Updated Dec. 24:
Amid all their squabbling over health care legislation, Democrats staunchly agree on the need to regulate how insurers spend their customers’ money.
Both the House and Senate bills would force insurers to spend the vast majority of premium revenue on medical care for their customers, reducing the amount available for profits, executive salaries, sales and administration. The Senate bill would require insurers to spend at least 80 percent on medical care and quality improvements, while the House bill specifies 85 percent. Insurers that don’t comply would owe rebates to customers.
Congressional supporters say those provisions would pressure insurance companies to be more efficient and help restrain price increases. But even some advocates say companies could game the system by broadly defining medical costs, for example. And spending limits alone may not stop insurers from raising rates. When New York State tried to limit non-medical care spending, many insurers companies complied - but still instituted double-digit rate increases.
"By themselves, such limits are not enough," said Kevin Lembo, who heads the state Office of Healthcare Advocate in Connecticut. Regulators must carefully define medical costs, and use other means to help curb premium increases, consumer analysts say.
Regardless of how well they'd work, the limits could be short-lived: House lawmakers call for them to end in 2013, when new insurance marketplaces, called exchanges, open. The Senate bill continues the limits indefinitely.
Concerns about the legislation’s effectiveness don’t faze House supporters like Rep. Jan Schakowsky, D-Ill., who said setting minimum spending requirements for medical care would ensure that insurance buyers "get their money's worth."
A major Senate supporter, West Virginia Democrat Jay Rockefeller, said consumers should know how insurers are spending their money. “Gone are the days of health insurance companies running rampant without oversight and accountability – now they must be accountable to consumers and spend more of their hard-earned dollars on actual health care and not on filling their coffers,” he said Sunday. New Rules For Insurers
The Senate bill sets an 85 percent minimum for plans sold to large groups and 80 percent for policies marketed to small groups and individuals. The House bill’s 85 percent requirement applies to all insurance categories. The remaining revenue would go for expenses such as marketing, claims processing, executive salaries, commissions to sales agents and profits. Certain nonprofit insurers that spend at least 92 percent of their revenue on medical care would be exempt from an excise tax the Senate bill levies on insurers.
Currently, insurers spend an average of 87 cents of every premium dollar on direct medical care, says the industry's trade lobby, America's Health Insurance Plans. Other estimates - including some from Wall Street analysts - put the average spent on medical care in the low 80s.
Regulation of what industry analysts call “medical loss ratios” has long been controversial. Insurers oppose them, saying they could prompt some health plans to cut administrative costs by reducing prevention and wellness programs, along with investments in computer systems, electronic medical records and other efforts that could save money.
Others have concerns about how the legislation would be implemented. Key details, such as the definition of medical costs and how insurers would be required to calculate them, would be drawn up after the legislation is approved. The House bill calls for the Secretary of Health and Human Services to write those rules, while the Senate specifies the National Association of Insurance Commissioners, which represents state regulators. Those regulators, who in either event would be responsible for applying the restrictions, would have to scramble to put them into effect -- as early as next year in the House bill and in 2011 in the Senate bill. What Is Medical Care?
How medical care is defined is critical. Would disease management programs be considered medical care or an administrative cost? How about gym memberships offered to policyholders?
"Insurers can make their (medical care numbers) look pretty darn good if they add in some things we might not consider part of claims" for medical expenses, said Sandy Praeger, the Kansas insurance commissioner.
States' experiences offer clues to the possible impact of such regulation. Nationally, at least 15 states have set medical spending requirements for insurers selling policies to individuals, ranging from 50 percent of premium revenue to 80 percent, according to the insurance industry.
Fourteen states set a similar range of limits for policies sold to groups, five of them requiring rebates to consumers if insurers fail to meet the rules.
One of those states is Maine, where insurers must spend an average of 78 percent of premium revenue on medical care. If they don't, they must rebate excess amounts to policyholders. In 2008, $6.6 million was returned to small businesses - and more than $4.6 million to individuals.
But state regulators say those limits aren't sufficient to slow rate increases. In New York, regulators want legislation empowering them to review premium increases before they go into effect and to reject excessive ones. That oversight was lost in late 1999, when new laws allowed insurers to raise rates without review so long as they spent at least 75 percent of their premium revenue on direct medical care.
Premium increases, which averaged 5 percent to 7 percent a year from 1996 to 1999, jumped to an average of more than 13 percent from 2000 to 2008, according to a report
from New York's insurance department.
"Based on our experience, we have found (the limits) alone are subject to abuse and don't necessarily help everyone they are intended to," said John Powell, assistant deputy superintendent for health.
To be truly useful to consumers, the limits need to be coupled with strong oversight of premium increases - and additional information such as how often insurers deny claims, according to Lembo and some other policy experts and regulators. But, for the most part, stronger oversight of premiums wouldn't occur until after the exchanges open several years from now.
"I see more good than harm if it's done thoughtfully," Lembo said of the restrictions in the House and Senate bills. "A lot goes back to the definition (of what is included in medical expenses), who is monitoring it and how aggressively they do so."
Once the exchanges open in 2013 or 2014, additional regulation of insurers would begin, including rules barring them from rejecting applicants because of health conditions and increased oversight of their annual premium increases.
Under the House bill, a federal health commissioner would have the power to reject premium increases deemed excessive. The Senate proposal would require exchanges to consider premium increases when deciding which insurers to allow in.
"The thought is that the exchanges will create real competition that will drive out insurers (with inadequate spending on medical care)," said John Rother, AARP's executive vice president of policy and strategy. While that remains to be seen, Rother says Democrats have a real selling point when they push insurer spending requirements.
"If you're going to talk with the public about cost control, then upping the medical loss ratio (the amount spent on care) is a powerful way to communicate that," said Rother.