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.