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Loss Ratios Key To Health Insurance Earnings

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WASHINGTON–Insurance agents and brokers should focus on the medical loss ratio decided on by Congress during upcoming negotiations over final healthcare delivery system reform legislation, a healthcare law and policy expert says.

That ratio would determine their future commissions, says Bruce Fried, a partner in the Washington, D.C. office of Sonnenschein Nath & Rosenthal L.L.P. The Senate bill sets limits on the MLR, he says.

“And that means that insurers will be trying to reduce their administrative costs,” Fried says. “And one place to do that will be in their distribution system. All commissions are going to get squeezed. The final provisions dealing with MLR are going to be critical for agents and brokers. That is what they should focus on.”

The Senate bill would set up an 80% MLR for individual and small group plans and an 85% MLR for large group plans.

Medical loss ratios are the percentage of premium spent on actual patient care services.

According to the bill, certain nonprofit plans must meet higher MLR standards to be exempt from the annual fee on health insurers. The definition of small group follows current state law until 2014, when small group is defined as 100 employees unless a state limits the definition to 50 employees before 2017.

These requirements apply to health plans inside and outside of exchanges, including “grandfathered plans.”

The Senate bill originally set the level at 90% for large plans. But it was reduced by Senate Democrats after the Congressional Budget Office said the result of such a strict MLR–which means the percent of healthcare insurance premiums that must be sent on patients–would be so much federal intervention in the form of subsidies that it would backfire.

Before the bills, there had never been federal standards on MLR, according to several industry officials.

Fried says the impact of this bill would be far-reaching. “This bill is going to touch every aspect of the healthcare delivery system, including the distribution system of which health underwriters, agents and brokers are a part,” he says.

But the bill ultimately would be beneficial to them, because it would offer opportunities to sell insurance for up to 33 million new customers, Fried says. At the same time, introduction of healthcare exchanges through the legislation would not necessarily be a negative for agents and brokers.

“Nobody knows how many people will obtain coverage through these exchanges, but clearly they will be a new avenue for distribution and as a result will impact the agent and broker system,” he says.

He believes the successful competitors are going to see this as opportunity as well as chaos and look for ways to take advantage.

“There are millions of Americans who are going to have coverage for the first time, and that is a new market for brokers and agents as it is for everyone else,” he says.

Fried also touched on the provision of the legislation that would deny insurance companies the right to reject customers on the basis of preexisting conditions once the exchanges open in 2014.

In the interim, the legislation calls for creating a high-risk pool where people with pre-existing conditions could purchase affordable coverage.”

Fried says it is unclear how this provision would be implemented. He suggests that the states might be granted the authority to create them but cautions they have been a mixed bag.

“There have been high-risk pools in some states for many years,” he says.

In some cases, they have worked well, and have become affordable options, he says. But in other states, premiums were so high that it was not an affordable option for most people.

“So it is unclear whether the states will be encouraged to create these or whether there will be a federal mandate,” Fried says.

Fried was also asked to interpret whether explicit language in the bill protecting the right of patients to choose a doctor would in fact eliminate the right of insurers to create networks and to insist that insureds stay within those preferred providers.

“I think there will continue be a variety of health insurance products, ranging from staff modeling modes to open network health plans,” he says. “I don’t think there will be restrictions on health companies as to what they can offer.”

Moreover, he disagrees with assertions that the proposed bills constitute a “government takeover of healthcare.” That “is just political hyperbole,” he said.


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