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(Reuters) Friday, Sept. 16, 2011 — Of the endlessly debated provisions in the Patient Protection and Affordable Care Act, the requirements for Medical Loss Ratios stand out for insurance companies because the requirements are designed to dictate how those companies pay their bills.

Until now, it’s been mostly unclear how those requirements will affect consumers. But a new study from the Government Accountability Office released last week sheds some light. And experts are weighing in.

First, some background: For every dollar taken in by insurance companies for health plans, those companies will now be required this year under the PPACA to spend either 80 or 85 cents — depending on the size of the plan; smaller group plans are held to the lower number — on costs related to healthcare.

In the past, insurance companies have traditionally spent less than that on health care costs and as much as 30 or 40% on administrative costs. The ratio of health care costs to administrative costs is the Medical Loss Ratio.

If companies do not meet the new MLR requirements under the PPACA, they are required to send their customers a refund to make up for the difference. This year is the first year that insurers will be held to the MLR requirements; the first set of insurer data is due in June 2012.

The goal of the MLR requirements is to make health insurance companies more efficient, says Dr. Timothy S. Jost, a law professor at Washington and Lee University who is a co-author of a textbook on health care law and a consumer representatives to the National Association of Insurance Commissioners, which helped to develop the MLR requirements.

The MLR requirements will “eliminate administrative costs, control profits and hopefully force these companies to provide better care to people,” he says.

Detractors say it will limit competition and increase overall premium costs.

Senator Tom Coburn, a Republican of Oklahoma who is also a doctor specializing in family medicine and obstetrics, wrote last week on his website that MLR requirements will “destabilize insurance markets” and that they represent “a government takeover of health care.”

The GAO study doesn’t get into that but it does say that a survey of insurance companies showed that insurers had, among other things, “decreased or planned to decrease commissions to brokers” and considered exiting individual markets.

What does this mean for health insurance buyers?

Jost concedes that fewer choices and lower fees for brokers are certainly possibilities.

“You could have fewer choices, sure,” he says. “But you’re going to lose your ability to choose a [health insurance] company that’s only spending 60% of its income on health care.”

He has a similar view of brokerage fees.

“If 20% of your insurance payment was going to the guy who sold you the policy and now that’s going to be 10%, I’m not sure many consumers will disapprove,” he says.

Alan N. Canton, who runs A. N. Canton Insurance Services in suburban Sacramento, says that might be true. But the result will be fewer brokers and increased risk that people will choose unnecessarily expensive plans.

For most agents, health insurance is now a “dead product,” he says — and the MLR requirements are a big part of that change.

“Thousands of agents no longer write health insurance because they can make a better living writing other projects such as annuities,” he says. “The new [commission] rates are just too low.”

Insurance buyers will suffer as a result, he says.

“Arguments can be made that health insurance brokers were disintermediated by the Internet,” he says. “But insurers know that if consumers are left to their own devices they will pay more. They’ll go to web sites and not get the insurance that’s right for them at a price that’s higher than they need to pay. So carriers are saying we don’t need brokers. But that means people will pay higher prices for insurance — probably without knowing the difference.”

Reps. Mike Rogers and John Barrow have presented a bill to the House of Representatives, H.R.1206, to keep sales commissions out of health carriers’ MLR calculations. But  Jost says it likely won’t help brokers.

“It doesn’t protect the agents and brokers,” he says. “All it does is increase the amount the insurers can keep. It’s up to them whether they spend that income on broker commissions or other costs.”

Commissions aside, Rajiv Sabharwal, chief solution architect in the Healthcare and Life Sciences unit at Infosys Technologies, says an additional problem with the MLA requirements is that they’re too stringent. They’ll require companies to spend their time and efforts on constant oversight of efficiency measures rather than innovation.

Health insurance companies will have two options, he says: “They can either not advance technology or they can have stagnant profits. Either way, people will likely experience substandard care.”

Ted Schwab, a partner in Oliver Wyman’s Health and Life Sciences Practice, concurs. “I think what you’re going to see is these companies becoming bloated,” he says. “The answer [for health insurance companies] is to somehow get bigger because these companies will not be able to deal with the MLR requirements without having the scale to meet the massive bureaucratic challenges the requirements necessitate.”

What will be the result?

“The days of going to small doctors is gone,” he says. “Fewer choices, bigger companies.”

© 2010 Thomson Reuters. Click for Restrictions.

 

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