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October 2010 St@teside

Medical Loss Ratio Regulations Recommendations Complete

One provision of the insurance reforms envisioned in the Affordable Care Act (ACA) requires that insurance companies spend at least 80 to 85 percent of premiums paid on medical costs. In other words, administrative expenses and profits are limited to 20 percent in the small group and individual market and 15 percent in the large group market. The legislation called for the National Association of Insurance Commissioners (NAIC) to develop draft medical loss ratio (MLR) requirements and submit them to the Secretary of Health and Human Services (HHS). NAIC approved their recommendations on October 21, 2010 and the Secretary indicated general support for the recommendations, saying they would be a “basis” for the final rules they will release in the coming weeks.

The MLR rules are expected to take effect in 2011. The ratios will be calculated annually at the state level.  Insurers that spend less than these ratios must refund the difference to their policyholders. The rebates to consumers are due starting in 2012.

The final regulations endorsed by the insurance commissioners were the fruit of months of meetings and debates with the insurance industry and consumer representatives.  While consumer groups were pleased with the final recommendations, insurance representatives warned of potential unintended consequences.  Critics noted that small insurers are less likely to be able to comply with the 80 percent minimum spending target, and thus, more likely to abandon the market.  Less populous states with many smaller plans in the individual market would be more severely affected.  States—such as Massachusetts—that require insurer pooling of small group and individual markets, would also be negatively affected because the small group segment shares the higher administrative costs of individual policies. Insurers were also arguing for a more expansive definition of medical costs. 

Acknowledging these concerns and the fact that insurers may have existing contracts in place with providers, contractors, and enrollees, the insurance commissioners sent a letter to HHS on October 13, asking that the Secretary be responsive to requests from state regulators for a phase-in period of the regulations for some state insurance markets.  The NAIC letter noted that, without a transition period, the new regulations could destabilize the market in some states, thereby hurting rather than benefiting consumers.

Maine, Iowa and South Carolina have already asked for waivers from the rules.  Other states are likely to follow.  Complicating matters is the fact that, according to the National Underwriter, 17 new insurance commissioners could take office as a result of the Nov. 2 elections. 

To access the regulations go to: