how to get care that is higher quality and less expensive, the legislation has numerous provisions designed to increase innovation in this area. Payment reforms strike me as having particularly large potential. Private insurers have a very important role to play in payment reform and many other areas of fostering improved delivery of care. But there are real risks that much of this activity could be precluded if administrative costs incurred to support reformed delivery are treated in the same way as selling costs and profits. The last thing that we would like to see is insurers deciding that the only path open to them is to do little beyond processing claims–that can lead to very high MLRs. Constraints on Medicare’s administrative budget has led to a program that is very efficient in paying claims but does little to make the delivery of care more effective.

Ginsburg is right to note that after 2014, actuarial values in the exchanges will undermine the need for MLR. MLR is designed to control insurer profits and would do very little to improve care quality. As James C. Robinson points out in this Health Affairs article, “High ratios can be achieved either through a large numerator (high medical expenditures) or through a small denominator (low insurance premiums).” In 2007, for instance, 6 of the 7 largest publicly-traded health insurers reported that their profits increased by 10%, while their medical loss ratios also went up. The same could happen in 2014. Once the exchanges are established, insurers will spend less on administrative expenses (reform will limit their ability to underwrite policies and the exchanges will streamline certain administrative tasks), and their medical-loss ratio will likely increase. This does not mean that they’re spending more money on patient care or shifting less towards profits. In fact, the law recognizes this reality and only requires insurers to maintain an 85 or 80% ratio until 2014.

As for his second concern about constraining insurers, the law creates a new category of expenses: “activities that improve health care quality.” Theoretically, if certain expenses really do help “get care that is higher quality and less expensive,” then insures should be able to convince regulators to include them in that definition (and by extension in the numerator of the MLR ratio).