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Final Medical Loss Ratio Regulations Released by HHS

The Department of Health and Human Services released the final rule for the medical loss ratio today, after months of debate and lobbying from both consumer groups and the health insurance industry. The regulations will force insurers to spend between 80-85% of premium revenue on medical treatment, rather than overhead, salaries and other compensation.

The entire debate was over what would be allowed to count as medical treatment, for the purposes of this ratio. On that score, consumer advocates won a number of victories, but insurers were able to get favorable tax treatment.

U.S. health insurers can include the cost of federal taxes in determining whether they spend enough on patient care, increasing the amount that can be kept for administration or profit under new rules. Company shares rose.

Health plans led by Indianapolis-based WellPoint Inc. may also win delays from the spending requirements if individual states show the federal government that the so-called medical-ratio rules will destabilize insurance markets, the U.S. Health and Human Services Department said in a statement today. The regulations are part of the U.S. health overhaul that President Barack Obama signed in March.

The tax decision may save the industry $313 million it would have had to rebate to consumers in 2011, Ana Gupte, a Sanford C. Bernstein & Co. analyst in New York, estimated in an October note. Under the rules, in effect next year, companies will have to meet a spending threshold of at least 80 percent for care they provide, or return the difference to customers.

Obviously the tax treatment is a big win for the industry. The chairmen of every Congressional committee involved in this law insisted that the MLR be calculated without federal and state taxes, saying this would be contrary to the law they wrote. The Administration could have dropped that rule, designed mainly by lobbyists and approved by the National Association of Insurance Commissioners, but they chose not to. And on the rule allowing states to prove that the MLR requirements would destabilize insurance markets to acquire exemptions, the Administration basically came up with that one themselves. As an analyst in the Bloomberg story said, “This suggests the administration is perfectly willing to be reasonable from an insurance point of view and try to preserve the private insurance market.”

Nevertheless, I wouldn’t characterize insurance companies as thrilled with the outcome of this rule. Medical loss ratios have been successful in many states in providing value for customers. And regulators denied AHIP’s claims that fraud prevention efforts, commissions for insurance agents and start-up costs should be included in the MLR calculations. They did get disease management provisions included in there.

Full information about the MLR is here and here.

UPDATE: The White House already has another of their now-ubiquitous whiteboard posts on this.

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David Dayen

David Dayen

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