California Hospital Charges Increase 150% in 10 Years

The Patient Protection and Affordable Care Act does a great deal to address insurance industry practices. The new health care reform law, however, has been rightly criticized as failing to directly and forcefully attack rising medical costs, the primary driver of insurance premiums. Yes, the new law establishes.

The PPACA has a number of pilot projects, demonstration programs, and studies buried in its provisions that could, in time, lower overall cost spending. And supporters of the bill will argue that the Medical Loss Ratio provision is aimed at keeping down the cost of coverage. (Ironically, the MLR limits may have the unintended consequence of raising insurance costs. Administrative costs are usually fixed and independent of the premium paid. The cost to have a claims representative process a claim is the same whether the coverage cost $1,000 or $3,000 per year. But the $1,000 policy makes only $200 available for administrative expenses under the medical loss ratio calculation; the $3,000 plan makes $600 available. In other words, because the MLR rules apply percentages, carriers have an incentive to eliminate low-cost plans).

Carriers need to educate lawmakers and the public about the elements that go into a premium rate. Yes, profit and overhead are a part of the cost. But the biggest driver of health insurance premiums is the underlying cost of medical care. And the carrier community may have begun this educational process.

America’s Health Insurance Plans, the industry trade association, released a study showing that, in California, hospital charges increased 150 percent between 2000 and 2009. The Sacramento Bee, quotes AHIP spokesperson Robert Zirkelbach as observing “What this data shows is that there needs to be much greater focus on the underlying cost of medical care that is driving those premium increases. At some point, people will have to address these underlying cost drivers if health care costs are going to come down.” In other words, you’ve taken your shot at the insurers, now, if you’re serious about reducing costs, let’s look at the hospitals.

Interestingly the AHIP report acknowledges that hospitals and other providers of medical care need to make up for underpayments by government health programs. In California, between 2000 and 2009, hospitals charges to health plans rose by 159 percent. This is more than twice the rate of increase for Medicare and eight times the increase hospitals received for Medi-Cal – the state’s version of Medicaid.

Needless to say the hospitals didn’t appreciate AHIP pointing this out. “It’s really tough for a pot to call a kettle black,” the Sacramento Bee reports Scott Seamons, the regional vice president for the Hospital Council of Northern and Central California. I don’t know if Mr. Seamons intended to acknowledge that hospitals are at least as much at fault for rising insurance premiums as carriers, but if the insurance companies are the pot and the hospitals the kettle, that is what he’s saying. If so, that would be a refreshing dose of frankness to the dialogue. Meanwhile, consumer groups, not unexpectedly, accused the AHIP of trying to shift the blame for rising premiums. Apparently they can’t accept that anything other than insurer greed and profiteering drives insurance premiums. Any correlation with hospital charges or medical inflation are merely accidental.

All of this rhetoric and accusing is standard issue among advocacy groups and trade associations. And if all that comes out of the report are fingers among these usual suspects pointing at the usual places, then this report will have done little good. If, however, the study represents the beginning of a concerted effort to bring to the public’s attention what drives their insurance premiums; if it leads lawmakers to ask “why” hospitals needed a 159 percent rate increase over 10 years; if it gets people thinking about the monopoly position some hospital chains enjoy – and employ – in parts of the state, that’s something altogether different. Because if these possibilities become reality, the AHIP report may be seen as an important start to what will be a long, but critical, educational effort.

Why Brokers Will Survive Health Care Reform’s MLR Provisions

Yesterday I wrote about the National Association of Insurance Commissioner’s decision not to exclude broker commissions from the calculations carriers will use to determine their medical loss ratio as required by the Patient Protection and Affordable Care Act. Some brokers have indicated, on this blog and elsewhere, that this result spells certain doom for brokers.

I respectfully disagree. And I had started to draft a post explaining why. The post was going to revisit an explanation I offered once of the math that will drive broker calculations. Then I was going to note that many carriers offering small group and individual coverage were already fairly close to meeting the PPACA’s medical loss ratio requirement. And finally I was going to highlight the expenses currently treated as “administrative” by carriers that will now be either excluded from the calculations (e.e., many taxes) or that will now be reclassified to the “claims” side of the calculation (e.g., quality improvement and disease management programs).

But then I read a comment to yesterday’s post submitted by Ann H. setting out her perspective on the impact of the NAIC’s decision on brokers. Knowing that not everyone visiting this blog reads the comments I wanted to give her statement the prominence it deserves. That this spares you from wading through my math calculations is an added benefit.

So here’s Ann’s comment. Other than correcting a spelling error or two, it’s presented as she wrote it.

I didn’t know about these facts, Alan, and thank-you for telling us. But even before I read this, I can tell you that I wasn’t overwhelmingly disappointed that broker commissions were not removed from the MLR.

I guess there are 2 reasons. First, I expected it, so I’ve already crossed the bridge of disappointment and even fear. On 3/23/2010 when President Obama signed the law, I realized that my commission would be squeezed, and my business would suffer in other ways including a reduction in the number of carriers, frustration of my clients, higher premiums that puts further pressure on my book of business and so forth. I guess I’ve already dealt with this emotionally and logically.

The second reason today’s news about broker commissions didn’t affect me much is because there are other factors involved. One of my carrier reps said this to me several months ago — he said, “Half of the commission rate on double the premium is still the same amount of income.” He also said, “half the commission rate on twice the clientele with half the work due to guaranteed issue is still the same income.” And he also told me that the insurance company he works for was planning to keep premiums and expenses at much the same rate as they had done before anyway. He said that once 2011 is over and the accounting is done, if they find that they must make rebates to customers, then they will rebate. But they aren’t going to freak out now.

I think, “don’t freak out yet” is a good idea. Another of my carriers told me that they aren’t going to make major changes in business practices until the election is over, and they’ve analyzed the result. And even then, they expect more modifications to the rules on the national and state level. They don’t want to make drastic changes now that affect their position in the market, their position with brokers, and their public relations. They said 90% of their business is driven by brokers, and they can’t afford to replace the workload brokers provide for that 90%. They would actually survive better by paying a rebate than by manning and maintaining workers to replace brokers, then watching their backside for loss of sales due to the deletion of sales brokers.

Cutting broker’s commissions is a balance walk. If one carrier cuts deeper than others, sales may severely diminish for that carrier. Carriers can’t afford to lose fresh input of new customers and be left with an aging risk pool!! I’m not saying broker commissions won’t suffer. They will. But to what extent they suffer is an important issue. And how long the commissions will be at the floor before economic realities make them rise is another issue. I remember when group commissions were cut from 10% level to the 4-6% they are now. It came at the same time as the HIPAA laws with Portability and Guaranteed Issue for groups. Premiums spiked, commission percentages decreased, but after the initial drastic dip it all equalized to be the same amount of income.

There are other balance walks insurers must make. If brokers go out of business, who will service the client? Some NAIC commissioners said they expect their consumer complaint departments to have triple the amount of work if brokers aren’t fielding questions and finding resolutions. That’s what the States think. How about insurers? What strain will there be on insurance company customer service departments if brokers leave the business? How will insurers pay for the administrative expense of those customer service departments when they must meet 80% MLR? Isn’t a larger customer service department just as expensive as broker commissions, and don’t they both affect the MLR? Another thing to think about is quality of service. If an insurer cannot compete based on underwriting, or creative benefit structures, or even premium outside a specified range controlled by the government, then competition on the basis of quality of service is paramount. The amount of money an insurer has to spend on it’s administration and customer service departments is squeezed by the MLR. Will our insurers’ service departments be manned in India or the Philippines? The need for brokers is actually larger now than ever. Maintaining Service Departments is a fixed expense of wages, benefits, office space, overhead and taxes. If insurers were able to replace us with in-house service departments they would have done it a long time ago, trust me. We are less expensive.

Granted, not every broker can survive the dip that will come until things equalize again. The dip may be drastic, especially in some markets. But if you can see past the temporary into the inevitable, you can see light. Some of the things in the PPACA are just not functionally possible. It’s inevitable that the functionally impossible will fail and a solution will rise.

My thanks to Ann H. for sharing her perspective and insight on this issue with readers of this blog.

Commissions: In or Out of MLR Calculation?

The National Association of Insurance Commissioners is meeting with the intent of finalizing rules surrounding the medical loss ration requirements contained in the Patient Protection and Affordable Care Act. The impact of their decision will be profound on consumers, employers, carriers and brokers. A final vote is scheduled for tomorrow (October 21st) by the full membership on the rules – and on amendments to those rules – which have been worked on for hundreds of hours by NAIC committees. Whatever emerges from the NAIC plenary session will be forwarded on to the Department of Health and Human Services. The Department may make amendments to the NAIC proposal, but The Hill has reported that HHS is reluctant to “override” the commissioners on NAIC medical loss ratio rules.

What this means is that a lot of issues surrounding the MLR provisions of the new health care reform law – provisions which take effect on January 1, 2011 – will come into clearer focus tomorrow. Again, HHS may still modify these rules, so these won’t be the final rules. And states are given some flexibility in applying the medical loss ratio regulations on carriers doing business within their boundaries, but there will be far greater clarity tomorrow than there is today.

Some of the issues being hashed out are esoteric (not to actuaries, but to the rest of us). But one issue that is of great concern to brokers is how commissions will be used in calculating a carrier’s MLR. As noted previously in this blog, the National Association of Health Underwriters and other agent organizations have been working hard to have broker commissions be removed from the medical loss ratio formula. The logic behind this is that carriers collect broker commissions as an administrative convenience to producers and their clients, passing 100% of these dollars along to independent third-parties. The carriers receive no benefit from this process, but the cost to brokers and policy holders, in the aggregate, is greatly reduced, lowering overall administrative costs.

Exempting this pass-through of commissions from the medical loss ratio calculations is not currently a part of the NAIC MLR regulations. However, I’ve been told that at least 10 Insurance Commissioners are co-sponsoring an amendment to create this pass-through exemption in the rules sent to Health and Human Services. And supporters believe they are closing in on the majority of the Commissioners needed to adopt this amendment.

Politico is reporting on the upcoming commission amendment, too. They note that “This could be a tough one for many commissioners who say that if agents/brokers go out of business – because their commissions would decrease – they’re going to get flooded with consumer inquiries and requests for help.”

Inclusion of the pass-through provision in the NAIC’s medical loss ratio rules would certainly decrease the pressure on carriers to dramatically reduce commissions. However, pressure on commissions will still continue. Tying broker commissions to a percentage of premium – premiums that increase based on medical cost inflation, not general inflation – is still likely to fall as carriers’ commission systems are refined to accommodate different calculations. And broker commissions will need to be disclosed to employers and consumers (carriers will need to separate broker fees from premium). In some states this is likely to result in downward pressure on commissions. And the guarantee issue provisions taking effect in 2014 will also tend to lead to lower commissions. On the positive side, the Insurance Commissioners’ recognition that brokers play an important role after the sale in counseling and advocating for their clients will tend to assure that brokers are compensated fairly.

Of course, all of this is moot unless the NAIC approves the amendment, HHS concurs with this provision and states don’t enact laws or regulations that run counter to it. We’re about to get some clarity. Certainty, however, is still to come.

MLR Rules Still in Play

The Patient Protection and Affordable Care Act requires carriers to spend a specified proportion of the premium dollars they take in on medical care and health quality efforts. That’s the law. As I’ve noted previously, legislation creates a framework. It’s the regulations and day-to-day interpretations of the law that determines its impact. There are lots of opportunity for regulators to soften the edges of the law or sharpen them up.

  • How should the law be applied to small or new carriers who may be subject to extreme fluctuations in their spending ratios that are beyond their control?
  • How should nurses hotlines be treated?
  • Should health quality efforts be considered non-administrative expenses only if they actually improve quality? And if so, what will that do to innovation?
  • How should commissions and other fees received by carriers but passed-through entirely to independent third-parties be treated?
  • At what level should carriers be required to meet the medical loss ratio requirements (i.e., state level? nationally?)

And the list goes on.

The National Association of Insurance Commissioners, working with the Department of Health and Human Services is tasked with resolving these issues. The NAIC provided some meaningful clarity last week when it published draft rules for how carriers were to calculate their medical loss ratios. But there are still many issues that are  far from being settled. The Hill reported that Brian Webb of the NAIC outlined a host of MLR-related regulations the Commissioners are still considering during a presentation he made to the Congressional health Care Caucus.

What’s significant about what Mr. Webb had to say is not just the long list of rules being modified at this late date (the MLR requirements take effect January 1, 2011, so settling on how this provision is to be interpreted is of urgent concern), but his description of how the process of resolving these issues will play out. He indicated that an NAIC panel is expected to adopt the draft regulations on Monday, October 4th. That will no doubt be widely reported. But what will be important for those concerned about the nitty-gritty of the MLR rules to remember is his prediction that the regulations are likely to change before the full NAIC adopts the them in mid-October.

And this vote by the NAIC is unlikely to be the last word. HHS Secretary Kathleen Sebelius has to “certify” the regulations, which gives the Obama Administration an opportunity to tweak elements. Then each state has to adopt its own regulations. And while the NAIC proposal will carry great weight, states will have flexibility to adjust elements of the MLR calculation to suit their own health insurance market — and political — environments.

The Hill also reports that the NAIC will urge Secretary Sebelius to allow, on a state-by-state basis, a transition period phasing in the medical loss ratio targets as it applies to plans sold to individuals and families (non-group plans). Such an exemption would not be automatic and states would need to demonstrate that applying the  80 percent MLR on individual plans in their jurisdiction, as is required by the PPACA, would “destabilize the state’s individual market.” According to Mr. Webb, a similar transition mechanism could be established for the small group market as well.

This ongoing uncertainty will have serious consequences. Carriers will make decisions based on the best guess each makes on where the regulations will wind up (and that best guess will no doubt assume the worst possible outcome). As the regulations get clarified the carriers may seek to adjust some of those decisions creating a ripple effect of change.  All of which means consumers, employer and the brokers who serve them are going to be kept busy adjusting to an evolving marketplace well beyond the effective date of the new health care reform’s medical loss ratio provisions.

NAIC Provides Some Clarity on Health Care Reform Law’s Medical Loss Ratio Requirements

Under the Patient Protection and Affordable Care Act, the National Association of Insurance Commissioners plays a pivotal role in determining how the legislation’s medical loss ratio requirements will be interpreted. The NAIC recently published a draft regulation and is seeing public comment before submitting their proposal to the Department of Health and Human Services. Overall the Insurance Commissioners’ approach to the medical loss ration rules provides carriers with some welcome flexibility.

The NAIC’s process began weeks ago. In August the Insurance Commissioners approved a form which will capture the data used to calculate a health carriers’ medical loss ratio (often referred to as the “blank form.”) Now the Commissioners have put forward how they think that data should be used to calculate a health plan’s medical loss ration.

The NAIC is proposing to take virtually all federal and state taxes from the calculation (the exception are taxes paid on investments and capital gains). This runs contrary to the wishes of the Democratic chairs of the Congressional committees through which the PPACA passed who wanted the tax exemption to be limited. As noted in a previous post, these legislative leaders may want health care reform interpreted in a given fashion, but they lack the authority to define legislative intent – that power is in the hands of regulators. And the regulators are saying the letter of the law is clear in this regard. The NAIC’s interpretation will provide carriers with a bit more room to manage their administrative costs than would the stated intent of the committee chairs. As Politico has reported, both sides agree carriers should be able to deduct taxes “that relate specifically to revenue derived from the provision of health insurance coverage.” The NAIC approach, however, allows insurers to remove payroll and income taxes from the MLR calculation – for most carriers these are substantial sums.

Another bit of flexibility: spending that Improving Health Care Quality Expenses” (which simply means spending that, because it is aimed at improving the health of members is considered to be medically related, not administrative costs) must be:

  • designed to improve health care quality and increase the likelihood of desired health outcomes
  • in ways that can be objectively measured
  • produce verifiable results and achievements
  • are directed toward individual enrollees or for the benefit of specified segments of enrollees (as opposed to general cost containment efforts)

This means costs related to nurse-lines, disease management, member health education, preventive and wellness efforts will be allocated to the “medical” side of the MLR calculation. Reuter’s quotes Ipsita Smolinski, a health care analyst at Capitol Street as describing this definition of carriers’ quality improvement spending as “a fairly generous definition.”

On the “wait and see” side of things, several Insurance Commissioners have been pushing the Obama Administration to phase in the medical loss ratio rules to enable carriers, consumers and state regulators to adapt to the new law (as opposed to being thrown into the deep end of this particular reg’s pool). Carriers are locked in to long term expenses (most especially, in many cases, vested broker commissions) that they contractually cannot reduce. Phasing in the MLR requirement would allow for a more orderly transition. The PPACA allows the Secretary of Health and Human Services to waive the health care reform law’s MLR requirements on a state-by-state basis. However, this could be a very awkward and time-consuming approach. Kansas Insurance Commissioner Sandy Praeger is asking the HHS to provide the states with blanket flexibility.

There’s other provisions of the proposed regulation that will take additional study (and, hopefully, clarification in the final version). For example, some are interpreting. For example, the definition of “earned premium” is defined as “the sum of all moneys paid by a policyholder as a condition of receiving coverage from a health insurer.” The examples given concern reinsurance and unearned premium reserves. But what about arrangements like California Choice in which several carriers charge the administrator a stripped-down premium and that administrator then adds fees for distribution, billing, and additional services like Section 125 administration. If employers purchasing through this kind of arrangement are obliged to pay the additional fees do they apply against the carriers’ medical loss ratio?

The regulations require rebates to be calculated at the “licensed entity level with a state.” In California, carriers often offer plans under a license with the Department of Insurance or the Department of Managed Health Care. The wording of the regulation seems to require carriers to calculate their DOI individual plans (for example) separately from their DMHC-regulated products. And while I read this as allowing carriers to calculate their MLR against all their benefit plans in a particular market segment, I understand some are interpreting this as requiring carriers to meet the MLR threshold with each of their various benefit plans. The latter would require a level of pricing precision that is beyond most human actuaries. Further clarification on these elements would be welcome.

The good news is that there will be additional clarification. It also means that carriers may have some additional breathing room than they’ve been assuming. However, the window for modifying their business plans (and, consequently, their commission schedules) is closing rapidly. The medical loss ratio requirement takes effect on January 11, 2011. Carriers will need to announce their new commission schedules in November to notify their brokers concerning what they’ll be paid on this business. And the NAIC’s final regulations won’t be submitted to HHS until October 21, 2010. And while The Hill reports President Barack Obama’s Administration doesn’t want to publicly override the commissioner’s MLR proposal, it will still take time for HHS to review the rules. That doesn’t leave a lot of time to resolve all the uncertainty out there (another reason to phase in the MLR requirement).

But at least the NAIC is providing some clarity on the MLR calculations. And at this point, any clarification is helpful.

Mandated Medical Loss Ratios’ Unintended Consequence

The health care reform package currently being negotiated in the Senate contemplates requiring health insurance companies to spend at least 90 percent of premiums on medical claims. But the Congressional Budget Office is warning lawmakers mandating such a high Medical Loss Ratio would be overreaching – unless their goal is to takeover those health insurance carriers. Which, as Megan McArdle notes on The Atlantic’s site, means the 90 percent mandated medical loss ratio would turn “the operations of the nation’s health insurers [into a part of] the financial statements of the United States government.”

Lawmakers could ignore the CBO memo, but are unlikely to do so. The credibility of the CBO is simply too high. This means the chances of a 90 percent medical loss ratio (“MLR”) requirement making it into the final health care reform bill has dropped from “well, maybe” to “not a chance” – or lower.

The CBO memorandum reasons that requiring carriers to meet a 90 percent medical loss ratio could drive carriers out of business, reduce plan offerings and take other actions limiting choice in the marketplace. The key to determining the impact of MLR requirements is to look at the percentage of health insurance carriers impacted by the requirement. “A policy that affected a majority of issuers would be likely to substantially reduce flexibility in terms of the types, prices and number of private sellers of health insurance,” the CBO memo states.

The CBO won’t say precisely when a required medical loss ratio crosses the line and becomes a government takeover of the industry. But it did give a hint, saying an MLR requirement “at 80 percent or lower for the individual and small-group markets or at 85 percent or lower for the large-group market would not cause CBO to consider transactions in those markets as part of the federal budget.”

Moving health insurance transactions isn’t what proponents of a mandated MLR had in mind when the put forward the idea. But unintended consequences are, well, just that: unintended. There are a lot of reasons why mandating medical loss ratios is bad public policy. The CBO has added another to the long list, a reason that even it’s most ardent advocates are unlikely to be able to overcome.