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The Most Important Health Care Reform Provision You've Never Heard Of

November 14, 2009 - by Donny Shaw

Most of the coverage of Congress’ health care reform process has been focused on the public option. From it’s arrival as a compromise for single-payer to its slow and painful neutering in each successive iteration of health care legislation in Congress, the public option has been the health care politics story to watch. But all of Congress’ health care bills have been more than 1500 pages long— there’s a lot more to them than just the public option.

For months, Bruce Webb has been tracking a provision in the House’s health care bills that has flown mostly under the radar. He calls it the “most important and most overlooked” aspect of the bills, and he may be right.

The provision in question is entitled “Ensuring Value and Lower Premiums.” In all of Congress’ health care bills it reads more or less like this:

In General- Each health insurance issuer that offers health insurance coverage in the small or large group market shall provide that for any plan year in which the coverage has a medical loss ratio below a level specified by the Secretary (but not less than 85 percent), the issuer shall provide in a manner specified by the Secretary for rebates to enrollees of the amount by which the issuer’s medical loss ratio is less than the level so specified.

Translation: Once the bill is enacted, all health insurance plans would be required to spend at least 85 cents of every dollar paid in premiums each year to providing actual health care. If, in a given year, an insurer doesn’t spend that amount on health care, they would have to give their extra profit back to their customers in the form of rebates. Only 15 percent of premiums max could be used for marketing, administration, underwriting and profit. And the HHS Secretary could up the ratio from 85-15 if she saw fit.

The provision “almost totally strips the ability of insurance companies to combine cherry picking and premium increases to continue the huge profits they garner today,” writes Webb at the Angry Bear blog. “In a word this [section] automatically limits profits by establishing indirect price controls,” he adds.

It’s a big challenge to the insurance companies’ way of doing business, and it’s totally independent of what kind of public option (if any) is in the bill. The business of denying coverage to the sick and unhealthy would be over. Insurers would have to make up for their losses in denying coverage by finding more patients. It would transform the business of private health insurance from strategically denying coverage in order to maximize profits to trying to insure as many people as possible in order to gain market share. That’s a HUGE change from the status quo.

But there’s a twist to all of this. The version of the bill that was passed by the House last weekend includes the provision, but also includes some curious, new “sunset” language. The sunset language states that the new minimum medical loss ratio requirements “shall not apply to health insurance coverage on and after the first date that health insurance coverage is offered through the Health Insurance Exchange.” In other words, in 2013, when most of the bill takes effect, the medical loss ratio language would be null and void. There would be no more profit control, just the market competition that is provided by whatever form of the public option is included in the bill. Read the sunset language in context here.

This really doesn’t make a whole lot of sense. What’s the point of including it in the legislation if it’s not going to apply once the bulk of the bill takes effect? Webb wonders if there is some kind of error — either in how he is reading the bill (the same way I read it), or how the language of the bill has been drafted. “In their zeal to get certain protections in place right away they swept Sec 116 [the medical loss ratio provision] which clearly is focused on a future Exchange and tried to enforce its requirements on the current market,” Webb writes. This sunset language was not included in the health care bills that went through the three House committees this summer, but it is included in the final version that was passed by the House.

There’s no final Senate bill at this point, but as far as I can tell the two existing Senate bills — the Senate Finance Committee bill and the HELP Committee bill — do not have any similar medical loss ratio language in them. The final Senate bill is expected out this week. I’ll be looking for any signs of similar language to be included in it. If it’s not (and, honestly, since it’s not in the Finance or HELP bill, it’s not likely) it would have to be reintroduced in the House-Senate conference committee. Unless of course the sunset language was some kind of clerical error and the House bill was always meant to include these stiff new medical loss ratio requirements on the health insurance companies.

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  • guy0307 11/14/2009 11:54pm
    Link Reply
    + -1

    Actually, it makes a lot of sense. The idea is to control costs before the public option kicks in – so that democrats can show they’ve done something before the mid-terms (and the presidential elections).
    I really do think they should change the enactment date to 2012.

  • Comm_reply
    spender 11/15/2009 7:56am

    But what’s the point of letting the cost controls expire once the public option starts if we’re likely going to see the weakest of all public options possible passed? Does Congress actually believe that what’s left of the public option plus the exchange will actually control prices using the free market as well as this 85% requirement would? If they do believe that, I’d say they’ve got too much faith in the system they’ve put together. If they don’t believe it, then what’s the point of letting the direct cost controls expire?

  • Comm_reply
    SaturdayMorningClub 11/15/2009 12:36pm

    If the insurance companies are limited to 15% of premium revenue going to administration, sales and operating costs, then we can look forward to ‘administrative fees,’ ‘transaction fees,’ and other sorts of imaginative charges. Also, as soon as a claim is made, the insurance companies will set aside outsized ‘reserves’ to cover the future costs that ‘might’ be generated. These guys didn’t just fall off the turnip truck. They’ll find (or buy from their favorite congressman) some kind of workaround.

  • Comm_reply
    BruceWebb 11/16/2009 2:40am

    All of that falls on the wrong side of the ledger. If the dollar doesn’t flow out the door to a provider it doesn’t count as a ‘medical loss’. No these guys didn’t fall off the turnip truck nor did their lobbyists but it is (or should be) pretty difficult to argue that dollars sticking to their fingers in the form of fees or reserves are actually out that door.

  • BruceWebb 11/15/2009 8:19am

    Well no it doesn’t make a lot of sense. First of all it requires relying on MLR methodology that has yet to be developed. Under HR3200 this was envisioned as being in place prior to ‘Year 1’ i.e. 2013 and apply to plans on or after that date. Under HR3962 somehow this methodology will be developed sometime in 2010 at which point it somehow gets applied retroactively to plans that are already in existence based on a MLR of around 81-82. In effect it would simply expropriate all profits of insurance companies for 2010 and probably 2011. That is both politically impossible and probably illegal. Something is wrong there.

    I had a lot more but ran up against the character limit. Oh well opportunity to blog-whore where discussion on this is ongoing.

  • skeltoac 11/15/2009 11:46am

    I am not that well versed linguistically
    nor literate in law and legalese
    but when I read the words “the first date that”
    “that” was demonstrative determiner.
    As such the sunset clause would not apply
    to coverage not sold on the Exchange
    which means the profit cap remains in force
    as disincentive to resist reform.
    I read it thus because I’m skeptical
    of man and beast and law and government
    but also I found “85 percent”
    an interesting term for which to search.
    This ratio applies to Medicare
    which should hold profits down in the Exchange
    but how that kind of market operates
    is voodoo on which I can’t speculate.
    I do know that this section of H.R.
    3 thousand and 962
    says that the Secretary must ensure
    “their premiums are used for services.”

  • Spam Comment

  • temporary 11/15/2009 4:19pm

    The resulting path to maximum profit for the insurance industry is then simple: maximum medical costs (they get 15%, and all the price costs are someone else’s fault). This provision *dis*incentivizes the insurance industry from containing costs; and since we’d still be using “insurance” to disconnect consumer and produce from price signals, we end up with even-faster cost growth.

  • Comm_reply
    BruceWebb 11/16/2009 2:47am

    That is where the Public Option comes in. Yes you can maximize profits by simply paying for more and more care and damn the cost but the result is to drive your premiums up to a level where you can no longer compete on price and individuals and employers dump your coverage in favor of your private competitors and/or the public option.

    Even without the PO someone is going to figure out that they can out compete you on volume and service rather than gold plating patients’ casts.

  • mjwooten 11/16/2009 4:16pm

    The big picture I see here is government control of a private corporation’s profits. That same corporation that employs thousands of people. There is something wrong with that concept, be it healthcare or otherwise. What is next? A lobbyist group that complains Verizon and ATT make too much profit? That cell phones are a necessity? That everyone should have free internet access? Oh hell, let’s throw in a free car while we are at it! Get real here! The simple fact is free trade is totally overregulated by the federal government. It is these very same regulations that explain why Alabama, for instance, has TWO health insurance companies and not 22. Drop the barriers to free enterprise and let the market WORK!
    PS. I do NOT work for an insurance company.

  • BruceWebb 11/18/2009 6:31am

    “A lobbyist group that complains Verizon and ATT make too much profit?”

    That is too funny. In the sixties it was determined that Bell Telephone’s monopoly was in fact making too much profit at the expense of ordinary Americans and the near monopoly was broken up. And Verizon/GTE and ATT both thrived in large part because they had the Bell system that stifled competion off of them.

    Back in the fifties and sixties the words ‘Long Distance’ were truly frightening ones, because those calls were so expensive that generally only people with terrible news would resort to them. The concept tha the phone companies would some day offer “Unlimited night and weekend minutes” being pretty much unthinkable. And how many people would be comfortable knowing that making a call in a phone booth was ten cents (later 15) for the first three minutes and another dime every couple of minutes after that. Even if you were calling down the street.

    You picked exactly the wrong example.

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