New Regulation Threatens Agents, HSA Plans
HHS recently issued its final standards on how to rebate money from insurance carriers that fail to reach the Medical Loss Ratio (MLR) standards for 2011. This has sparked a new flurry of attention to the MLR issue, which requires insurers to spend no more that 20% of premium on administration in the small group and individual markets and 15% in the large-employer market.
Importantly, HHS decided not to exempt broker and agent commissions from being included in the administrative cost side of the equation despite a new National Association of Insurance Commissioners (NAIC) resolution urging it to do otherwise.
The Kaiser Family Foundation has taken a look at how this decision will impact various states. It finds that, while commissions average about 6% of premium in the individual market and 5% for the small group market, it varies widely from state to state. KFF writes:
Interestingly, the amount insurers spend on brokers compensation varies quite a bit from state to state. In the individual market, commissions range from less than 1% of premiums on average in Hawaii and Vermont to nearly 10% of premiums in South Carolina and Delaware. In the small group market, broker compensation accounts for less than 1% of premiums in Alabama and North Dakota, compared to about 7% of premiums in Utah and California.
The difference is due to a number of factors, but the biggest one is probably competition. If a single company has a near monopoly it is not necessary to spend much on marketing and sales.
This suggests a fairly obvious consequence of the MLR regulation. If monopoly leads to lower administrative expenses, and hence higher MLRs, due to low marketing costs, the opposite is likely to happen as well — a requirement for higher MLRs will lead to monopoly.
Dan Perrin, of the HSA Coalition, notes another consequence — instead of lowering the cost of coverage, the MLR will raise it. He argues that lower-cost “bronze plans” and HSAs will be banished from exchanges because both achieve their lower premiums by having higher out-of-pocket responsibilities. The out-of-pocket spending is not counted in the MLR calculation. He writes:
To repeat, just so everyone is clear: If an insurer pays for a health care service for their insured, the MLR rule counts that in their MLR rule. But if an individual pays for a health care service to meet their deductible, the MLR rule does not count that expenditure.
Let’s give an illustration:
- I buy an insurance policy with no deductible that costs $5,000.
- I have $4,000 in medical expenses.
- That is 80% of my premium, so the health plans is in compliance.
However:
- If I buy a policy with $1,000 deductible for $4,000 in premium,
- And still have $4,000 in medical expenses.
- I pay the first $1,000 directly to meet my deductible.
- The health plan pays the remaining $3,000
- That is only 75% of my $4,000 premium, so the plan is not in compliance.
Exact same total cost of coverage. Exact same medical expense. But one design complies and the other does not.
So, the consequences of the MLR regulation are:
- More monopoly, and
- Higher costs
And maybe that is why MLR regulations have never actually worked in the states that have adopted them over the years.
But, like everything else in ObamaCare, the law was enacted heedless of any evidence or logic and solely for political reasons.
This is a very disturbing post.
As usual, Greg, you are right on! Fundamental Stupidity reigns in ObamaCare…it always has and always will..because it is not about fixing problems……only “controlling” behavior! Everything in it is like advocating walking on the ceiling as an acceptable mode of ambulation. I cannot abide with anything or anyone discussing ObamaCare as if it deserves to be dignified. I realize the tone is to find ways to survive EVEN under ObamaCare regs but another option is defiance. Leaders cannot lead without followers to follow. Short of mass defiance, we can only hope the conservative justices on the Supreme Court do not try to exceed their purview and stick to interpreting the US Constitution when dealing with the “everyone vs HHS next spring. I think that subject would be worth a posting alone!
I’m afraid this analysis is correct. The Medical Loss Ratio (MLR) regulations favor comprehensive plans where a major part of the premiums reflect pre-paid medical care.
This is bad of course, but it is hard to imagine that the regulation will not be amended very soon to exempt HSAs. This does not impact the larger self funded HSA groups, only the smaller fully insured plans. That does not play very well politically given the millions of people with HSAs. I don’t think King O wants to give his opponents a club to beat him with in the campaign.
As much as it disgusts me to do anything to acknowledge Obamacare by arguing about individual provisions (anything short of repeal is not acceptable), this particular provision needs to be fixed right now.
I’m afraid not, Frank. This was not an inadvertent mistake. The authors knew what they were doing.
Hopefully, “King O” does let this slip through and he IS beaten with it. Hopefully, whoever the Republican candidate is and the RNC are smart enough to use that club!
If you are right Greg I guess correcting all this will be left up to the repeal of the whole thing. It is just hard to imagine that millions of policies have to be altered to accommodate something that is temporary. I know, I know, nothing is certain, but between the SCOTUS and the election I have high hopes.
Frank…………kind of like Germany in the 1930s isn’t it? Talk radio in Chicago suggests that if the Supreme Court doesn’t bounce this Obamanation of a health reform plan out, then the Republican presidential candidate will get more enthusiastic support in November 2012. My hope is that the Justices will not say, as was said recently, “Oh, yes, it (individual mandate) is unconstitutional but the situation with health care is so bad, we need something. No, Your Honors, we don’t need ObamaCare!
Interesting take Harv. You are suggesting there may be a diabolical scheme to “encourage” the SCOTUS decision on the mandate only and take some heat off O in the campaign. We win a battle and lose the war. I don’t even want to think about it.
No, I’m not suggesting that but, the way things go, I guess it wouldn’t surprise me if, years later, something like that was uncovered.
Greg – This is a bit late to the party, but I have just seen this post and comments. While I appreciate the spirit in which this is written, the illustration is not actuarially sound in its generalization. For you and your exemplary claim, and plugged premium for the $1,000 deductible, you have the resulting block of one policy showing a medical loss ratio that violates the MLR. However, it is not that simple, and I know you know this. The expectation is that the $1,000 deductible premium will be such that it takes the AVERAGE claim in excess of $1,000, and divides that by .80, to arrive at the actual gross premium, which may or may not be your plug of $4,000. Or not – but that doesn’t necessarily matter either. The point is that this policy as a block will be dumped into the overall block for a given carrier group for a given state for a given class of business (individual, small group, or large group), and the company will manage THAT loss ratio to achieve MLR requirement, or pay a rebate (or lose money). By “choosing” your $1,000 deductible premium to somewhat conveniently be $4,000, you have forced the result. In actuality, if $4,000 in claims was the actual actuarial average for claims from the ground up for your class of risk, I am certain the discount for the deductible would be more than 20%, and perhaps the resulting loss ratio would, in actuality, turn out to be 80% instead of 75%.
All this having been said, I do agree with a lot of the thinking put forward overall in the comments, and wonder what will really happen in the dark recesses where SCOTUS will do their dirty dealing.
HD,
It is only an illustration, don’t get your knickers in a knot over it. But the point remains — OOP spending that is outside the insurance contract doesn’t count for the MLR calculation. But if the exact same money is processed through the insurance mechanism than it would count. The law discourages direct payment of services in favor of third-party payment.
This is madness because we can get more HC services for every dollar spent with direct payment than we can with insurance payment. The reason is obvious — the administrative load on both the insurance dollar and on the provider. If I pay $100 in premium, the MLR standard means I get only $80 in services. But it doesn’t stop there because the payer adds admin costs to the provider as well. Assume that is also 20%. I am therefore getting only $64 of services for every $100 of premium. Not a very good deal.
Thank you Greg. I have been wondering where the outrage is over this ruling. I have read nothing from HSA providers or health agents that are going to be effected by this move.
TIM
THE PROBLEM IS THAT MOST AGENTS AND PROBABALY MOST INSURERS DON’T KNOW ABOUT OR UNDERSTAND THIS. I WOULD SUGGEST THAT AGENTS AND INSURERS (IF THE INSURERS HAVE THE INTESTINAL FORTITUDE) WOULD NOTIFY THEIR HSA CLIENTS WHO ARE HAPPY WITH THE PLAN TO MAKE “A PUBLIC STINK” ABOUT THIS……..AND A BIG ONE! THOSE ARE MILLIONS OF VOTERS WHO, IF THEY CAN GET THE CONNECTION BETWEEN THE CANDIDATES AND THE HEALTH REFORM PLAN, COULD CHANGE THEIR VOTE NEXT FALL. I WISH THAT IT IS JUST IGNORANCE BY THE POWERS THAT BE THAT WOULD ALLOW HSAs……THE MOST IMPORTANT INNOVATION IN CONTROLLING HEALTH CARE AND INSURANCE COSTS……….TO BE VICTIMIZED BY THIS RULING. BUT MY BRAIN TELLS ME IT IS DELIBERATE AND THAT IS A TRAVESTY THAT THE AMERICAN PEOPLE, NOT JUST THE AGENTS, BE UP IN ARMS ABOUT! IN FACT, I THINK I WILL SEND A BLAST OUT TO OUR NAABC MEMBERS TO NOTIFY THEIR CDHP CLIENTS AND HAVE THEM ACT ACCORDINGLY.