California To Enforce Health Insurer Spending Limits

California’s Office of Administrative Law (OAL) has approved state Insurance Commissioner Dave Jones’ request for an emergency regulation to give him the authority to enforce the 80 percent Medical Loss Ratio (MLR) in the individual market established under the Patient Protection and Affordable Care Act (PPACA) that went into effect on Jan. 1, 2011.

The MLR is defined as the percentage of premium revenues an insurer pays for medical services, as opposed to insurer profits, marketing and overhead. According to the rule, insurers must provide rebates when the spending on “non-claims costs” — such as executive salaries, advertising and administrative costs — exceed 20 percent in the small group and individual markets.

The MLR rule is controversial in the insurance industry, because insurance agent commissions are not excluded from the calculation. The Independent Insurance Agents & Brokers of America (Big “I”) has argued that these agent commissions are passed 100 percent to third p arties and are therefore pass-through payments that should not be included in the formula

“The OAL’s ruling to approve the emergency regulation I proposed on my first day in office is an important step in ensuring that consumers are getting the best deal possible for their premium dollars,” Commissioner Jones said. “This emergency regulation will give me the legal authority to enforce the new federal 80 percent medical loss ratio for the individual health insurance market in California, even if Congress prevents the federal Department of Health and Human Services from enforcing it. I will be watching very closely to make sure health insurers comply.”

Jones said the OAL ruling reflects a fulfillment of the committment he made at his inauguration when he signed a “Notice of Emergency Regulation” to begin this process. Under PPACA, as of January 1, health insurers in the individual market are required to maintain a medical loss ratio of 80 percent.

Topics California Carriers Legislation