Under New Rules, Insurers Will Spend More on Patient Care

BY Lea Winerman  November 22, 2010 at 2:30 PM EDT

Beginning next year, health insurers will have to follow a new set of rules that details how much money they must spend on patients’ medical care, according to guidelines the Obama administration released Monday.

(Photo: Flickr Creative Commons/Howard)

The rules are part of the health care reform law, which mandates that insurers spend a minimum of 85 percent of the premiums that they take in on patient care rather than administrative costs or profit (insurers who sell to small groups and individuals will have to spend a minimum of 80 percent).

Companies that spend less than that will be required to issue rebates to their customers beginning in 2012 — the administration estimates that up to 9 million Americans could be eligible for rebates that year, worth up to $1.4 billion total.

And starting next year, insurance companies also will have to publicly report their medical loss ratio — the technical term for the percentage they spend on medical care.

“These new rules are an important step to hold insurance companies accountable and increase value for consumers,” Health and Human Services Secretary Kathleen Sebelius said in a statement.

The new spending minimum requirements may seem simple, but the broad strokes of the health reform law left many details unaddressed, including how to define what counts as “patient care.” The regulations issued Monday answer those questions. They come after months of debate and lobbying that pitted consumer groups, who argued for tighter definitions, against health insurers, who argued for looser ones.

The months-long process illustrates how many of the important details of the new health reform law will be worked out in regulations like these, and how many important decisions are left to be made.

There weren’t many surprises Monday — on the more controversial aspects of the rules, the administration followed the recommendations issued last month by the National Association of Insurance Commissioners, a group of state insurance commissioners tasked with coming up with the guidelines.

Among the decisions: Insurance companies will be able to deduct many state and federal taxes before calculating their ratio, making it easier to hit the target percentage. They won’t, however, be able to deduct investment taxes. Insurers also will have to calculate the ratio on a state-by-state level, rather than as a national average, as they had wished.

Health insurers also had advocated for more time to implement the changes, arguing that the companies unable to meet the new rules quickly could be driven out of business, which would reduce options for consumers. In response, the administration gave state insurance commissioners the option to ask for a one-year waiver if they feel that the new rules could “destabilize” the insurance market in their state. Four states have already asked for a waiver — HHS has final say over whether to grant them.

The administration also said that it will give a one-year pass on meeting the new requirements to mini-med plans — inexpensive health plans with very low annual coverage limits, which are popular in the retail and restaurant industries. Insurers who offer mini-meds have argued that they have intrinsically higher administrative costs because of high worker turnover. HHS said that it will review the plans’ MLR ratios during 2011 and revisit the issue in 2012.