Bet you didn’t see this one coming.

One of the cost control measures under the new health care law passed just last month was “medical loss ratio” floors that go into effect on January 1, 2011. The MLR floor requires health insurers to spend at least 80 cents out of every insurance premium dollar in the individual and small group markets, and at least 85 cents in the large group market on medical expenses (as opposed to administrative costs and profits).

But according to the just released report from U.S. Senate Committee on Commerce, Science, and Transportation on how health insurance companies spend the billions of dollars in premiums that American consumers pay them annually for health care coverage, the MLR floors could present a problem for health insurers.

2009 medical loss ratio results show that the largest for-profit health insurers are still spending too much of consumers’ premium dollars on administrative costs and profits. In the individual health care market, for example, the largest health insurers spent on average more than 26 cents out of every premium dollar on administrative costs and profits. In some individual markets, insurers are spending more than one third of each premium dollar on non-medical expenses.

That is ten percent below the floor. Ouch! That means compliance could take a sizable chunk out of health insurers profits (and bonuses). But never fear, the insurers are already working on a fix.

the insurance industry is beginning to consider the financial impact of the new federally required minimum loss ratio requirements, including questionable changes in their accounting practices. WellPoint, for example, has already “reclassified” more than half a billion dollars of administrative expenses as medical expenses. A leading industry analyst also recently released a separate report explaining why for-profit insurers might attempt to satisfy consumer protections in the law through an “MLR shift” – reclassifying previously identified administrative expenses as medical expense to create the appearance of a higher medical loss ratio.

So is anyone out there surprised by this?

What would you bet that the accountants had this all worked out long ago?

It will be interesting to see how the National Association of Insurance Commissioners debates the meaning of medical care and medical cost.

While several states impose their own MLR requirements for commercial and individual policies, the U.S. minimums that the group of state insurance commissioners is developing with the Department of Health and Human Services are new and frequently higher.

Even though the law calls on the NAIC [National Association of Insurance Commissioners] to provide the uniform MLR definitions by year end, HHS Secretary Kathleen Sebelius, who must certify them, asked the group this week to provide the guidelines, as well as standardized calculation methods and other related information, by June 1, as the provisions will be effective for plan years starting later this year.

Wendell Potter, a former Cigna Corp. (CI) spokesman turned health-reform activist, is now a consumer representative to the NAIC. He said he will suggest that the NAIC use what has been standard industry practice in deciding what counts in the MLR, which would mean keeping nurse hotlines and disease management as administrative costs.

How confident are you that insurers will get to keep their reclassification and more?

Dylan Ratigan discussing this issue

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[Cross posted at No Quarter]

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