The Department of Health and Human Services, which has approved nearly 1,500 waivers from President Obama’s health care law, has refused to issue waivers requested by two states, Iowa and North Dakota.
The states had requested waivers from medical loss ratio (MLR) regulations, one of the more popular waivers granted by HHS. Obama’s law requires insurers to use 80 percent of their premiums for patient benefits (85 percent in the large group market). The remainder can go to administrative costs such as overhead, labor, marketing, and profit.
Iowa had requested a 60, 70, and 75 percent MLR target in 2011 through 2013, respectively, while North Dakota asked for a 65 percent standard for 2011, followed by 70 and 75 percent targets
The waiver’s rejection concerns Al Berg, who owns the Prairie Benefits insurance group in Fargo, North Dakota.
“The group health insurance market in North Dakota is becoming more competitive,” Berg says, and he expects that to continue.
“My biggest concern is going to be the whole issue of loss ratio and rebates and refunds on premium, if those loss ratios run too low,” said Berg. “Our percentages are fairly high already as far as what carriers have to meet for loss ratio, because of state regulations.”
“My concern is that if we reach that point in 2014 when we no longer have underwriting, plus the fact that if a group has very low claims experience it is my understanding that the carrier is going to have to refund some of that premium, it’s going to be very difficult for the free market to work, and difficult for the insurance carrier to accurately underwrite the risk,” Berg said.
HHS Drives Out Choice
Unlike the HHS-conceived waivers for insurance plans, the health care law explicitly grants HHS Secretary Kathleen Sebelius the authority to adjust MLR targets for entire state markets through 2013. Starting in 2014, plans in all states must meet the same 80 or 85 percent target, according to John Graham of the Pacific Research Institute.
“Some fraction of insurers are not going to be able to meet their MLR and will withdraw from markets or go out of business, and then we will have less choice,” Graham said.
Graham expects insurers to take a variety of steps to meet the targets, not all of which will benefit consumers.
“One way is to reduce their commissions to brokers, which they have already done. And that will be a challenge for small businesses because the brokers will leave the market,” Graham said. “They won’t get paid for consulting to small business. So just as we get into this incredibly complicated period of transition into ObamaCare, small businesses are going to have lower quality of information and advice upon which to make their decisions.”
Graham also suggests insurers might meet the MLR targets by buying hospitals.
“If the insurer owns the hospitals and the doctor’s practices, then the MLR becomes whatever the executives want it to be,” Graham said, “because they can transfer administrative costs between the insurance side and the provider side.”
Insurers Leaving Marketplace
Ed Haislmaier, a senior fellow at The Heritage Foundation, agrees the MLR regulations could cause many insurance carriers to leave the health care market.
“The problem with the MLR is that it lumps together not just profit but a lot of administrative costs, and that will depend on a number of factors, such as the kind of products that the carrier is selling,” Haislmaier said. “Some will have higher costs than others. Also it will depend on where the carrier is in terms of its life cycle of its business in that state. A carrier that is trying to enter a new market will have higher costs of marketing and advertising.”
Haislmaier said the regulation will effectively stop new companies from entering the marketplace.
“The overall effect of this,” said Haislmaier, “is to create incentives for niche players and smaller players to leave the market, and to create a barrier for entry for newer players. The concern that the law addressed is the first one, that if they suddenly imposed this that it might cause a bunch of players to leave the market. And that’s why they allow the Secretary to set the limit lower, and that is what states are applying for. None of this solves the problem that they’ve really killed off the incentives for new entrants and new competition.”