No More Waivers For Private Health Plans

At the height of the debate over the health reform law, insurance companies spent tens of millions of dollars trying to defeat the legislation, warning that its provisions would raise premium costs and force Americans to abandon their current plans.

Instead, large insurers like WellPoint, Aetna and Cigna have seen profits and enrollment rise “to levels not seen since before the recession,” according to a new Bloomberg Government study . Just last week alone, United Health Groups announced that its fourth-quarter profits had risen 21%.  And despite fears of a “government take over of health care,” private insurers have made significant inroads into the Medicare and Medicaid programs.

A recent piece entitled “Betting On Private Insurers” by the Kaiser Family Foundation, reports that about 30% of seniors are now enrolled in private Medicare Advantage plans, while 23% of Medicaid enrollees receive coverage through a private managed care organization. Another 15 million Medicaid recipients receive care through managed care plans that are a mix of private and public insurers.

What does this privatization mean for health care savings in the long term? First of all, private insurers have historically had higher overhead costs than government plans and, according to the McKinsey Global Institute, “Across the health system, we pay a price for this reliance on private insurance in terms of higher administrative costs.” These higher costs are reflected in premiums and in the case of Medicare Advantage, resulted in the government spending an average 14% more for seniors enrolled in private plans vs. the traditional fee-for-service program.

That’s where key provisions of the Affordable Care Act come in. By eliminating excess payments to Medicare Advantage plans, the government is hoping to save $136 billion in health care costs. And staring this year, large group insurance plans will have to devote 85% of what they collect in premiums on direct patient care or quality improvements. Individual and small group plans must spend at least 80% on care. That means only 15% or 20% (respectively) can be spent on non-care costs like overhead, executive salaries and marketing. Plans that do not meet those thresholds, called the medical loss ratio or MLR, must refund the difference to beneficiaries beginning in August of this year.

According to a McKinsey report, “Health administration costs represent $91 billion, or 14 percent of total [health care] spending above expected, due partly to the system structure, but also on account of inefficiencies and redundancies that exist within the system.” Lowering administrative costs should, in theory, reduce premiums and drive health care costs down.

At face value meeting the new MLR threshold doesn’t seem too onerous; after all, the much-maligned Medicare program spent just 8% on administrative charges in 2010; Medicaid administrative costs vary by state and type of plan, but in general average less that 8% of premiums  as well.

But these government programs operate on far leaner budgets than many private plans and they don’t have to please investors. In a Dec. 2 press release, the Centers for Medicare and Medicaid Services estimated that up to 9 million Americans could receive rebates totaling between $600 million and $1.4 billion as a result of private insurers failing to meet the medical loss ratio thresholds. Since the MLR applies to private insurers who offer Medicare Advantage plans too, the federal government will also expect to receive rebates from those plans that also failed to meet the 85% threshold.

It seems that many of these rebates will be coming to consumers who bought insurance in the small group or individual markets. According to a recent report by the Government Accountability Office (GAO) , in 2010 at least 64% of health insurers would have met or exceeded the health law’s medical loss ratio standards. There was considerable variation between insurers in the group market and those who sold individual plans: 77% of plans in the large group market and 70% in the small group market met or exceeded MLR standards. Meanwhile, only 43% of insurance plans in the individual market met or exceeded the standards. For this last group, fees and commissions paid to brokers (as well as inefficiencies and poor management) drove up the administrative expenses not related to patient care.

The GAO report notes that most of the insurers interviewed for its report indicated that they were planning on reducing broker’s commissions and reducing premiums to meet the health law’s MLR requirements. But despite these good intentions to cut costs, there is a concurrent push to roll back, at least temporarily, conforming to the MLR and paying rebates to consumers. To start, companies that sell some 1,231 “limited benefit” health plans known as “mini-meds” lobbied for and already received exemptions from meeting the medical loss ratio. These bare-bones policies with large deductibles are also allowed to limit yearly outlays to $250,000, even though most other plans sold to individuals and in the large group market have had to raise those limits to $750,000 in preparation for 2014 when the ACA does away annual limits altogether. The mini-med plans receiving the waivers cover 3.9 million mostly lower-income enrollees, according to the Center for Consumer Information and Insurance Oversight.

Some 16 state insurance commissioners have also sought MLR waivers for plans sold on the individual market; asking the Department of Health and Human Services to provide a reprieve for companies and denying rebates to consumers who purchased these plans. The health care law allows HHS to adjust the medical loss ratio in states where implementing the 80% standard would cause too many insurers to leave the state and reduce consumers’ access to coverage.

So far, HHS has accepted six state waivers and rejected eight, most recently for Florida, Kansas and Oklahoma. Kansas had asked that the MLR standard be adjusted so health plans would spend 70% of premium dollars on medical care in 2011, 73% in 2012 and 76% in 2013.  Oklahoma and Florida had requested an even more gradual transition, warning of major disruptions in the state insurance markets if all plans were required to comply with the new standard. In responding to Kansas’s waiver request, Steve Larsen, director of the HHS Center for Consumer Information and Insurance Oversight, said; “We determined the insurance companies in Kansas in the individual market are able to meet the standard or will in the near future.” The office’s response to other states denied waivers has been similar—in Florida’s case a detailed letter (accessible as a pdf here) in response to the waiver request explains that most insurers selling individual policies in the state already meet the new MLR. Those insurers that claim to be leaving Florida are doing so because of prior financial problems or they cover so few people (in the hundreds, generally) that they are already exempt from the MLR standard.

Undeterred from its first rejection, Florida, as one report puts it, “like a battered fighter who keeps coming back for another round” has filed once again for an MLR waiver. Along with the same concerns about companies leaving the state, officials also say the necessary cuts in administrative costs will harm insurance agents and brokers whose fees will be greatly reduced. Ethan Rome, head of Washington-based Health Care for America Now!, told the Miami Herald that the medical loss ratio “is one of the most arcane but most important consumer protections in the healthcare law.” For Florida, he says, the alternatives are clear; “Consumer advocates say Florida consumers should get $145 million in rebates. The governor and the insurance commissioner want to take $145 million and give it back to the insurance companies.”

Texas is the latest state to request a waiver; if granted insurers would avoid having to pay out $160 million in rebates to customers. As in other states, Texas insurance officials claim that implementing the MLR will cause companies that provide good quality care at reasonable prices to move out of the state and leave consumers with few options.

That seems unlikely. According to a report on NPR, “Consumer advocates say that even if a few Texas companies do drop coverage, it’ll be less of a threat and more like good riddance. Take, for example, Standard Life and Casualty Insurance. That company spends only 53 percent of premiums on medical care, with the rest going to overhead and profit, according to the state documents filed with the feds.”

Stacey Pogue of the Center for Public Policy Priorities in Austin told NPR; “I think [it] would surprise some Texas consumers that we have some plans out there that offer little value. The new rules that are put out would end business as usual for these types of low-value health plans, and that benefits all consumers.”

The fact is, when the Affordable Care Act is fully rolled out, it will actually increase the role of private insurance in covering a growing percentage of Americans. But to participate—and for savings to occur—these plans must embrace the quality and cost-saving initiatives that are at the heart of the legislation. For example, the ACA now requires insurers to report rate increases over 10% to the Department of Health and Human Services. Recently, Kathleen Sebelius, the HHS secretary, informed Trustmark Life Insurance Company, that it must rescind “excessive” rate hikes of 13% that would have impacted nearly 10,000 people in Alabama, Arizona, Pennsylvania, Virginia and Wyoming. “HHS determined that the rate increases were unreasonable,” the agency reports, “because the insurer would be spending a low percent of premium dollars on actual medical care and quality improvements, and because the justifications were based on unreasonable assumptions.”

It’s important that the administration stays on this track and not yield to more state or insurance company demands for waivers or unreasonable rate hikes. Much of the private insurance industry is having a banner year; if small, inefficient and low quality plans leave the individual market they will not be missed. Over the last year or so, the Affordable Care Act has been pulled, prodded and not-so-gently massaged to meet the demands of states, insurance companies, lobbyists for industry and patient groups. Hewing to the MLR standard is a requirement that must be enforced in order to slow the growth of health care costs and to increase transparency in the system. It’s time to strengthen health reform, not cede more ground to special interests.