Rules require cash to be spent on care

Health insurance premiums should go for actual medical care - not insurers’ overhead and profits - the Obama administration said Monday in rules that for the first time require the companies to give consumers a rebate.

The regulation unveiled by the Health and Human Services Department calls for insurance companies to spend at least 80 cents of the premium dollar on medical care and quality. For employer plans covering more than 50 people, the requirement is 85 cents. Insurers that fall short of the mark will have to issue their customers a rebate.

Part of the new health care law, the rule is meant to give consumers a better deal. Administration officials said it will prevent insurers from wasting valuable premiums on administration, marketing and executive bonuses. “While some level of administrative cost is certainly necessary, we believe they have gotten out of hand,” said Health and Human Services Secretary Kathleen Sebelius.

Some insurers have complained the approach is heavy-handed, and doesn’t take into account costs of marketing to individuals and small employers. Indeed, some are threatening to pull out of the individual market, and four states have already asked the federal government for an exemption from the rule, fearing it could lead to loss of coverage.

But industry watchers said the final regulations wound up being more manageable than investors initially feared. Analyst Les Funtleyder, who covers the industry for Miller Tabak, noted that HHS has wide latitude to adjust the rules to prevent market disruptions.

“From an expectations point of view, these are rules that managed care can live with in 2011,” he said.

Currently, there is no uniform requirement that health insurers spend a minimum share of premiums on medical care. Consumer groups say somewhere between 80 to 85 cents on the dollar represents good value, but many plans spend in the range of 60 to 80 cents.

That will change Jan. 1, when the rule goes into effect. Starting in 2012, as many as 9 million customers could get rebates averaging $164, officials estimate. It could be a discount on premiums or a payment by check or credit card.

Consumers shopping for health insurance in the future will be able to compare what plans in their area spend on medical care. They’ll have to learn some new jargon: the proportion insurers spend on care is termed the “medical loss ratio.” Overall, the new requirement applies to plans that cover about 75 million people.

One major exception involves large employer plans. Generally major companies pay their employees’ health care expenses directly, hiring an insurance company to act as an outside administrator. To employees, it looks like they are covered by an insurer, but it’s actually their company that’s paying. Because most big firms pay up front, they already have a strong incentive to be as efficient as possible.

Administration officials say they don’t anticipate the kinds of dire disruptions that some health insurance companies have warned about.

“No one is going to lose their coverage,” said Jay Angoff, head of the HHS office of insurance oversight.

Developed in conjunction with state insurance regulators, the regulation provides for adjustments to ease the impact of the requirements if problems emerge.

Very small insurers with fewer than 1,000 enrollees will not be required to provide rebates, and those with fewer than 75,000 enrollees will get an adjustment. Limited benefit plans popular in low-wage industries will get more time to comply, and may also be able to claim adjustments. States can apply for a waiver if state regulators conclude that the requirement would destabilize local markets, for example if a large insurer pulled out.