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Birnbaum: Commissions No Reason To Blur PPACA Cost Rules

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The National Association of Insurance Commissioners should not think about producer compensation when implementing the new federal minimum loss ratio requirements, according to Birny Birnbaum.

The new minimum MLR provision, part of the federal Affordable Care Act, will require large group insurers to spend 85% of premium revenue on health care and health improvement costs starting in 2011. Issuers of individual and small group policies will have to spend 80% of premium revenue on health care and health improvement costs.

ACA — the legislative package that includes the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act – puts the NAIC, Kansas City, Mo., in charge of helping the states develop standard minimum MLR implementation rules.

The Medical Loss Ratio Regulation Work Group at the American Academy of Actuaries, Washington, wrote to the U.S. Department of Health and Human Services in May and suggested that overly strict individual market MLR rules could reduce the availability of individual health insurance, in part by reducing the commissions that give agents an incentive to sell health insurance.

Agent groups also have encouraged the NAIC and HHS to think about the possible effects that tough MLR rules might have on agent commissions, and the effects lower agent commissions might have on health insurance sales.

“This argument is based on the insurance industry conducting business as usual,” according to Birnbaum, executive director of the Center for Economic Justice, Austin, Texas.

Congress passed PPACA and HCERA because of a belief that the health insurance insurance needs to change, Birnbaum writes in a comment letter sent to an NAIC PPACA actuarial subgroup.

“There is no rationale for discarding an essential consumer protection — the MLR — because the industry does not want to change its current business model,” Birnbaum writes.

Even if a strict MLR rule caused problems, the insurance industry could fix the problems by making minor changes in distribution practices or agent compensation, Birnbaum writes.

The AAA has assumed “that the only recourse for an insurer is to reduce agent commissions, period,” Birnbaum writes. “This is illogical because it is an ineffective way of addressing the problem.”

Some have suggested lowering the minimum MLR for “grandfathered,” in-force individual policies.

“This defeats the purpose of MLR,” Birnbaum asserts. “It would actually be difficult to implement because, if the reason for this fix is ‘lifetime pricing,’ which plans are grandfathered?”

Grandfathering would create unfair competition based on when a policy was started, and it would encourage gaming of the system, Birnbaum writes.

Birnbaum also discusses and rejects several other proposed minimum MLR rule adjustments.

“I am not convinced that this transition is a problem severe enough to disrupt the marketplace for individual health insurance plans,” Birnbaum writes. “It really does come down to whether the regulations assume insurers can or cannot change their current business models. Given that health care reform assumes that insurers can and will change their business practices, there is no rationale for these transition loopholes.”


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