Catching Up on Health Care Reform

Hello. It’s been awhile. Hope you’re all well. To all who have inquired, my thanks for your concern, but all’s good. Hectic, but good. Lot’s going on (more on that later) and an awful lot of travel. I’ve had a chance to meet and talk with brokers in various parts of the country, including a few places I’ve never been before or haven’t been to for years: Boise, Omaha, Denver, Nashville. It’s been a great time to learn, recharge and stay a bit too busy to write any meaningful posts. While staying busy appears to be the new constant, I’ll try to find something worthy to share on a more regular basis. For now, however, let’s play some catch-up:

We’ll start with some (relatively) good news. One of the more popular elements of the Patient Protection and Affordable Care Act is the ability for children up to age 26 to remain on their parents’ medical insurance. The Department of Health and Human Services estimated 1.2 million young adults would take advantage of this opportunity. A story at Kaiser Health News indicates the actual number may be much higher: at least 600,000 young adults have already obtained coverage under their parents’ health plans. While most of the growth has apparently been in self-insured groups, fully insured plans are experiencing the same upsurge in membership. WellPoint, for example, reports adding 280,000 young adult dependents nationwide and the federal government added a similar number (although the article didn’t state what percentage of these were in fully-insured plans).

Of course, when it comes to health care reform every silver cloud has a gray lining. The Kaiser Health News article quotes Helen Darling, CEO of the National Business Group on Health, as noting “I don’t think anyone is eager to spend more money. This is not something employers would have done on their own.” She further cites the unfairness of asking employers to cover adult children who may be employed elsewhere. And businesses (and their employees) will pay a bit more due to this expansion of coverage to young adults – about one percent more according to estimates. And while its unclear how many of these individuals would not be able to obtain coverage elsewhere, but the general thinking is that a large majority of these young adults would be uninsured or underinsured, but for this provision of the PPACA.

Next let’s pause to note how rate regulation can be big business for consumer groups. In some states, regulators must approve health plan rate increases before they take effect. In others carriers may need to file their rate changes with regulators, but so long as the rate increases are actuarially sound they move forward. California, where rate increases tend to generate national news, is in the latter camp. The state’s Insurance Commissioner, Dave Jones would like to change that. (Actually he’d like to put health insurance companies out-of-business by implementing a single-payer system, but that’s another matter). However, he and others are pushing to change that. Assembly Bill 52, authored by Assemblymen Mike Feuer and Jared Huffman. This legislation would give the Department of Insurance (which regulates insurers in the state) and the Department of Managed Care (which regulates HMOs) to reject rate or benefit changes the agencies determine to be “excessive, inadequate, or unfairly discriminatory.”

In the findings section of the bill (which are the “whereas” clauses justifying the bill), the legislation cites rising premiums and the need for the state to “have the authority to minimize families’ loss of health insurance coverage as a result of steeply rising premiums costs” are among the problems the bill is intended to address. The solution: give politicians and bureaucrats the power to reject rate increases. No need, apparently, to address the underlying cost of medical care. The assumption seems to be that the way to reduce health care spending is to clamp down on premiums. This, of course, is like saying that the way to attack rising gas prices is to limit what gas stations can charge at the pump. One might conclude that, to be charitable, the legislation is addressing only a part of the problem.

Not only does AB 52 give medical care providers a free pass, it is likely to result in a windfall for the consumers groups supporting its passage. Politico Pulse notes that AB 52 requires insurance companies to pay for costs incurred by groups representing consumers at rate hearings. For groups like Consumer Watchdog this can represent a substantial amount of income. The Politico Pulse post reports that “Under a similar California provision for property and auto insurance, Consumer Watchdog has recouped approximately $7 million in legal fees since 2003”

Then there’s the 4th Circuit Court of Appeals hearing on two Virginia law suits seeking to have the Patient Protection and Affordable Care Act declared unconstitutional. A ruling from the three judge panel is expected in July. Much has been made of the fact that two of these three Appeals Court Judges were appointed by President Barack Obama – and the third by President Bill Clinton. While those so inclined are likely to consider this a conspiracy of cable news worthy dissection ad nauseum, it’s important not to make too big a deal about this.

First, courtrooms are not like the floor of Congress: partisan leanings have far less influence there. Second, as the Associated Press article points out, there are 14 judges on the court. Which of them hear a particular appeal is randomly determined by a computer program. There’s nothing sinister about the three judges selected for these appeals being appointed by Democrats, it’s just the way things turned out. No black helicopters are involved. Third, whatever this panel decides will be appealed by whichever side loses. The appeal could go to a hearing before all 14 Appeals Judges in the 4th Circuit or it could go straight to the Supreme Court. Finally, even if the appeals remain at the circuit level for another round, the final decision will be made by the Supreme Court. Everything going on in the lower courts (and there’s a lot of other suits out there needing to go through their appropriate Circuit Courts), is simply prelude. Yes, what the appeals court decide influences the Supreme Court Justices, but in a matter of this magnitude, far less than one might imagine. What happens at the District and Circuit levels is not unimportant, but it’s far from definitive.

While we’re playing catch-up: my previous post noted that Congress was likely to repeal the 1099 provision in the health care reform law. They did and the President Obama signed the law removing the tax reporting requirement from the PPACA. The PPACA no longer impacts 1099 reporting. I know you already knew that, but I wanted to close the loop on this issue. It’s now closed – and repealed.

Finally, a note about broker commissions and the medical loss ratio calculations required by the health care reform law. Where we last left our heroes, the National Association of Insurance Commissioners was debating whether to endorse bi-partisan legislation (HR 1206) that would remove broker compensation from the MLR formula used to determine a health plan’s spending on claims and health quality initiatives. The NAIC task force dealing with this issue wants time to review data being pulled together by the National Association of Health Underwriters, carrier filings and elsewhere.  Pulling together all this information, much of which has never been gathered before and is not maintained in a centralized data base, took a bit longer than initially anticipated. According to Politico Pulse, however,  the task force no”now believes it has all the data it will be able to get.” Which means the task force’s final report on broker commissions and the MLR calculation is now expected by May 27th.

Stay tuned.

And thanks again for staying tuned to this blog.  I look forward to continuing the dialogue with all of you.

NAIC to Study MLR Impact on Compensation and Consumers Before Voting on Changes

Brokers holding their breath to see if their compensation will be removed from the medical loss ratio formula required by the Patient Protection and Affordable Care Act will be turning a darker shade of blue. The hoped for support from the National Association of Insurance Commissioners, which was expected to result from a meeting of the NAIC’s Professional Health Insurance Advisors Task Force this past Sunday, has been delayed at least four weeks.

While there was widespread and strong support for removing independent broker compensation from the formula carriers are used to calculate their medical loss ratio under the PPACA, the Task Force opted to ask their staff to provide additional data before making a decision.

While disappointing the delay is not really surprising. A substantial of the commissioners are new, having just been elected or appointed as a result of the November 2010 election. As Jessica Waltman at the National Association of Health Underwriters put it in a message to NAHU’s leadership, “[I]t was clear as soon as we arrived in Austin that some of the new Commissioners (and there are quite a few of them) had reservations about moving that quickly since this is their first meeting…. some of the more senior Commissioners were very sympathetic to their concerns about rushing things through. The NAIC almost never endorses legislation, so this is a huge deal for them.“

In addition, the issue is controversial. Consumer groups and some liberal Democratic Senators have voiced opposition to changing the MLR formula.

The Agent-Broker Alliance leading the charge for this change to the health care reform law met with several supportive commissioners and the decision was made to delay the vote. This would allow time for information relevant to the issue, already requested of carriers, to be received and considered. This time will also be used by the Agent-Broker Alliance to gather and submit data on how independent brokers are able to save clients money and the post-sale service brokers provide their clients.

Most observers I talk with are optimistic the NAIC will eventually endorse this change in spite of hesitancy from some liberal commissioners. In this regard, Politico Pulse is reporting that “Liberal insurance commissioners got a little feisty (well, for insurance commissioners) … pushing back against the speedy, one-month time line for” considering the broker compensation exemption proposal. Politico quotes California Insurance Commissioner Dave Jones as saying “I’d hate to see haste impede us having the information in front of us to make a relevant decision.” And Washington state’s insurance commissioner Mike Kreidler as declaring “I hope what we produce as a work product we can stand behind and that we’re more interested in accuracy than speed.”

When politicians speak of the need to “study” and “consider” an issue it means 1) they sincerely want to learn more about the topic or 2) they want to defeat the proposal without having to go on the record voting against it. While I hope I’m wrong, given the opposition to the exemption from liberal consumer groups, I’m betting on the latter motivation in this case. (Time will tell as I’m inclined to believe the data will be very supportive of moving forward with the exemption). That the NAIC went ahead with just a four week delay in spite of calls from Commissioners Jones and Kreidler to slow down is a sign that while there will be debate, there’s a better than even chance the NAIC will indeed support legislation to make changes to the medical loss ratio provisions of the PPACA.

Ultimately whether broker compensation is included in medical loss ratio calculations will be determined by Congress and President Barack Obama – which means nothing is certain. While I believe taking this action furthers the intent and purpose of the health care reform bill, the proposal will not enjoy smooth and speedy sailing. The bipartisan legislation introduced by Representatives Mike Rogers and John Barrow, HR 1206, has been referred to the House Energy and Commerce Committee, but no date for a hearing has yet been set.

That the idea is still alive, however, is both remarkable and encouraging. But it’s still too early to start breathing again quite yet.

Broker Testimony Before NAIC Concerning MLR and Commissions

The National Association of Insurance Commissioners will be meeting in Austin, Texas this week to consider a number of issues related to the Patient Protection and Affordable Care Act. One topic will be how the medical loss ratio provisions of the health care reform bill impacts brokers and consumers. A coalition of broker organizations will be testifying this Sunday urging the NAIC to move forward with a proposal to exempt producer compensation from the MLR calculation.

The MLR targets (individual and small group carriers must spend 80% of premiums received on claims or health quality efforts; large group carriers must spend 85%) is a critical part of the PPACA’s scheme to “bend the cost curve” when it comes to premiums (never mind that the biggest driver of premium rates is the cost of medical care). Limiting the amount of premium dollars insurers can devote to administration and profit, supporters believe, will result in reduced insurance rates. Also, since the PPACA requires all consumers to obtain health insurance coverage the medical loss ratio rules are designed to prevent carriers from gaining an undeserved financial windfall.

Significantly, exempting broker commissions does not run contrary to either purpose. The legislation being considered by the NAIC will still limit the percentage of premiums carriers can spend on administration and profit – and to a greater degree than most state measures addressing MLR targets do today. In addition, carriers will still need to aware of the total cost of their policies – including broker compensation. From a consumer’s point of view, the total cost of coverage will be the carrier’s premium and the broker’s commission. Carriers will be unwilling to go to market with a total cost that is uncompetitive because of overly generous broker commissions. This is one, but not the only reason, broker commissions are unlikely to return to where they were before the passage of the PPACA even if broker compensation is removed from the MLR formula. That broker commissions should increase at the rate of medical inflation, as opposed to general inflation, for example, is hard to justify when medical inflation is increasing at twice the rate of increases to the Consumer Price Index. But this change will — and should — be driven by market forces, not arbitrary limits set by Congress.

The NAIC proposal is also consistent with the purpose of the PPACA’s approach to MLRs because, as I wrote last summer, exempting commissions from the medical loss ratio may actually reduce overall administrative costs in the system. Carriers today aggregate broker compensation from small groups and individuals then pass 100 percent of these dollars onto independent third parties, retaining none of it for themselves. This reduces paperwork costs for hundreds of thousands of brokers, businesses and families and is a cost-saving measure that should be encouraged by the PPACA.

Not everyone sees it this way, of course. The American Medical Association, consumer groups and some Democratic legislators have urged the NAIC to keep the medical loss ratio calculation put in place by the Department of Health and Human Services (with input from the NAIC) as is. On the other hand, a bipartisan group in the House of Representatives has introduced HR 1206 to remove broker compensation from the formula used to determine a carrier’s MLR.

The broker coalition, comprised of the National Association of Health Underwriters, the National Association of Insurance and Financial Advisors, the Council of Insurance Agents & Brokers, and the Independent Insurance Agents and Brokers of America, was asked by the NAIC to present their views at Sunday’s hearing on the NAIC medical loss ratio proposal. Significantly, they were told there was no need to talk about the value brokers add to America’s health insurance system – this value was already recognized and appreciated by the Insurance Commissioners. Instead they were asked to focus on the economic impact of the MLR provisions as currently being implemented.

In a letter to NAIC from the Agent-Broker Alliance reports on a study that shows 25 percent of brokers surveyed are reporting business income reductions for individual and small group sales of 21-to-50 percent with another 25 percent describing losses at between 11 and 20 percent. The result is that brokers are leaving these markets, reducing the availability of their expertise to consumers just when the complexity of health care reform makes this expertise more critical than ever.

Past NAHU president Beth Ashmore will be providing testimony at the Sunday NAIC hearing. As a long-time Texas broker she will be able to provide Commissioners with a glimpse into how the “theory” of the PPACA is revealing itself in practical terms.

The NAIC has no vote in Congress, but they do have significant influence, especially to the extent the NAIC vote in favor of changing the MLR calculation is bipartisan. If they support exempting broker commissions it will give considerable momentum to efforts bills such as HR 1206. The legislative process takes time so there will be no quick fix. The key is to keep initiatives moving forward down the path. The NAIC meeting is a milestone along the way.

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.

Understanding Broker Anger

Non-insurance brokers reading this blog may be wondering what the fuss is about. Yes, commissions are being reduced, especially in the individual market segment. Who didn’t see the writing on that wall? Given the Patient Protection and Affordable Care Act’s medical loss ratio provisions, a substantial cut in individual health insurance commissions was a mathematical certainty.

So why the anger, despair and sense of betrayal? Yes, fear that one won’t be able to make a living in one’s chosen profession has a tendency to make macro events very micro – and personal. This would explain the despair, but more is going on here than concern over a reduced revenue stream.

Most brokers reading this blog are far more engaged in insurance sales and service than I currently am and can express how brokers feel far better than me. (Hopefully they will – and will do so civilly). However, I’d like to offer some observations to non-broker readers to start the dialogue.

First, let’s get the obvious issue out-of-the-way. Yes, the money matters. Professional brokers add value to the products they sell and service. (The service aspect of what brokers do is too often overlooked, but it is a major part of the job). Brokers want to be fairly compensated for that value. There are bills to pay and other products to sell. Time and resources are being spent and commensurate compensation is deserved.

The commission cuts we’re seeing vary greatly from state-to-state, carrier-to-carrier and product segment-to-product segment. In the individual market (where consumers buy coverage without support of an employer) commission reductions of roughly 30-to-50 percent appear to be the norm.  Cuts of this magnitude would disrupt any enterprise. Imagine telling GM that their new $41,000 Volt must now be sold for $25,000. So much for paying back their government loans. Look at what happened in California when state revenues fell by roughly 20% from fiscal year 2007-08 to 2008-09. (For those not paying attention, the result has been a fiscal, policy and political nightmare).

Brokers recognize that during the Great Recession others have sustained even harsher financial hits. Yet when it’s your cash flow, company doesn’t reduce the misery. Yes, brokers are better off than the owner of a neighborhood business bracing for the arrival of a Wal-Mart in their neighborhood or of a worker watching her job shipped overseas. After all, when a business closes or a job ends, all compensation revenue and income ends, too.

Brokers, however, still have strong relationships with their clients. There are other products to sell and service. Some producers no doubt have already calculated that the size of cuts to commission rates in many instances do not necessarily reflect commensurate cuts in actual compensation (in some circumstances, unfortunately, they do). Between 2004 and 2009 the average premium in the individual health insurance market segment increased by 31% for single coverage and 43% for family policies according to two reports published America’s Health Insurance Plans, a trade association for carriers. Premiums have no doubt increased in 2010 and will again in 2011 – the PPACA will see to that.

Still, given commission reductions of the magnitude being reported, the response of many brokers is neither surprising nor inappropriate – and it is intense and genuine. Because there is more involved here than the money.

Professionals who have devoted their careers to serving their clients and supporting their carriers are being told by those same companies that those services will no longer be worth tomorrow what they are today (in a monetary sense). At the same time, carriers are reminding brokers that their role in educating consumers has never been more important given the new health care reform law. How could anyone in this situation feel anything but devalued personally and professionally?

Intellectually most producers knew changes to the commission structure were inevitable even in the absence of reform. Tying broker compensation to the rate of medical inflation, which brokers know has greatly outpaced general inflation for years, was becoming increasingly difficult to justify. Knowing this, however, doesn’t make commission cuts any easier to accept. This is especially true when some carriers seem to be hiding behind health care reform to lower average commissions below what the math embedded in the PPACA’s medical loss ratio provisions seems to require (roughly to 7-to-8 percent of premium). Were these carriers to fully explain why they were reducing commissions significantly below their competitors, brokers might find the situation more easy to accept. Instead, brokers are being told “Here it is, take it or leave it.” A message that does nothing to address brokers concerns, but simply inflames their anger.

Worse, some carriers have apparently chosen to apply the compensation reductions to brokers’ existing block of business. This is a tactic brokers find unacceptable (and I feel for the sales executives of these carriers who have to explain and justify an approach they vehemently opposed).

Why are brokers concerned about retroactive commission cuts? For the same reason no health plan CFO would let their company offer a policy empowering subscribers to unilaterally lower premium payments simply by declaring that “household costs must be cut.” Yet these same CFOs are asking brokers to accept such an arrangement.

That even one carrier would attempt to take this approach undermines trust in all carriers. Brokers entrusted their clients and a portion of their livelihood to these insurers. Yes, there are contracts governing these arrangements, but there’s a large element of trust involved, too. Brokers rely on insurers to provide the coverage promised in their policies, to treat their clients fairly, and to be dependable business partners. Retroactively cutting commissions on existing business defies the definition of dependable.

My guess is that when their sales drop precipitously, as they inevitably will, these carriers will reconsider this approach. Insurers have, after all, retreated from similarly bad compensation ideas in the past (more on these examples in a future post). Even then, however, the sense of betrayal brokers feel today will linger.

Complicating brokers evolving view of their carriers is that while the commission cuts are obvious, other cost cutting measures insurers are taking are less apparent. The ranks of home office executives are being reduced at many companies, for example. but unless these terminated officers worked directly with brokers, their departure goes largely unnoticed. As a result many brokers feel, (in many cases wrongly) that carriers are not accepting their a share of the pain necessitated by the PPACA.

Brokers rightfully consider the services they provide their clients – and their carriers – to be valuable and important. And they are. Clients trust their brokers far more than their carriers. Consumers listen to their agents when it comes to choosing a health plan; I’ve never heard of a consumer listening to a carrier when it comes to choosing their agent. Most carriers seem to be making the cuts that the math requires of them. Brokers who expect that 20% commissions in an age of 80% medical loss ratios can continue are being unrealistic. And attacks on all carriers for unfair or inappropriate actions taken by a few insurers are unfair. Yet doing so is all too easy – and human.

Whether as a non-broker you believe producers have been overly compensated or not, the reality is that the imposition of commission cuts understates and undermines the perceived value of the profession. Brokers may have been reassured by the resolution passed by the National Association of Insurance Commissioners expressed their concern about the negative impact the PPACA could have brokers this past summer. They may be heartened to know that state regulators was calling on the Administration to “protect the ability of licensed insurance professionals to continue to service the public.” But outcomes trump good intentions. And while the position of the NAIC may impact the role of brokers in the future, what producers are seeing now is a devaluation of their work.

I believe that’s the greatest source of anger. Yes, selling and servicing individual health insurance will be less profitable next year than this year. Producers will determine on a broker-by-broker basis whether selling and servicing individual health insurance will be profitable enough to justify continuing to do so. What works for one broker may not for another.

The income being lost today will, I predict, be replaced through an influx of new customers and increases in the cost of coverage. What will be far harder to set right is the diminished trust between brokers and carriers. Loyalties and relationships have been strained and must be reforged. Harder still, however, will be restoring brokers’ sense that the value they provide is recognized and respected. Doing so will require carriers, lawmakers and regulators to treat brokers differently than has been too often the case to date.

Whether they are inclined to do so remains to be seen. Until they do, however, broker anger will continue, even when the lost income is replaced.

MLR to Mean Greater – and More Interesting – Disclosure

Much of the debate over the Patient Protection and Affordable Care Act’s medical loss ratio provisions have focused on what expenses are to be considered claims and quality improvement spending, which are to be treated as administrative costs, and what carrier expenditures should be removed from the MLR calculation altogether. This blog alone has dozens of posts touching on the topic.

One of the primary goals of the PPACA’s medical loss ratio provisions is to lower premiums. The health care reform law requires individual and small group carriers to spend at least 80% of the premium dollars they take in on claims and improving the health of their members – and requires large group coverage to spend 85% of premium dollars on those expenses. The likelihood of this happening is, to put it politely, extremely low. Back in 2007 when California Governor Arnold Schwarzenegger proposed a similar provision, I pointed out some of the misconceptions surrounding MLR targets and cost.

But there is likely to be one revelation that will result from the PPACA’s medical loss ratio requirements. There will be greater transparency concerning how carriers spend their money – all carriers – than there has been in the past. While publicly traded insurers have been required to disclosed significant information, how it’s organized and presented is of more use to investors than policy analysts. And non-profit or private carriers have been subject to far fewer disclosure requirements. And those disclosures are subject to rules that vary from state-to-state. All of this makes comparisons across carriers and markets challenging.

All that is about to change thanks to the Patient Protection and Affordable Care Act and, specifically, the MLR provisions in the health care reform law. I realized this after reading Health Affairs excellent brief on the medical loss ratio provision published in HealthAffairs and brought to my attention by Chris Conover (publisher of the U.S. Health Policy Gateway blog. (Both HealthAffairs and the blog are featured on this site’s Health Care Reform Resources page.)

The HealthAffairs brief reminded me of a minor provision in the PPACA I’d forgotten about: although the medical loss ratio requirements only take effect on January 1, 2011, the law calls for a “dry run” to test out the system. Once the medical loss ratio regulations are final (the MLR rules were developed by the National Association of Insurance Commissioners, but must be certified by the Department of Health and Human Services) carriers will complete the various forms describing their 2010 spending. Assuming these reports are made public, they’ll enable the first true apples-to-apples comparisons among carriers. What are their current medical loss ratios? How much is being spent on quality improvement programs? What percentage of premium is passed on to brokers in the form of commissions? The list goes on.

Transparency and disclosure have been heralded as a “disinfectant” in politics. The results, as the $4 billion+ spent on the mid-term elections underscore, are questionable. Nonetheless, in most situations, most of the time, disclosure does tend to help keep people and corporations on, well, if not the straight-and-narrow, then the straighter-and-narrower.

I can’t predict what we’ll learn from the disclosure resulting from the implementation of the PPACA’s medical loss ratio requirements. But I’m willing to bet it will be interesting.

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.

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.

Governor Schwarzenegger Signs California Health Benefit Exchange Legislation

California became the first state to enact legislation creating an exchange under the Patient Protection and Affordable Care Act on September 30th when Governor Arnold Schwarzenegger signed into law AB 1602 (authored by Assembly Speaker John Perez) and SB 900 (by Senator Elaine Alquist). The two bills create the California Health benefit Exchange. In signing the bills Governor Schwarzenegger stated “Choice and competition have the power to improve health care quality and reduce health care costs for California consumers. With the California Health Benefit Exchange, we will be able to create a competitive marketplace where consumers can choose among qualified health plans – all without relying on the state’s General Fund.”

The five-person Board created by the legislation are tasked with creating an exchange to present health plan options to individuals and small businesses beginning January 1, 2014. Concurrent with Governor Schwarzenegger’s signing of the bills, the Obama Administration announced a $1 million grant to the state “to fund the costs of preliminary planning efforts related to the development of the Exchange.” Further federal funds are expected to become available to the California Health Benefit Exchange in 2011. After 2014 the Exchange is designed to be supported entirely from fees paid by health plans and insurers, meaning no general revenues will be allocated to the entity.

Some carriers supported the legislation; others urged the Governor to veto it. The concern of many opponents was the power given to the Exchange’s Board to exclude accept or exclude carriers from the Exchange. The fear, which is demonstrated on a weekly basis by local, state and federal agencies every day, is that the Board will use the carrot of being included in the Exchange as a lever to dictate what insurers do (and what plans they offer) outside the Exchange. Giving this power to an independent Board (one that is exempt from significant oversight by the legislative or executive branches of government) is seen as a threat to the private marketplace.

Supporters argue that this power is essential if the Exchange to going to fulfill the desired (and desirable) goal of negotiating lower health insurance premiums for consumers and businesses buying through the Exchange.

Brokers have had another concern about AB 1602 and SB 900. The federal health care reform envision exchanges that include “navigators” to help consumers and business owners explore their health insurance options. However, the PPACA leaves it to states to define the actual specifics of the navigator role. Will they simply be a “help desk” answering questions about how to use the exchanges or will they be actively engaged in providing advice and guidance on which plan a consumer or business should select? The California laws leaves these details to the Exchange Board. What’s of concern, however, is that language that would have required the California Exchange’s navigators to be licensed was removed from the now-signed legislation shortly before it was passed by the Legislature.

And there’s a sentence in Governor Schwarzenegger’s press release touting his signing of AB 1602 and SB 900 that is at both once reassuring and of great concern. “The Exchange will work in partnership with agents and brokers, community organizations and other “navigators” to help consumers make informed decisions based on the price, quality and value.” While it’s reassuring the Schwarzenegger Administration recognizes that agents and brokers need to be involved with the Exchange, it’s of concern that they consider licensed professionals to be on an equal footing with unlicensed community organizations and others.

What will be important for the California Association of Health Underwriters, the leading organization representing independent producers, and other agent groups to work through with the Legislature and the Exchange Board is that there is a difference between licensed, regulated brokers and others. Each can play a role. When it comes to publicizing the Exchange and providing general advice about how to use it, non-licensed individuals and entities can play an important and valuable role. Helping consumers select the health plan that best suits their unique needs and then providing ongoing service to purchasers once they’ve obtained coverage, however, is best performed by licensed and regulated professionals.

The statement in the Governor’s press release is consistent with this division of labor, but only because it lacks details. Follow-up legislation and explicit regulations will be needed to assure consumers have access to qualified professionals. The National Association of Insurance Commissioners sees a continued role for brokers as an essential consumer protection. In a resolution adopted during their August 2010 meeting, the NAIC noted that “employers and consumers will need professional guidance even more in the future” as a result of health care reform. 

While Governor Schwarzenegger’s signing of AB 1602 and SB 900 directly impacts only Californians, other states are likely to study these bills as they contemplate the design of their own exchanges – another reason why legislation to clarify brokers’ role in the state’s Exchange should be introduced and enacted quickly in the next legislative session. So this California development could have repercussions across the country.

In some of the comments posted on this blog, some have suggested that Democratic states are likely to create anti-broker exchanges while more Republican states will create broker-friendly ones. This view, however, ignores the facts that Republican’s health care reform proposals are as those of Democrats to increase health care costs while undermining brokers’ role in the system. Consider Republican support for mandating carriers to offer health insurance coverage to all applicants (“guarantee issue”) and their opposition to requiring all consumers to purchase coverage (an “individual mandate”)  No surer recipe for skyrocketing health insurance costs exists than imposing guarantee issue without an individual mandate. Assuming lawmakers will do the right thing just because of the political party they are in is naive. What’s required is a strong political and educational push by people who understand the current system, who sees its flaws, and have practical and meaningful ideas on how to fix it. Put another way, brokers must stay involved and engaged regardless of which political party holds the majority of seats in their state’s legislatures.

Fortunately, there’s still time (even in California) to make a difference. As noted, CAHU is already working on needed changes to AB 1602 and SB 900. Meanwhile, the National Association of Health Underwriters is deeply involved in working with state legislatures and insurance commissioners to help them develop exchanges that implement the letter and spirit of the Patient Protection and Affordable Care Act while preserving consumers’ access to qualified, professional producers.

In any change of the consequence and complexity presented by health care reform there will be advances and setbacks. The nice thing about politics and legislation is there’s always another election and another legislative session coming up. The key is to avoid giving in to despair with each setback, but rather to persevere until one achieves the next advance.

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.