J.P. Farley News and Blog

Another Health Reform Problem for Insurance Companies

A group of policy wonks created another problem for health insurers Thursday morning. The National Association of Insurance Commissioners (NAIC) voted on a set of rules for determining what can and cannot go into an insurance company's Medical Loss Ratio (MLR). The MLR is the portion of an insurance company's premium that must be spent on claims. Under health care reform the MLR has to be at least 80% for individual and small group policies and 85% for policies covering 50 or more employees. The question that was answered in this meeting is what can be included in claims or excluded from premium. On both questions the NAIC decided on the method that was least favorable to health insurance companies.

Failure to attain the required loss ratios will result in carriers have to pay out the difference and more. With the NAIC's decision:

• Expect further movement to self-funding. The result of this set of decisions is anticipated to be a further movement of customers away from fully insured and to self insured arrangements which do not have to comply with the medical loss ratio because there is no premium being paid. (Due to the nature of its obligations and contractual relationships, stop loss premium does not count.) Another result will be further consolidation of the insurance carriers who do try to stay in the business in order to try to maximize economies of scale.  
• Anticipate a reduction in cost containment efforts by insurance carriers for two reasons. First, expenses for cost containment efforts will count as administration expenses not claims. Second, the more effective such efforts at driving down costs, the more difficult it will be to attain the MLR requirements. A carrier that had an 80% loss ratio that effectively cut costs by 10% would end up with a 70% loss ratio and have to pay out the penalty.  That takes away any incentive to cut costs.
• Insurance companies may decide it best to drop out of health insurance. The health care reform debate has certainly not been kind to insurance companies. Many have speculated that the insurance companies will end up walking away the health insurance business.That has been occurring for the past 20 years. We used to have 1,700 carriers in the health insurance business and about 30 with significant amounts of health insurance business. Now we have 4 carriers that cover over 80% of the market and probably another 200 or so smaller or regional companies. These new rules, along with other parts of health reform, seem certain to accelerate this trend making the market again less competitive.

Look for more and more groups who are able to move to self insurance using either administrative services only (ASO) contracts with carriers or Third Party Administrators (TPAs). The opportunities and choices within those self funded frameworks will far exceed anything available in the insurance market.