Thursday, October 28, 2010


One expectation in the wake of the passage of the Affordable Care Act seven months ago was that it would lead to major changes in the health insurance industry.

Throughout the reform debate, insurers were painted as the “bad guys” of the American health care system, guilty of egregious policy cancelations, huge premium increases, heartless rejections of applications for coverage, and overly generous executive compensation, all in the context of an inefficient and ill-structured industry.

Not surprisingly, insurers became the primary targets of the new law. ACA will prevent insurers from imposing annual and lifetime benefit limits, arbitrarily canceling policies, denying coverage to children with pre-existing conditions, imposing copayments on preventive care, excluding necessary services, and basing premiums on health status or gender. ACA will also force far more open competition though insurance exchanges and limit insurer administrative expenses and profits.

So far, though, in spite of a steady stream of complaints from America’s Health Insurance Plans, the industry lobbying group, there has been little apparent impact on the health insurance industry.

Many insurers have increased premiums to compensate for ACA’s increased benefits, and some have decided to no longer offer “child only” policies, to avoid the risk of accepting children with very costly pre-existing conditions. In terms of the overall market, however, these are very small blips.

There have been a few other blips. Following national publicity over McDonalds’ threat to cancel its min-med employee insurance plan, HHS granted waivers of the annual benefit provision to the burger chain and some thirty other employers. A couple of small insurers have withdrawn from the health insurance market and transferred their policies to larger competitors. And three states have applied to HHS for waivers of the MLR provisions.

Overall, however, there has been a remarkable absence so far of change in the health insurance industry. Given all the potential threats of ACA, why do insurers seem to be in some kind of limbo?

There are three reasons: delay in finalizing medical loss ratio regulations; uncertainty about HHS’ approval of waivers; and the November mid-term election.

ACA’s medical loss ratio provisions offer a huge threat to smaller insurers, especially those specializing in “affordable” high-deductible policies which typically have high administrative expenses relative to benefit costs. The National Association of Insurance Commissioners has finally—after several delays—completed its proposal for MLR computation, but until this is accepted by HHS Secretary Sebelius and incorporated into regulations, insurers will continue to be unsure of its impact.

Secretary Sebelius also must decide how to rule on MLR waiver requests already submitted by a handful of states, and on the larger issue raised by NAIC of how to measure the potential market destabilization that ACA requires to trigger a waiver. Again, this is an issue with huge ramifications for many insurers. A rigid interpretation by HHS of waiver requirements could lead to a wholesale insurer exit from the individual market.

Finally, the November election is seen by insurers as providing the chance to squeeze the Obama administration’s implementation of ACA. With a strong enough showing by Republicans, the insurance industry hope is that threats of a funding cut-off by the new Congress will lead to dilution of many of the more onerous or profit-crippling ACA provisions.

And if insurers don’t get everything they are hoping for? Starting in January 2011, when the new MLR regulations are scheduled to be effective, we can expect to see three things: insurers dumping their small group and individual business, replacing high-deductible policies by more costly coverage with lower limits, and the wave of consolidation in the industry that executives from the largest carriers have been forecasting for several months.

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