If regulators do not come up with a realistic medical loss ratio rule transition plan for individual heath insurance, insurers may start to abandon the market in June.
Rowen Bell, chair of the medical loss ratio regulation work group at the American Academy of Actuaries, Washington, issued that warning in a letter about the medical loss ratio rule sent to officials at the National Association of Insurance Commissioners, Kansas City, Mo.
The Patient Protection and Affordable Care Act actuarial subgroup, part of the Accident and Health Working Group at the NAIC, has posted the letter in a collection of comments on the minimum medical loss ratio provision in the new federal Affordable Care Act.
ACA is the legislative package that includes the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act.
The ACA will require providers of individual health insurance to spend at least 80% of premium revenue on paying insureds’ medical claims.
Bell, who is now an actuary at an independent accounting firm and who once worked for the Blue Cross and Blue Shield Association, Chicago, has written to recommend that regulators work quickly to come up with transition rules.
“Some carriers may seek to exit the individual market out of concern about the impact that rebate requirements in 2011 may have on their existing book of business and potentially on their solvency,” Bell writes to regulators on behalf of the AAA medical loss ratio regulation work group.
To get out of the individual market by Jan. 1, 2011, an insurer may have to announce its intent to withdraw by June, to give insureds a 6-month warning, Bell writes.
“Consequently, any transitional alternatives will be more effective, in terms of minimizing potential individual market disruption, if they are announced in the next several weeks,” Bell writes.
In theory, insurers could reduce administrative costs and other non-claims costs to meet the 80% medical loss ratio requirement.
In the real world, insurers may have a hard time cutting non-claims costs that much that quickly, and they may prefer to leave the individual market, Bell writes.
The NAIC working group also has posted a copy of a comment letter that Jeffrey Smedsrud, a senior vice president at Independence Holding Company (NYSE: IHC), sent to U.S. Health and Human Services Secretary Kathleen Sebelius.
Small carriers account for about 15% of the health coverage market, Smedsrud writes.
One small insurer dropped out of the market last week, and “more will follow unless you take action,” Smedsrud writes.
Because small health insurers tend to charge less than large carriers do for comparable coverage, and because small health insurers tend to have relatively high marketing costs, they have administrative costs that tend to be about 5 percentage points higher than the administrative costs at larger carriers, Smedsrud writes.
One solution might be to set lower minimum medical loss ratios for insurers with a small market share, or for insurers that sell high-deductible plans or other low-cost plans, Smedsrud writes.
“Another possible solution is to allow a portion of the agent commission to be a service fee,” Smedsrud writes.