State insurance commissioners on Thursday unanimously endorsed tough new standards that would require many health insurance companies to spend more of each premium dollar for the benefit of consumers.
The new federal health care law stipulates that at least 80 percent of premium revenue must be spent on medical care and “activities that improve health care quality” for patients — not retained as profits or used to pay executive compensation and administrative expenses.
The rules, adopted at a meeting of the National Association of Insurance Commissioners in Orlando, Fla., describe how the calculations will be made, specifying what counts as medical care and what expenses will be classified as administrative.
These seemingly obscure statistics will soon be significant to consumers because insurers will have to pay rebates to policyholders if the companies do not meet the standards, known as medical loss ratios.
“These are pretty stringent requirements,” said Sandy Praeger, the Kansas insurance commissioner, who supervised the drafting of the rules.
In effect, the rules put a cap on insurance company profits. State regulators resisted intense last-minute pressure from insurers to alter the rules so it would be easier for carriers to comply.
Technically, the association was making recommendations to the federal government, as required under the health care law signed in March by President Obama. Consumer advocates and administration officials welcomed the proposed rules.
Kathleen Sebelius, the secretary of health and human services, said she would soon issue a regulation based on the recommendations.
The insurance commissioners drafted the standards after considering comments from insurers and consumer advocates.
One of the consumer advocates, Prof. Timothy S. Jost, an expert on health law at Washington and Lee University, said: “Congress asked the insurance commissioners to do a job, and they did it with openness, integrity and dignity. Although we did not get everything we wanted as consumers, we think the rule is fair, workable and faithful to the law.”
But Karen M. Ignagni, president of America’s Health Insurance Plans, a trade group, said the rules would have unintended consequences.
“The proposal will reduce competition, disrupt coverage and threaten patients’ access to health plans’ quality-improvement services,” Ms. Ignagni said.
Starting next year, the law prescribes a minimum loss ratio of 80 percent for insurance sold in the individual and small-group markets, with a minimum of 85 percent in the large-group market.
The ratios will be calculated annually at the state level, and insurers will have to meet the new standards in each state.
Even while backing the new rules, state regulators warned the White House that immediate enforcement of the 80 percent standard could destabilize the individual insurance market in some states.
“Health insurance companies in some markets will need a transitional period to comply,” said Jane L. Cline, the insurance commissioner of West Virginia and president of the association. “Consumers will not benefit if companies are forced out of the market and individuals are left without coverage.”
Several states, including Maine and Iowa, have asked the Obama administration for waivers allowing a gradual three-year transition. Federal officials have said they will consider granting waivers if states can show their markets are likely to be disrupted.
Lobbyists for agents and brokers said they were disappointed with the recommendations.
Janet S. Trautwein, executive vice president of the National Association of Health Underwriters, said that sales commissions would be classified as administrative expenses. “That will put pressure on insurance companies to reduce commissions, making it more difficult for agents and brokers to perform the valuable services they now provide consumers,” Mrs. Trautwein said.
The new federal health care law stipulates that at least 80 percent of premium revenue must be spent on medical care and “activities that improve health care quality” for patients — not retained as profits or used to pay executive compensation and administrative expenses.
The rules, adopted at a meeting of the National Association of Insurance Commissioners in Orlando, Fla., describe how the calculations will be made, specifying what counts as medical care and what expenses will be classified as administrative.
These seemingly obscure statistics will soon be significant to consumers because insurers will have to pay rebates to policyholders if the companies do not meet the standards, known as medical loss ratios.
“These are pretty stringent requirements,” said Sandy Praeger, the Kansas insurance commissioner, who supervised the drafting of the rules.
In effect, the rules put a cap on insurance company profits. State regulators resisted intense last-minute pressure from insurers to alter the rules so it would be easier for carriers to comply.
Technically, the association was making recommendations to the federal government, as required under the health care law signed in March by President Obama. Consumer advocates and administration officials welcomed the proposed rules.
Kathleen Sebelius, the secretary of health and human services, said she would soon issue a regulation based on the recommendations.
The insurance commissioners drafted the standards after considering comments from insurers and consumer advocates.
One of the consumer advocates, Prof. Timothy S. Jost, an expert on health law at Washington and Lee University, said: “Congress asked the insurance commissioners to do a job, and they did it with openness, integrity and dignity. Although we did not get everything we wanted as consumers, we think the rule is fair, workable and faithful to the law.”
But Karen M. Ignagni, president of America’s Health Insurance Plans, a trade group, said the rules would have unintended consequences.
“The proposal will reduce competition, disrupt coverage and threaten patients’ access to health plans’ quality-improvement services,” Ms. Ignagni said.
Starting next year, the law prescribes a minimum loss ratio of 80 percent for insurance sold in the individual and small-group markets, with a minimum of 85 percent in the large-group market.
The ratios will be calculated annually at the state level, and insurers will have to meet the new standards in each state.
Even while backing the new rules, state regulators warned the White House that immediate enforcement of the 80 percent standard could destabilize the individual insurance market in some states.
“Health insurance companies in some markets will need a transitional period to comply,” said Jane L. Cline, the insurance commissioner of West Virginia and president of the association. “Consumers will not benefit if companies are forced out of the market and individuals are left without coverage.”
Several states, including Maine and Iowa, have asked the Obama administration for waivers allowing a gradual three-year transition. Federal officials have said they will consider granting waivers if states can show their markets are likely to be disrupted.
Lobbyists for agents and brokers said they were disappointed with the recommendations.
Janet S. Trautwein, executive vice president of the National Association of Health Underwriters, said that sales commissions would be classified as administrative expenses. “That will put pressure on insurance companies to reduce commissions, making it more difficult for agents and brokers to perform the valuable services they now provide consumers,” Mrs. Trautwein said.
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