Feds Erred in Loss Ratio Decision

Congress May Need to Intervene

After months of discussions, the interim final rule on Medical Loss Ratios (MLRs) released by the U.S. Department of Health and Human Services (HHS) was a huge disappointment. The rule essentially mirrors efforts by the National Association of Insurance Commissioners (NAIC) by including agent and broker commissions as “non-claims costs” when calculating an insurer’s MLR as part of the new health care reform law.

The law requires insurers to annually disclose the percentage of premium revenue spent on reimbursement for clinical services and activities that improve health care quality and to provide rebates when the spending does not meet certain minimum thresholds in a plan year. Rebates must be provided to consumers if the percentage of total premium revenue (excluding specified taxes, licensing and regulatory fees, and certain other costs) spent on reimbursement for clinical services and activities that improve health care quality is less than 85 percent in the large group market and 80 percent in the small group and individual markets. In other words, the law requires health plans to issue rebates when their “non-claims costs” – such as executive salaries, advertising and administrative costs – exceed 15 percent of premium revenue in the large group market or 20 percent in the small group and individual markets.

Agent Commissions

Throughout consideration of the issue, the Independent Insurance Agents & Brokers of America (IIABA or the Big “I”) and others urged the NAIC, which was tasked with making a recommendation on the MLR definitions in the new law, and HHS to exclude agent commissions, arguing that these agent commissions are passed 100 percent to third parties and should not be included in the formula. Although they acknowledged the potential impact of the MLR standard on agents and brokers, and included that impact as a factor in considering whether the individual market would be destabilized, HHS did not appropriately exclude agent commissions and fees from the MLR calculations.

These regulations will have a destabilizing effect on the private marketplace and will negatively impact consumers. If HHS does not fix this language before the rule is final, Congress should step in and revise the MLR formula through the legislative process. Although we certainly hope the issue is resolved before Congress has to get involved, the Big “I” is already planning a legislative strategy.

The situation did not need to become this dire. A few weeks ago, the NAIC unfortunately failed to adopt an amendment strongly supported by the agent and broker community that would have addressed these concerns. After the NAIC meetings, we were greatly disappointed with their MLR recommendations and appalled that there was no up-or-down vote on an amendment to exclude agent compensation from the proposed methodology for calculating MLRs. The bipartisan amendment, championed by Mississippi Insurance Commissioner Mike Chaney and Vermont Insurance Commissioner Michael Bertrand, and cosponsored by 13 other regulators (including two of the four NAIC officers), was not even brought up for a vote. The irregular process by which the issue was handled raised numerous concerns.

The Big “I’s” attempts to secure a vote on the measure were preempted when questions were raised regarding the NAIC’s authority under the reform law to make such a recommendation. These arguments, the lobbying of a small number of opponents and concerns by some about the public’s response to excluding agent compensation from the MLR calculations effectively derailed efforts to adopt the amendment.

While the Big “I” found the NAIC’s actions disappointing, it remains clear that an overwhelming majority of regulators recognize the vital role that producers play in the health care marketplace. We remain confident that the amendment would have been adopted if a vote had been permitted.

Potential Destabilizing Factor

In a nod toward the importance of the issue, the NAIC authored a letter on Oct. 13, listing the prospective impact to consumer access of agents and brokers as a potentially destabilizing factor in the individual market. In the interim final rule, HHS partially acquiesced to these assertions by allowing states to request an adjustment of the MLR regulations in the years leading up to the creation of the exchanges in 2014 if there is a disruption in the individual market.

Despite the disappointment with recent actions by the NAIC and HHS, the Big “I” will continue to work with the newly established NAIC committee, HHS, members of Congress and others in an attempt to secure relief from the onerous MLR requirements.

Topics Profit Loss Agencies Legislation