Wouldn’t it be great if we could all deduct our federal income and
investment taxes from next year’s income? And if we could also deduct that
stress-reducing trip to a spa in Bora Bora? And if the government
would just take our word for it? Fantasy for us, but the health
insurance industry think that’s what federal health reform ought to
allow, on a corporate scale.

Whether national health reform succeeds will depend on how it’s
implemented, since the law itself is riddled with vague and unclear
language. The first chance to measure it is proposed regulations by the
National Association of Insurance Commissioners for the Department of
Health and Human Services.

They’re mostly about the new law’s requirement that insurance companies
spend 85% of premium dollars on health care, not overhead, in the group
market–and 80% in the individual market.

The law makes brief mention of deducting "federal and state taxes" from
premiums before the percentage of health care is figured, but doesn’t
define which taxes. It also allows insurance companies to newly include
their own "health quality improvements" directly in the health care
percentage–but doesn’t define them. That vagueness offers massive
leeway for mischief.

So the best news from the NAIC’s meeting in Seattle, and the vote on
Tuesday, is what the insurance lobby didn’t get–at least
yet–regarding deduction of taxes an broker fees.

The parts that make us uneasy still give insurance companies too much
room to redefine their own administrative and marketing projects as
"health care." It’s also unclear just how much insurers will have to
publicly disclose about their rate requests.

The worst part is that no one is calculating, in dollars and cents,
the result of the new regulations, i.e. whether they’ll actually force
the industry to cut overhead and get more efficient to cut costs.

Here’s a rundown:

1. Medical loss ratio, or MLR. This is the phrase used by
insurance companies to describe what they’re forced to spend in health
care. Ugly, isn’t it? Under the federal law, the Affordability of Care
Act, insurers are allowed to count “health quality improvement"
activities as part of their medical-loss ratios. Consumer advocates
worked to restrict this category to activities that measurably help
individuals. But, based on the NAIC action this week, insurers get too
much leeway.

Activities that count as quality improvement include: insurer case
management, care coordination, chronic-disease management and wellness
programs, hospital discharge planning, some call lines, such as 24-hour
nurse hotlines and public health education campaigns conducted with
local health authorities. Insurers will be able to deduct at least part
of what’s called "utilization review," which is mostly the cost-cutting
that is accomplished through delay or denial of care. Also, the cost of
complying with new accounting and reporting requirements, which has
nothing to do with actual health quality. 

The worst of insurer demands for redefining health care–for instance that it include their legal expenses on lawsuits for denial of care, plus anything else related to claims–were turned down. 

Bottom line: not great, but so far not awful.
Everything that’s newly allowed as "health improvement" used to be
counted as overhead. A lot of it may be thinly disguised marketing and
advertising  administrative cost containment or regulatory compliance.
You can bet insurance companies will stretch the envelope of what’s
allowed to the breaking point, and HHS should narrow these ill-defined
categories. But other really gross proposals affecting didn’t pass–yet
(See No. 2)

2.  Tax and Broker fee deductions. A raging battle continues over
whether the law allows insurance companies to deduct all of their
federal income and investment taxes from their premium revenue before
they calculate the percentage being spent on medical care.

Here’s a hypothetical example:

A customer pays the insurance company $10,000 a year for an individual
policy. The insurance company spends $7,000 on average per policyholder
for health care in individual policies. $7,000 divided by $10,000
equals a medical loss ratio of 70%–and the insurance company would owe
a big refund Mr. Customer.

But the company also has millions or billions of dollars in invested
reserves, so its income and investment taxes combined come to $1,000
per policyholder. If the insurer get to subtract all of those taxes
from revenue, the equation is $7,000 divided by $9,000. And the MLR is
now miraculously 78%! That means a very tiny refund, and probably
nothing when insurance companies add all the vague all vague "health
quality improvement" activities to the $7,000 health spending.

The NAIC may well throw up its hands and punt the whole tax question
to HHS. That won’t stop the lobbying. Unless HHS caves completely to
the insuance industry demands, outlined in this insurance industry lawyer letter, it will wind up in court. So a long court battle is actually the best outcome. Here’s a response from law professor and consumer advocate Tim Jost that would probably be the backbone of a case against the insurers.

Deduction of insurance broker fees came up late at the NAIC but finally got sent back to committee with a resolution praising brokers
but not making any firm promises. The rationale for deducting broker
fees is even weaker than for investment taxes, but brokers have a
lobby, too, and want to preserve their big commissions and yearly 5%
cut on policies they sell. NAIC could bury this issue, or punt it up to
HHS.

Bottom line: Billion-dollar issues, with a still-uncertain outcome,
will decide whether the 80% and 85% health spending floors mean
anything. Delay is better that acquiescence, and going to court is
better than caving in. It’s a good example of the
outrageous maneuvering by insurance companies that were supposed to
take a little less profit, and become more efficient, in exchange for
getting millions of new customers under health reform.

3. Consumer disclosure: NAIC committees are still working on new
insurance policy forms that would be written clearly and allow people
to compare the value of policies from company to company. That’s nice,
but unfortunately the law still says that the impenetrable language of
the policy itself is still what matters in court. 

More important, from the standpoint of holding insurers accountable, is the amount of information insurers have to disclose about how they do business.

For instance, insurance companies are required to publicly disclose
a “justification” of rate increases that are found to be
“unreasonable.”  The NAIC is still working on a form that would give
consumers and advocates quite a lot of information about how the rate
was calculated, and how the insurer is spending its money.

But insurers are still pushing back hard and a lot of questions
remain. For instance, What will insurance companies be allowed to keep
secret, or show only to regulators? For instance, some are arguing that
all cost containment and health quality improvement measures are
proprietary. Insurers also don’t want to reveal underlying actuarial
data used to determine rates. Without the details, insurer
"justifications" would be of little use–we couldn’t even determine if
they’re telling the truth.

Will there be a full accounting of administrative costs? The latest
proposal at the NAIC does not disclose: lobbying expenditures, campaign
contributions, utilization and benefit management expenses,
advertising, travel, association and other fees and insurance.

Will insurance companies be required to itemize transfers to
out-of-state affiliates, including detail that will allow the public to
determine whether administrative costs are being camouflaged as medical
services, or whether insurers are overpaying affiliates for medical
services as another way to boost the bottom line under MLR
restrictions? Again, that’s omitted from the latest proposal.

Will executive compensation be disclosed as a dollar amount, or as a percentage of members’ premiums? It should be both.

Insurance companies are hinting that they’d prefer just to release
the data they give to the states when they file for a rate change. That
sounds good on the surface, but the data varies wildly from state to
state, is hard to compare and is often insufficient. 

Bottom line: The latest proposal needs more detail. It
would tell us far more than insurers currently have to
disclose about how they set rates in most states. But it ought
to be better, and tell us more about how each insurer does business. 

4. Who’s adding this up? Insurers are certainly calculating
what monetary benefit they’ll get from each "health quality
improvement" that’s allowed, and each deduction from premium revenue.
But they’re not talking, and no one else involved in the process, at
the NAIC or HHS, appears to have a clue.

Without numbers, no one can say tell what damage the concessions are
doing to the efficiency requirements implicit in the 80% and 85% MLR
requirements.

Bottom line: the answers have to come from
either the NAIC or HHS, with the help of the IRS and SEC. Someone has
to put together data from multiple sources to produce even an aggregate
estimate of the effect of the proposed regulations and concessions.The
clearest picture would come from applying the new rules to the MLR
figures reported in the last three years of insurers’ financial
reports. 

The estimates wouldn’t be exact, but at least we would have
ballpark percentages about how much each concession is weakening the
bill’s intent.