Repealing PPACA’s 1099 Provisions Could Happen Soon — Maybe

Getting anything done in today’s Washington is never easy. Even when there’s widespread agreement. .

Congress has been trying to eliminate the 1099 requirements since last year. Everyone agrees that the provision is an unaffordable burden on American business. President Barack Obama supports removing it from the health care reform law. So do a majority of Democrats and Republicans in Congress. It’s not hard to see why. Today businesses file a 1099 with the Internal Revenue Service only when they pay contract workers $600 or more. The Patient Protection and Affordable Care Act expands this to all vendors and contractors providing $600 or more in goods or services. Meaning a business (non-profit or government agency) buying $600 in paper and staples per year from, say Staples, would be required to file a 1099 form. Same with paying the guy who waters the plants. Or UPS for delivering products. Or the printer, the security service, the landlord, the … well, you get the idea.

Even with what passes in the Capitol these days for near universal support, Congress has tried and failed to repeal the provision. The problem is that more thorough reporting of payments for goods and services is expected to bring roughly $20 billion into federal coffers over the next 10 years. Repeal the enhanced reporting and the money goes away.

Democrats and Republicans have differed on how to make up for these lost funds. The House approach is to increase the amount consumers will need to repay if they receive premium subsidy overpayments. (The PPACA will assist consumers purchasing coverage through exchanges set up by the health care reform law. The premium subsidies vary based on consumers’ income as reported in previous years. If their income turns out to be higher than anticipated consumers will need to repay a portion of the subsidy).

Here’s an example used by Representative Joseph Crowley as reported in the New York Times: “A family of four with an annual income of $88,000 buys a typical family insurance policy costing $13,000. The family would have to pay $8,360 in premiums and could qualify for a federal tax credit of $4,640, which the Treasury would pay directly to the insurance company. If the breadwinner receives a $250 bonus at work, the family would become ineligible for the tax credit and would have to repay the full amount, $4,640, with its income taxes.”

Democrats oppose this outcome because the overpayment of the subsidy was no fault of the consumer. As reported in the The New York Times article, they see this as a “tax increase on the middle class” claiming “honest taxpayers might find themselves owing large sums to the I.R.S.” This they consider a tax trap. Republicans in the House deny repaying money to which one is not entitled can be described as a tax increase. They also claim it’s the same offset Democrats proposed to pay for adjusting Medicare payments to doctors, according to The Hill’s On the Money blog.

The Senate has taken a different approach to paying for repeal of the 1099 provision. They want the Office of Management and Budget to recapture unused federal dollars from various governmental agencies. But it appears there may now be sufficient votes in the Senate to go along with the GOP approach. So things will happen quickly now, right? Perhaps, but maybe not.

Senator Robert Menendez wants the Senate to consider an amendment requiring Health and Human Services to determine the impact the subsidy claw-back provision in the House bill will have on the overall cost of coverage purchased in the exchange. If this amendment were to pass, the Senate version of the legislation would differ from that passed by the House. This, in turn, would require the bill to go back to the lower House delaying passage of the repeal.

Republicans, however, are expected to stand united in opposition to this amendment, effectively blocking its passage. Assuming this is the way things play out next Tuesday, the bill could wind up on President Obama’s desk sooner rather than later. The Administration, in the past, has expressed “serious concerns” about the way the House bill retrieves subsidy overpayments. A statement from the Office of Management and Budget notes “H.R. 4 could result in tax increases on certain middle-class families that incur unexpected tax liabilities, in many cases totaling thousands of dollars, notwithstanding that they followed the rules.” The statement goes on to support the Senate approach to paying for repeal of the 1099 reporting provisions in the health care reform law.

Whether President Obama signs the legislation in an act of bi-partisan compromise or vetoes it in the cause of avoiding a middle class tax cut won’t be known for sure until the bill is before him. It remains highly likely the tax reporting element of the PPACA will eventually be repealed. Whether this will happen soon remains an open question.

Commissions, Medical Loss Ratio Targets, Brokers and Politics

Legislation to exempt broker commissions from the medical loss ratio provisions of the Patient Protection and Affordable Care Act is gaining bipartisan steam. Original sponsor Republican Representative Mike Rogers has been joined by Democratic Representative John Barrow. Other House Members from both sides of the aisle are expected to sign on before the legislation is formally introduced – perhaps as soon as next week.

Meanwhile, the National Association of Insurance Commissioner’s Professional Health Insurance Advisors Task Force has posted their draft of a bill to exempt broker commissions from the MLR (a copy of the proposed law is available at the end of this Employee Benefits Adviser’s BenefitNews article). The NAIC is seeking comments on the proposed legislation (which is very similar to that proposed by Representatives Rogers and Barrow) in that it simply removes compensation paid to independent brokers from the medical loss ratio calculation. A hearing on the draft bill will be held on March 27th during the NAIC’s quarterly meeting in Austin, Texas. (Those wishing to add their two cents to the conversation can submit an email to by Monday, March 21st.

This legislation is a top priority of the National Association of Health Underwriters, the National Association of Insurance and Financial Advisors, and the Independent Insurance Agents and Brokers of America. Florida Insurance Commissioner Kevin McCarty, president-elect of the NAIC, has led the organization’s effort to deal with the negative impacts the PPACA has had on brokers.

All this is pretty good news, right? In a few weeks there could bipartisan legislation backed by the NAIC as a whole and its leadership in particular and supported by the grassroots strength of agent organizations. There’s just two problems: opposition from Democratic liberals and political maneuvering from Republicans.

Senator Jay Rockefeller has sent a letter to the NAIC complaining that treating broker compensation as anything other than administrative costs “would allow agents, brokers, and health insurance companies to retain the estimated $1 billion in benefits that American consumers will receive next year thanks to the health care reform law.” Senator Rockefeller overstates his case ($1 billion just from the MLR provision?), but at least he attempts to marshal some arguments behind his concerns. However, in many of these arguments his reasoning is flawed.

He states, for example, that “the proposal would make it more difficult for consumers and small businesses to understand how their premium dollars are used ….” Why? The PPACA already exempts taxes from the MLR formula, yet no one has expressed concern that this will confuse anyone.

He also assumes that if broker compensation is removed from administrative costs that commissions will revert to what they were before the PPACA. He even quotes a statement from me published in Benefits Selling magazine to support this point. In that article I noted that brokers cost of doing business rises at closer to general inflation, not the rate that medical costs drive up insurance premiums. And I predict that commissions will eventually be decoupled from premiums. However, my belief that how broker compensation is calculated is unrelated to health care reform. I’ve been talking about this dynamic for years, long before the start of the Obama Administration. Even were the PPACA to be repealed I believe the method of determining commissions will change. It’s simply too hard to justify tying commissions to medical inflation.

And that’s what Senator Rockefeller is missing. Commissions are set by market dynamics. Carriers, consumers and business owners need independent producers and are willing to pay for the value brokers provide. In setting commissions carriers not only look at what competitors are offering, but at what brokers can earn selling other products like life or disability. In the end it comes down to an economic calculation: does the compensation justify the time and resources brokers commit to make sales and service their clients. Regardless of how it’s calculated, if the answer is yes, brokers will engage with the product; if the answer is no, they won’t.

The medical loss ratio provisions in the PPACA disrupts this formula. By imposing an arbitrary cap on administrative costs and including commissions within this cap, the law threatens to make remaining engaged in the sale of individual products uneconomical for too many brokers. The PPACA shifts the situation where compensation reflects the value brokers bring to consumers and carriers to a mathematical formula driven by the medical loss ratio calculation which ignores value, effort and resources.

Liberal Democrats, however, are not the only hurdle to making changes to the MLR formula. As noted in a thorough and illuminating examination of the issue by Sarah Kliff in Politico, political calculations by Republicans may doom the bill. Republicans, Ms. Kliff points out, “have little to no political incentive to improve” the PPACA. Improving the PPACA simply makes it more palatable and that, in turn, makes the law harder to repeal. Better to leave the legislation’s flaws in place, this reasoning goes, so as to strengthen calls to chuck the entire package. Or as one source cited in the Politico article says, “If it really became a bill with steam and the Republicans started hearing from all those brokers maybe the odds change.” But I can’t get myself past the ‘we aren’t fixing this bill’ hurdle.”

NAHU and its allies are pitching the MLR change as necessary to protect small businesses – specifically the many health insurance agencies around the country. They are gaining potent support. Yes, there is opposition, but still, if approached on the merits, I believe the Rogers/Barrow legislation could pass. The primary reason for this optimism is that exempting broker commissions from the MLR formula doesn’t undermine the purpose of the PPACA’s medical loss ratio provisions.

It would be a shame, but in today’s world not at all surprising, if this helpful fix were derailed because some lawmakers find a greater political advantage to preserving the flaws within the PPACA than fixing them.

Maine Gains Three Year Waiver from Medical Loss Ratio Target

The Patient Protection and Affordable Care Act requires carriers offering coverage to individuals and families (not purchased on their behalf by an employer) to spend 80 percent of premium on medical claims or other costs related to health care quality. These medical loss ratio provisions took effect in January of this year and has created a host of challenges for states, carriers and brokers.

Authors of the PPACA anticipated that quickly implementing this 80% MLR requirement could disrupt the individual market. Consequently, the health care reform law empowers the Secretary of Health and Human Services to waive this requirement if states can demonstrate that meeting the 80 percent target would “destabilize the individual market” in the state.

To date, five states have sought this waiver: Florida, Kentucky, Maine, New Hampshire, and Nevada. And one of those requests, Maine’s request for MLR release was recently granted by HHS. In approving the waiver, HHS agreed with that a 65 percent medical loss ratio was appropriate given the circumstances in Maine. The waiver is for three years (meaning carriers will have to achieve the 80 percent MLR target in 2014) although the Maine Bureau of Insurance will need to demonstrate the need to keep the waiver in place for 2013. In the letter approving the request, HHS noted that only three carriers issued almost all of Maine’s individual insurance policies: Anthem Blue Cross Blue Shield of Main (with 49 percent market share), MEGA Life & Health Insurance Company (with a 37 percent share), and HPCH Insurance Company (13 percent).  As reported by HealthCare Finance News, MEGA Life and Health had stated it “would likely withdraw from the state if forced to immediately adhere to the 80 percent MLR standard.”

What level of disruption to their individual market that states will need to demonstrate is still unknown. The Maine decision is based on the unique situation of that state and one data point is hardly a trend. However, the Obama Administration is focused on making health care reform work, so they are being very practical when considering waivers and the like. They seem very intent on giving states latitude in implementing the law, James Gutman at AIS Health refers to as “’bend but not break’ mode.”It would not be surprising to see additional states consider seeking the waiver in light of Maine’s success.

In fact, Florida officially filed its waiver request only last week. In making the request Florida Insurance Commissioner Kevin McCarty asserts that meeting the 80 percent MLR requirement would drive some carriers to exit the individual market in the state, erect barriers to entry discouraging new carriers from entering the market, reduce the number of offerings in the individual market and “severely hamper agent involvement in the individual market to the severe detriment of Florida consumers.” Florida is seeking the same three-year waiver received by Maine for insurance plans (65 percent) and a 70 percent MLR for HMO.

For those interested in what their own state is considering concerning requesting a waiver from the PPACA’s medical loss ratio targets in the individual market, Politico Pulse runs a scoreboard each day. As of today, in addition to the five states mentioned above, 11 are leaning toward seeking a waiver, 16 are leaning against requesting relief, and the remainder have yet to make their intentions known.

Effort to Eliminate Waste Coming Soon

It’s not that the Patient Protection and Affordable Care Act doesn’t contain any provisions aimed at reducing the cost of medical care – it’s that it doesn’t have enough of them. Still, what it has should be acknowledged. For example, Politico Pulse has reported that a unit of Health and Human Services will soon announce a package to incent providers to “disseminate effective practices and foster the spread of new knowledge on patient safety to the hospital community.” According to Spencer Health Strategists, who obtained a copy of a draft memorandum a few weeks back, the goal is to dramatically cut the estimated $50 billion spent each year on preventable hospital readmissions and hospital-acquired conditions.

The grants are designed to get private hospitals to improve patient safety and improve outcomes. Instead of developing new approaches or dictating specific practices, financial incentives will be to encourage hospital-generated innovations and to share best practices.  For example, the Innovation Center within the Centers for Medicare and Medicaid Services within HHS will support “states and large systems to developed networked learning project.” Those networks that achieve specified results will get additional resources to expand their efforts.

This focus on the private sector links the effort to improve safety and reduce readmissions underway within Medicare. According to the memo posted by Spencer Health Strategies, by 2013 six percent of hospital payments from Medicare to providers will be tied to public reporting of errors and the provision of safer, more reliable care ….” Over the next 10 years, $70 billion of Medicare hospital payments will be tied to hospitals’ “delivery of high quality care.” Medicaid will introduce similar provisions.

None of this is “official” yet, but based on the Politico Pulse report, it appears the Obama Administration will be launching this initiative soon. The potential of the program is to save billions of dollars and to do so relatively quickly. Even more significantly, the program could save thousands of lives. There’s a lot wrong with the PPACA, but this is an example of something that it gets right.

Rate Regulation Grants Announced by HHS

Carriers set health insurance premiums based on several criteria. The single biggest component is the expected cost and utilization of medical services. Then there’s the need to cover overhead (such as operations, sales costs, marketing and armies of lawyers to deal with regulation) and profit (or retained earnings for non-profits). Insurers know they don’t operate in a vacuum, however, so they consider the pricing of competitors as well.

What’s a reasonable premium? Arguably it’s one that covers claims, operations, provides a profit, but is still affordable to consumers, at least relative to the pricing of competing carriers. This approach assumes an effective market. Carriers that get greedy (and overcharge) will lose market share to more fairly priced competitors. Those that underprice their plans one year will need to seek large premium increases the following year to make up for losses. At any one time a particular carrier’s pricing may be out-of-whack (to use the technical term), but over time the market is supposed to work things out to keep pricing reasonable.

The market, however, can be messy. A carrier seeking to make up for losses in prior years may need to seek substantial rate increases (think 40-to-50 percent).  Within the walls of the insurance company such increases makes perfect sense. Medical costs and utilization are skyrocketing. Operating efficiencies take time to achieve (without totally degrading customer service). Executives are rarely first in line to reduce their own take-home pay (nor would it amount to a lot if they did). The only way to make up for underpricing errors is to raise rates – a lot.

Outside the bubble that is most corporations, however, double-digit premium increases appear more like highway robbery than a logical business decision. How many items in our economy go up 10, 20, 40 percent of more each year? Year-after-year? Cars don’t. Most food items don’t. Gas prices may skyrocket, but they drop from time-to-time, too. Health insurance premiums seem to be on a one-way trajectory upward. When’s the last time health insurance premiums fell? (1996 is the last time I recall, but I may be missing some other exceptions).

This pricing trend is unsustainable. Some of you may recall the “rule of 72” from your economics (or math) classes. The rule of 72 is a way to estimate how long, given a growth rate, it takes to double a number. Just divide the assumed rate of growth into 72. Invest $100 in an account paying 5 percent interest and your principal will double in roughly 14.4 years (72/5 = 14.4). Increase the cost of health insurance by 10 percent per year and premiums will double in 7.2 years.

So here’s the situation: carriers price their products to cover their costs (both claims and administration), to earn a profit and to be competitive in the marketplace. Consumers see their costs increasing at unacceptable levels. What’s a lawmaker to do?

If that lawmaker believes in markets they let nature take its course. If the lawmaker: 1) believes the market isn’t working; and 2) government needs to step in when markets are broken, you require carriers to get government approval before raising their rates. The Patient Protection and Affordable Care Act includes provisions to encourage this latter approach. Or as the federal government’s web site puts it, “The affordable Care Act provides new tools and resources to protect consumers and employers from large and unreasonable health insurance premium hikes.”

That encouragement is the reason the Department of Health and Human Services is making $199 million in grant funds available to help states “create or enhance their premium rate review programs.” The goal is to bring greater transparency to the rate making process while assuring that the states are “comprehensively” reviewing carrier’s proposed prices hikes.

The idea is to prevent “unreasonable” rate increases – which begs the question: what’s unreasonable? According to a regulation proposed by HHS, that would be any rate increase of 10% or more in the individual and small group market segments. Maybe. The 10 percent threshold doesn’t determine whether a rate increase in unreasonable, but it would trigger a state review to determine if it is. Carriers would also need to post their justification for such rate increases on the Internet.

Personally, I don’t mind increased transparency in health insurance pricing. As I’ve written before, carriers need to educate consumers and lawmakers about the value they provide. After years of being hammered politicians in both parties and reams of articles about denied or rescinded coverage, the general public would be excused asking “what is it you folks do that’s of any benefit?”

So if the states ask tough questions and make carriers justify their increases, I’m fine with it. A second set of objective eyes couldn’t hurt and as I’ve noted in an earlier post, the resulting dialogue could be a way to educate the public about how rates are driven by the cost of medical care. But what we’re likely to see is an increasing number of states deciding their regulators need to sign off on any rate increase (some states already do this).

Inserting politics into the premium setting process distorts an already messy process. What politicians (or their appointees) are going to sign off on a significant rate increase – even an objectively necessary substantial premium hike – in the middle of an election season? Rates are already impacted by the underwriting cycle, now they are to be beholden to election cycles? The calculation for a politician is simple: if they allow a substantial rate increase they anger voters; if they deny it they upset an insurance carrier. Sure they could try to explain to their constituents why the rate hike was needed. But that’s hard work. It’s far easier to just say no.

Nor are public officials likely to link medical cost increases to premium hikes. Far easier to attribute increasing costs to greedy insurance executives than doctors or hospitals. Nor is there anything regulators with the authority to reject premium increases can do about increases to medical costs. The PPACA does not give states the power to tell doctors what they should charge for a given procedure. Anyone who has read this blog for long knows I’m not a fan of a single payer health care system. I do respect, however, the honesty of single payer advocates who recognize that their approach is about controlling the cost of health care at its source – what doctors and hospitals charge for care.

Advocates of increased government involvement in rate setting believe it will help lower costs. And there’s no requirement that states seek approval powers over premiums to qualify for the grants. But some (I’m looking at you California) no doubt will.

There are cost containment provisions in the PPACA. Certainly not enough, but they’re there. Rate regulation, and encouraging states to establish themselves as the final arbiters of what rate increases are permissible, is not one of them.

Governors and HHS in Violent Agreement Concerning Exchange Flexibility?

While the Patient Protection and Affordable Care Act is federal law, much of its implementation is  in the hands of the states. Near the top of the list on the state’s to-do list is the creation, design and operation of the health insurance exchanges.

Not all Governors are happy with this burden. They are busy with other priorities, such as keeping their states from going bankrupt. However, the PPACA makes it hard for Governors, even those who oppose the new health care reform law, from avoiding their exchange-related responsibilities. If states fail to create an acceptable exchange in time (acceptability being determined by the Secretary of Health and Human Services) the federal government will step in and establish (and run) an exchange of its own in the non-cooperating state.

Which is one reason 21 Governors sent a letter to HHS Secretary Kathleen Sebelius asking for more control over the structure and operation of the exchanges. (Thanks to blog reader The Insurance Barn for commenting on this letter when it first became public). That all those signing the letter were Republicans suggests another reason might be political – shocking, I know. But focusing on the substance of the Governor’s concerns, they asked for six concessions (in their own words):

  • Provide states with complete flexibility on operating the exchange, most importantly the freedom to decide which licensed insurers are permitted to offer their products
  • Waive the bill’s costly mandates and grant states the authority to choose benefit rules that meet the specific needs of their citizens.
  • Waive the provisions that discriminate against consumer-driven health plans, such as health savings accounts (HSAs)
  • Provide blanket discretion to individual states if they chose to move non-disabled Medicaid beneficiaries into the exchanges for their insurance coverage without the need of further HHS approval.
  • Deliver a comprehensive plan for verifying incomes and subsidy amounts for exchange participants that is not an unfunded mandate but rather fully funded by the federal government and is certified as workable by an independent auditor.
  • Commission a new and objective assessment of how many people will end up in the exchanges and on Medicaid in every state as a result of the legislation (including those “offloaded” by employers), and at what potential cost to state governments. The study must be conducted by a neutral third-party research organization agreed to by the states represented in this letter.

Most of these items are non-controversial. In fact, soon after the letter was sent, Politico Pulse was reporting on a statement from HHS claiming that the PPACA already offered states the flexibility concerning the exchanges the Governors were seeking. Specifically, HHS claims (in its own words):

  • States will determine which insurers are permitted to offer products in the Exchanges.
  • States can choose benefit rules that meet the needs of their citizens.
  • Consumer-driven health plans and Health Savings Accounts (HSAs) will be available.
  • States have discretion over Medicaid coverage.
  • New funding to establish Exchanges and modernize eligibility systems is available.
  • Reliable, independent cost estimates are available.

So, the Republican Governors and the Democratic HHS Secretary are in violent agreement on this matter, right? Well, that depends on through what color lenses one is looking.

Substantively, probably. Some of the Governors’ concerns do seem to be addressed already in the PPACA or related regulations. Others are non-controversial and non=political. However, the independent cost estimates referred to by the HHS fails to meet the Governors’ criteria – to to address their concern regarding the financial impact on their states. There are some unanswered subtleties remaining, too, as well as new concerns that will no doubt surface over time.

Politically, so long as either party feels there are points to be made in the run-up to the 2012 elections by engaging in these disputes, they’ll continue to engage in these disputes. And since both sides do believe there are points to be made, expect a lot of letters passing between Governors and HHS.

What’s unfortunate in all this is that some harder questions concerning the exchanges are not being addressed. Leave aside the most important one, “are exchanges really necessary?” Most Democrats and Republicans believe they are. There are other questions needing answers, however.

For example, if exchanges will accomplish so much , why do they need special advantages? Why are tax credits offered to small businesses and premium subsidies made available to consumers only if they obtain coverage through the exchange? This assistance could be made available simply enough to those getting insurance outside an exchange. If lawmakers and regulators truly believe in maximizing consumer choice and are convinced the aggregated buying power of the exchanges will deliver increased value to small businesses and consumers, why limit the availability of the incentives? If they’re right, the exchanges will come to dominate a state’s insurance marketplace because consumers recognize their value. If not, then they have failed. Such real world feedback should be welcomed by policymakers.

Exchanges should be required to compete on a level playing field with the health plans available in the broader market. Governors of both parties should be asking for the flexibility to make this possible. And HHS should have the confidence in the exchanges necessary to make that goal a reality.

Politics, Math and Premiums

Math. Can’t live with it. Can’t live without it. We all like things to “add up.” We want ledgers to balance. And some folks even believe numbers don’t lie.

But when politics joins the equation the math gets a bit slippery. OK, they get a lot slippery. One accepts that politicians and pundits will perceive the same event quite differently (if only to have something to argue about). But math is pure, right? 2+2=4 and if it doesn’t somebody is selling something – or Congress is in session. (Both cheap shots, but you get the idea).

Which brings us to an interesting Politico story in which David Nather does some fact checking concerning claims being bandied about concerning the impact of the Patient Protection and Affordable Care Act on premiums. Mr. Nather does an excellent job of showing how both Democratic and Republican are playing the numbers game.

President Barack Obama, for example, claims that the PPACA will lower premiums. Mr. Nather notes that while some supporters of the PPACA claim the law may reduce the rate of increase, no one is claiming premiums are going down any time soon. Mr. Nather cites an HHS report claiming annual premiums will fall by as much as $2,300 thanks to the PPACA, but that’s from where they would be without the reform bill in 2014, not from today.

Republicans fare no better (or worse, depending on your point of view) when it comes to juggling numbers. GOP lawmakers have cited the spate of recent rate hikes as evidence that the new health care reform law is already increasing premiums. However, even some of the carriers raising rates exonerate the PPACA. For example, Blue Shield of California has gotten a lot of attention for rate increases of as much as 59 percent on their individual policies (although it’s amazing how few stories mention that the average rate increase is dramatically less). Republicans blame health care reform for this hike. Unfortunately for their cause-and-effect claims, Mr. Nather reports that Blue Shield has said “the increases ‘have almost nothing to do with the federal health reform law. These rates reflect trends that were building long before health reform’ including higher prices demanded by health care providers, more use of health care, and healthy people dropping their coverage because of the bad economy.” How inconvenient.

Mr. Nather concludes his fact checking by citing a Hewitt Associates’ research indicates that “employers will see their premiums go up by about 8.8 percent in 2011 – and about 1 to 2 percent is because of the law.”

Maybe in 2011, but there’s a lot more to come from health care reform and the impact of the PPACA on premiums is only going to grow. Consider:

  1. The Patient Protection and Affordable Care Act imposes new taxes on insurers. Insurers, in turn, will do what companies always do: pass this additional cost of doing business onto their customers, in this case, through higher premiums.
  2. The PPACA also raises taxes on non-insurers such as makers of durable medical equipment. They will pass this cost along to their consumers and, to the extent these added costs are covered by insurance, the result will be higher premiums.
  3. Today it’s not uncommon for young people to pay 1/6th of the premium charged to older insureds. The PPACA reduces this ratio from 6-to-1 to 3-to-1. Let’s assume carriers will compress the premium spread by moving toward the average (as opposed to converging on the highest premiums). For 60 years olds the result would be a premium reduction; for 20 year olds the cost of insurance is going up.
  4. The new health care reform law requires carriers to offer “essential benefits” (yet to be defined) and offer plans with specified actuarial values. This will eliminate many lean, low-cost plans from the market, increasing the average premium of all plans offered.
  5. Many expect the PPACA’s medical loss ratio provisions to restrain future premium increases. However, as I’ve written before, because the MLR is stated as a percentage of premium dollars that must be spent on claims and health improvement, the result may be to encourage carriers to eliminate lean, low-cost plans and focus on more expensive offerings. After all, 20% of a $300 premium plan provides twice as many dollars that can go to administrative costs and profits as 20% of a $150 premium plan.
  6. Supporters also claim the exchanges will help drive down premiums. By driving a hard bargain with carriers the theory is that prices will come down. Maybe, but at least 80% of premiums are going to pay doctors, hospitals and other medical providers. Exchanges can be tough with carriers, but they’re addressing the smaller part of the premium dollar. Yes, the exchanges may wring some administrative expenses out of the system, but over time medical inflation will erase any of those savings.
  7. While there are provisions in the PPACA aimed at restraining medical costs (really, there are) most are pilot and demonstration projects or studies whose impact. Their impact, if any, will not be felt for many years.

In short: there’s a lot of factors in the PPACA which will tend to drive up premiums. There are far fewer that will tend to lower premiums. So even if the numbers take a vacation from reality, logic would lead one to conclude that the new health care reform law will drive up premiums.

At least that’s the way I add things up.

Requirement that Carriers Justify Double-Digit Rate Increases a Teachable Moment?

Reasonableness, like a host of other things, can be in the eye of the beholder. Regulating reasonableness, consequently, is nothing like a science. Yet the Patient Protection and Affordable Care Act requires health insurance carriers to disclose their reasons for “unreasonable premium increases.” The Department of Health and Human Services has issued a preliminary version of the regulation aimed at determining how and where this rate increase disclosure will take place.

The draft regulation, which is open to comment and subject to change, requires carriers to publicly disclose any individual or small group rate increases higher than 10 percent. While double-digit increases will not be automatically considered unreasonable, they will trigger a review by state or federal regulators to determine if they’re justified. States will get the first shot at scrutinizing the rate hikes. Only if HHS determines a state lacks the ability to do a thorough actuarial review of premium increases will federal regulators step in. States are eligible for federal grants to bolster their review capabilities and 45 states have taken advantage of the program to date.

Over time this 10 percent threshold could be adjusted on a state-by-state basis according to the National Underwriter. “After 2011, a state-specific threshold would be set for the disclosure of rate increases, using data that reflect each state’s cost trends.”

HHS has the authority to require disclosure of large group rate increases, but chose not to do so.. They’re asking for comments on the advisability of seeking disclosure of large group claims, but according to the National Underwriter, regulators are concerned that doing so would not align with current practices. 43 states, however, already review — and some can deny — rate increases on individual and small group medical insurance coverage. Significantly, neither the regulation nor the PPACA gives HHS the power to deny rate increases. If they determine a premium hike sought by a carrier is unjustified it will post that finding on a government website, but the increase will still be permitted (again, unless a state regulator prevents it). 

The mechanics of the rate review are described in the proposed regulation. To oversimplify, if its desired rate increase is over 10 percent or greater, the carrier will need to notify HHS and post its justification on the insurer’s web site. In evaluating the increase HHS will consider whether:

  1. “the rate increase results in a projected future loss ratio below the Federal medical loss ratio (MLR) standard
  2. “one or more of the assumptions on which the rate increase is based are not supported by substantial evidence.
  3. the choice of assumptions or combination of assumptions on which the rate increase is based is unreasonable.”

The timing of the rate increase is determined by state law, so HHS’ review cannot delay implementation of the rate change. What it will do, however, is require disclosure of a great deal of information, bringing an unprecedented amount of transparency to the rate setting process.

Transparency is one of the reasons Consumers Union praises the draft regulation. According to Kansas City InfoZine, its spokesperson, DeAnn Friedholm, cited two benefits the group expects the premium regulations to deliver: “First, it provides a strong incentive for insurers to do a thorough review of their justifications before asking for big rate increases. And second, it will help consumers better understand why their rates are going up and they can decide to look for better plans.”

Which could lead to an interesting result. As the Consumer Union notes, the regulation could “help consumers better understand why their rates are going up .…” And the scrutiny on carriers explanation for increases will be intense. Which makes the posting of the reasons behind the price hikes a powerful  “teachable moment.”

Carriers can use the disclosure to tell a detailed explanation for their actions. For example, in California, hospital rates increased by 150% between 2000 and 2009. Carriers can, and should, get creative in presenting how this medical trend drives premium increases. The question is whether carriers, their actuaries and their attorneys have the skill and willingness to take advantage of this opportunity to present the full story behind skyrocketing insurance costs. Regence Blue Cross Blue Shield provides an example of a meaningful explanation for premium hikes. They even explain the impact of deductible leverage, which is no mean feat.

Regence is providing a general explanation of how pricing works, something other carriers will need to do as well. However, when justifying specific rate increases, Regence and others should go further, naming names. A hospital increases their reimbursement rates by 10%? Name the hospital. A pharmaceutical manufacturer introduces a new drug that costs 20% more than the effective medicine it replaces? Name the drug and the manufacturer.

Carriers could – and should – get even more specific. If the hospital initially sought a 20% increase the insurer should note it’s success in reducing the increase. After all, the beneficiaries of carriers’ successful negotiations with providers are consumers. As I’ve noted previously, health insurers need to do a better job justifying their role in the system. Most health insurance executives would justify their enterprise’s contribution to the system as lowering the cost of health care. Yet with every rate increase they undermine this argument by offering the broad excuse that premiums are rising due to increases in “medical inflation.” Well, now they have the forum and the reason to be specific about what — and who — is driving that inflation.

Who knows, some day regulators may decide to ask medical providers if their charges are reasonable. Until then, there’s no reason carriers can’t ask that question – publicly and loudly. As long as transparency is coming to rate setting, the bright light of disclosure may as well shine on as many parts of the system as possible.

NAIC Submits Standardized Benefit Summary Recommendations to HHS

Before I worked for a carrier I’d often wonder if the folks who write health plan benefit descriptions go to a special school that teaches them how to write these documents in as confusing and obtuse a manner as possible. After all, each carrier writes documents in their own way sometimes using the same or similar terms to mean something different. As a General Agent, my first job in the industry back in the early 80s, I spent considerable time trying to rewrite these benefit summaries into a somewhat standardized form to help brokers and their clients make more accurate and meaningful apples-to-apples comparisons.

Even today general agents and quoting systems devote a tremendous amount of time, money and resources to molding the various descriptions published by health plans into standard benefit summaries. In fact, one of the biggest barriers of entry for new software aimed at presenting rates and benefits is not the quoting engine itself, but the data entry and especially the benefit descriptions. Given the number of medical insurers and HMOs competing in today’s health care system and that even the offerings from the same carrier can vary significantly from state-to-state, we’re talking about literally thousands of benefit plans. The effort required to wrestle this tsunami of data into a standard format has required a Herculean effort.

The Patient Protection and Affordable Care Act is about to change that. Section 1001(5) of the PPACA requires the Secretary of Health and Human Services to work with the National Association of Insurance Commissioners to develop standards for benefit summaries and coverage explanations for individual and group insurance products. Significantly, HHS and the NAIC is required to establish a working group of representatives from carriers, consumer groups and others with expertise in the area.

After over 25 meetings lasting over 120 cumulative hours with approximately 100 working group members or observers participating, the NAIC has sent to the Secretaries of HHS and the Labor Department their recommendations for both standard benefit descriptions and a glossary.  The recommendations are now available for public review and comment. The Secretary of HHS is required to finalize the standards by March 23, 2011 and carriers must provide the forms to consumers beginning March 23, 2012.

The glossary uses plain language to describe terms of art such as co-insurance, deductible, balance billing, primary care provider and the like. Some terms, such as “formulary” are missing, but the list is relatively complete and will no doubt be added to over time.

And these are terms of art. I once did a man-on-the-street interview asking random individuals what certain health insurance terms meant. One, a teacher, described “co-insurance” as referring to the situation where two people in the same household both have insurance. (Being me, I asked if the two people had to be married. He replied that was a local issue, but not in San Francisco).

For those unfamiliar with the term, the NAIC proposed glossary defines co-insurance as “Your share of the costs of a covered health care service, calculated as a percent (for example, 20%) of the allowed amount for the service. You pay co-insurance plus any deductibles you owe. For example, if the health insurance or plan’s allowed amount for an office visit is $100 and you’ve met your deductible, your co-insurance payment of 20% would be $20. The health insurance or plan pays the rest of the allowed amount.” (And. yes, “Allowed Amount” is also defined in the glossary).

The draft NAIC standardized benefit summary is also a remarkably document. (Remarkable in that most people don’t expect government committees to put forward clearly written work). One welcome feature: in addition to explaining the benefits, the NAIC benefit descriptions also includes a short “Why This Matters” statement which puts the information into a useful context.

The documents could be improved, but even as they stand, they’re much better than what is often provided by carriers and quoting systems. And by aggregating these descriptions in one place they will make it easier for entrepreneurs to find new and helpful ways to provide this kind of information to consumers.

Working at a carrier I discovered there was no school teaching brochure writers to be confusing. Lawyers and the general dynamics of “writing by committee” made such a school unnecessary. And the impact of these groups will continue to assure that each carrier presents information in a unique voice. Still the standardized formats will assure a lot more transparency and clarity across products than exists today.

The PPACA has many provisions that are counter-productive. Anything it does to bring intelligibility and understanding to plan descriptions, however, is a good thing.

Commission Exemption Not in NAIC’s MLR Rules, But Issue is Still Open

The National Association of Insurance Commissioners approved rules defining how carriers will calculate their medical loss ratios as is required by the Patient Protection and Affordable Care Act. The NAIC’s proposal will now be considered by the Department of Health and Human Services which is expected to finish its review of the regulations in a few weeks. Which is a good thing considering the PPACA requires carrier to begin meeting the medical loss ratio targets established by the health care reform law (80 percent for individual and small group plans; 85 percent on coverage for groups of 100+) beginning January 1, 2011.

In approving the MLR regulations the NAIC rejected or tabled amendments put forward by insurers and brokers. One change some insurers sought was to allow carriers to calculate their medical loss ratios based on national business (the Commissioners are requiring the calculations to be based on a state-by-state spending). Another would change the “credibility adjustment” formula used in the calculation.  Apparently this would have made it easier for smaller carriers to meet the MLR target.

The amendment put forward by brokers to exclude commissions from medical loss ratio calculations was withdrawn and the issue was referred to a working group of the NAIC’s executive committee. While some interpret this as ending the issue, that is far from clear.

The National Association of Health Underwriters along with the National Association of Insurance and Financial Planners and the Independent Insurance Agents and Brokers of America were the advocates of the broker commission amendment. I attended a conference today at which NAHU’s CEO, Janet Trautwein spoke. I’ll do my best to summarize my understanding of the situation based on her talk bolstered with reporting by National Underwriter.

Apparently there were enough votes among Commissioners to pass the broker commission amendment. However, NAIC lawyers questioned the authority of the organization to promulgate such a rule and warned that it conflicted with other proposals submitted to HHS by the NAIC. This led to a concern that including the broker commission exemption would lead to HHS rejecting the NAIC rules altogether. At the very least, HHS was likely to strike the commission exemption.

To avoid this result  a compromise was brokered between HHS staff and supportive Insurance Commissioners. A joint NAIC executive committee/HHS working group will be created to address broker compensation and the medical loss ratio provisions of the health care reform law. The MLR amendment advocated by the agent associations will be the “starting point” for the working group’s deliberations. Aware of the need to resolve this issue quickly, the NAIC committed to convening the working group immediately (which, I assume, means in in a few weeks). The goal of the commissioners supporting this approach is to work with HHS to fashion a regulatory solution that ensures equitable compensation for brokers.

Ms. Trautwein noted the possibility that the working group approach could result in a better outcome for all parties (regulators, carriers and brokers) than if the amendment had been adopted by the NAIC. This would certainly be the case if exempting commissions was deemed, as the NAIC lawyers warned, to exceed the NAIC’s authority.

NAHU and its allies have certainly built a great deal of political support among Insurance Commissioners (both Democrats and Republicans) behind the need to preserve a role for professional brokers in the new health care reform system being created as a result of passage of the PPACA. They recognize the value brokers bring to the products they sell and, as importantly, service well beyond the initial purchase. They also recognize the heavy service load underfunded and ill-prepared state agencies would need to take on if producers are removed from the health insurance marketplace.

There are some, including commentators on this blog, who believe without the commission exemption brokers will be put out of business. I disagree and will explain why in a future post. What’s significant to note now is that the treatment of broker compensation under health care reform has yet to been finally resolved. And there are individuals of good faith from both parties seeking a workable solution. That doesn’t guarantee a positive result, but it certainly creates the possibility for one.