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States Seek to Soften Rule on Insurers’ Profits, Millions Of Dollars In Consumer Rebates At Stake

May 16, 2011

In a move that could absolve health insurers of paying more than $95 million in consumer rebates, nine states are pressing for relief from a federal rule limiting insurers’ profits and administrative costs.

State regulators say they fear insurers would flee their markets and leave some individuals without coverage options if the rule isn’t eased. But consumer groups say there’s little evidence insurers would bail out.

If the rule is relaxed, “the end impact will be to deny consumers the millions in rebates they expect to get on this year’s premiums,” says Carmen Balber, Washington director of the advocacy group Consumer Watchdog.

Under the federal health law, insurers must spend at least 80 percent of premium revenues on medical costs or quality improvements; the remainder can go toward administrative costs, sales commissions and profits. Plans that fail to meet the standard must pay rebates to policyholders.

Many health plans, but not all, already meet that target. Data provided by states seeking to relax the rule show a wide range of spending on medical care: Several insurers spend only slightly more than half of their premium revenues on care. Potential rebates across the nine states total more than $95 million for policies in effect this year.

The spending requirement, called the "medical loss ratio," applies to all health plans, except those offered by self-insured employers. However, the exceptions sought by the states would affect only individual policies bought by people who don’t get coverage through their jobs.  Nationwide, more than 18 million Americans purchase their own policies. 

Up to 9 million Americans with individual policies and in group plans could be eligible for rebates, according to government estimates.

On Friday, May 13, the Department of Health and Human Services approved adjustments to the target in New Hampshire and Nevada. The law allows states that can show a "reasonable likelihood" that meeting the spending target would disrupt their insurance markets to seek federal permission to lower the goal.

Other states that have applied are Florida, Kentucky, Louisiana, North Dakota, Georgia, Kansas and Iowa. 

"We need time for the market to adjust," says Nevada Insurance Commissioner Brett Barratt, who wants the medical-spending requirement for insurers in his state lowered to 72 percent this year. Only two of the 10 Nevada carriers subject to the rule expect to hit the 80 percent medical-spending mark this year. Barratt says he doesn’t know if the others would leave the state if they had to pay rebates.

Saying Nevada might lose up to four of 10 insurers affected without a change, HHS granted a one-year lowering of the goal to 75 percent of revenue. In New Hampshire, where two of four insurers in the individual market reportedly would lose money if they had to pay rebates, HHS granted a gradual shift, with insurers required to meet a 72 percent spending goal this year, 75 percent in 2012 and the 80 percent by 2013.

HHS in March approved Maine's request to lower the target to 65 percent for each of the next three years.  The state’s second-largest insurer – MegaLife, a subsidiary of HealthMarkets – had threatened to withdraw if the target wasn’t reduced.  The insurer, projected to spend 68 percent of its revenues on medical care this year, was facing an estimated $1.9 million in rebates to policyholders.

HHS officials said they granted Maine’s request because a pullout by MegaLife could have forced up to 13,700 policyholders to go uninsured or buy coverage from the other two insurers, which sell policies that are more comprehensive, but also much more expensive.

The insurance industry says the 80 percent rule, which went into effect in January, was adopted too quickly and that insurers should be allowed to ramp up over three years. By "going into effect overnight this year, it has the potential for some significant unintended consequences, including driving plans out of the marketplace," says Robert Zirkelbach, spokesman for America’s Health Insurance Plans.

But Balber counters that most insurers can already meet the standard and that the regulation will prod the rest to hold down costs. "Insurers can address this in a very simple way, by lowering premiums." she says.

In deciding whether to lower the target in some states, the administration will weigh how many insurers might leave a market, how many people would be affected and whether policyholders have other options, such as special insurance pools for people with health problems, says Steven Larsen, deputy administrator of the Center for Consumer and Insurance Oversight at HHS.

He says deciding on the states' requests is a balancing act: While insurers should be pushed to spend more on medical care, it "might not be in consumers' best interest" to drive them out of the marketplace.

Because of that, some analysts predict that the administration will grant most of the states’ requests.

"The last thing the Obama administration wants is the Des Moines Register writing about 500 people who lost their health insurance in Iowa because of the Obama health plan," says Robert Laszewski, a consultant to the health care industry and a former insurance executive.

While each state has its own issues, officials have some common concerns. They fear the threat of rebates will cause insurers to pull out of their markets, stop writing new policies, cut sales commissions for agents -- or all three.

In Florida, officials want the target set at 65 percent of revenues for three years. Of the 21 insurers that sell individual policies, nine reported they expect to spend less than 80 percent on medical care and quality this year. Based on those reports, state officials estimate those insurers would owe at least $25 million in rebates to consumers, under the current rule.

Analyst Carl McDonald of Citi Investment Research wrote in a recent report that Florida’s request looks weak because “none of the six largest plans in the state will drop out” as a result. But if the requirement is softened, he says, it will boost insurers’ earnings and suggest HHS will take a lenient approach: If Florida is approved, “it’s hard to think of a situation where HHS doesn’t grant a waiver.”

In Georgia, regulators have asked for targets of 65 percent this year, 70 percent next year and 75 percent in 2013.

At least 5 of the 18 insurers included in the state’s request estimate they will spend less than 60 percent of their revenue on medical care and quality this year. Rebates could total more than $33 million this year without a waiver.

In its filing, Georgia officials say nearly 29 percent of the 344,000 people in the state who buy their own policies are in plans offered by insurers that might leave the state without an adjustment.  Like some of the other states, Georgia does not have a high-risk pool, meaning there would be little choice for people with medical problems.  A federal pool is available, but consumers would have to be uninsured for six months before qualifying, leaving them “at substantial financial and medical risk,” the filing says.

In New Hampshire, regulators are worried that the spending target will cause insurers to lower their premiums on policies sold to individuals. That would help some consumers, but potentially raise costs for group plans sold to small employers, says Leslie Ludtke, health policy analyst for the state. That’s because young healthy people might opt out of group coverage to buy cheaper insurance as individuals.

This article was updated on May 16.

jappleby@kff.org

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