The Battle Over the Biggest Consumer Protection in Health Reform

Health insurance reform is being implemented now, and it's no surprise that there’s a big battle going on pitting consumers against insurers.  The surprise is that the state regulators charged with protecting consumers are siding with insurers on some key issues.

The Biggest Consumer Protection in Health Reform

If you ask 100 people what the biggest consumer protection in the health reform law is, I would guess that fewer than 10 of them would tell you it’s the loss ratio mandate.

The what, you say?   We know about lifetime caps and pre-existing conditions and minimum benefit packages.  Few of us know about “loss ratios.” As we’ll see, consumers have a lot at stake in the loss ratio battle, including – for some – hundreds of dollars of premium costs per month. 

What’s a loss ratio?

What’s a loss ratio, and why should you care?  Simply put, a loss ratio is the percentage of dollars taken in through premiums paid back out in benefits.  For example, if a plan pays out $75 in benefits for every hundred dollars in premiums, then the plan’s loss ratio is 75.

The reason we should care is because when loss ratios are higher, consumers receive more benefits.  Medicare’s loss ratio has been calculated to be as high as 97.  Paying out up to $97 in benefits for every hundred dollars in premiums is the gold standard for consumers. 

Private insurers can’t touch Medicare when it comes to expenses.  They have higher administrative costs and also need to make a profit.  To make sure they pay out enough, public officials establish a minimum loss ratio through regulation.  Insurers can only sell policies that meet this minimum standard.      

This is enough about loss ratios.  To prevent our eyes from glazing over, from now on I'll just call them “the biggest consumer protection in health reform.”  

 What Congress Decided about the Biggest Consumer Protection in Health Reform

 The 2010 Federal law created a national standard for the biggest consumer protection in health reform.  Advocates initially asked that the standard be set at 90, but Congress considered this too high, and ultimately agreed to 80 for individual plans and 85 for large group plans.  This means that Congress decided that giving private insurance companies a 15-20% allowance for administrative expenses and profits was fair.

These new standards are set to take effect in a few weeks, on January 1, 2011.

A Battle Rejoined

While the battle over the biggest consumer protection in health reform got little attention in the spring, it erupted into a full scale war over the summer.

Insurers amassed their forces to get at least some relief from the biggest consumer protection in health reform and found two allies, health insurance agents and state insurance commissioners. 

Agents thought that they would be squeezed out of their commissions by insurers when the new law took effect.  They were right.  Insurance companies began to cut agent commissions almost immediately.  In response, insurance agents argued that they were primarily consumer agents, not insurance company representatives.  They asked HHS to count their 3-4% commissions as benefits to consumers instead of as administrative expenses, and asked state regulators to support them. 

The other group sometimes siding with the insurers was politically more powerful – the state insurance commissioners charged with implementing the new standards. 

As reported in Health News Florida in late September, Florida Insurance Commissioner Kevin McCarty, President-elect of the National Association of Insurance Commissioners (NAIC), took the lead in making the case against the biggest consumer protection in health reform, arguing that he was “concerned about the ability of our individual carriers to meet that standard in a seamless, non-disruptive manner.”  Florida’s current standard is only 65 for traditional insurance plans, and 70 for HMOs, far less than the new federal mandate.

This means that traditional insurers in Florida can keep up to 35% of premiums for administrative costs and profits.  If your monthly premium in Florida is $1000, then up to $350 of that can be kept by the insurance company.

That’s a lot of money for companies to give up.

What’s Going to Happen?

In mid-October, NAIC submitted its draft recommendations to HHS, which is now finalizing them.  NAIC elected not to support the agents’ position, leaving agents to fend for themselves.

But NAIC did ask HHS for a phase-in of the biggest consumer protection in health reform, staking out an anti-consumer position.

Why do this when your job is to protect consumers?  President-elect McCarty argues that some plans will otherwise go out of business, reducing consumer choice.  But isn’t that the idea?  If the plan’s expenses or profits are too high, then it’s not a good choice for consumers.  That plan should go out of business.  It’s really just that simple, if protecting the American public is the goal.