COULD THE NEW MEDICAL LOSS RATIO PROVISIONS INCREASE PREMIUMS?

One of the most significant—and hotly debated—parts of the new health care reform law is scheduled to come into effect on the first day of 2011. It’s one that’s likely to impact insurers, employers, and individual consumers.

The medical loss ratio provision, intended to limit the amount of premium spent on other than medical care, will require large group health plans to spend at least 85 percent of premium on medical care and related health quality efforts, and small group and individual plans to spend at least 80 percent. Plans failing to meet these thresholds will be required to offer rebates to enrollees.

The Senate backers of the MLR requirement, notably Jay Rockefeller and Al Franken, obviously hoped that it would force insurers to be more efficient, and specifically to cut their administrative costs and profit. In the case of some insurers, the Senators are likely to be successful, as I noted in an article by Reed Abelson in today’s New York Times, if only by slashing broker commissions. However, as I also remarked to Reed, in other cases the new rule could lead to policy cancellations or even higher premiums.

While most large group plans are expected to be able to meet the new requirements, many small group and individual plans may have problems. In some small states—for example, Maine—there may be only one insurer (or none) whose MLR is above the PPACA threshold. Small group and individual plans will experience most difficulty for two reasons: higher administrative costs, resulting from higher marketing expense per enrollee, and less generous benefits, resulting from the need to offer affordable policies.

Although the regulations for enforcing the MLR provision have not yet been finalized, insurers are urgently trying to figure out how best to deal with the expected requirements, as reported in the New York Times article. In some cases, especially where plans are already close to the MLR thresholds, insurers are working on staff cuts and other expense reductions such as reducing or eliminating broker payments. However, others are considering either abandoning the market or extensively restructuring their coverage offerings. Restructuring coverage to increase benefits—for example, by lowering deductible limits—will increase a plan’s MLR, but will also increase premiums, hardly likely to be popular in the present economy.

So, the bottom line (for the moment) seems to be that some policyholders will gain from the MLR provision (although the gain may not be readily apparent as medical costs continue to grow), while others will find themselves facing higher premiums or needing to seek other coverage.

And those will be the ones that reform opponents will make sure we read about.