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Life Health > Health Insurance > Your Practice

GAO Notes Commissions in Individual Market Adding to Expenses

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A GAO report released this week purports to demonstrate that early indicators show that the new medical loss ratio (MLR) standards mandated in the Patient Protection and Affordable Care Act would have worked for most insurers in 2010.

However, the individual market is one where high commissions continue to exist, according to the report.

Insurers in the individual market still averaged higher nonclaims expenses, including expenses for brokers’ commissions and fees, than those in other markets, the GAO report found.

“The GAO report supports what we have long predicted: PPACA’s immediate impact has been diminishing access to health insurance agents, particularly in the individual and small-group markets,” stated Janet Trautwein, CEO of National Association of Health Underwriters (NAHU). 

“Though insurance premiums are slightly down, we are already seeing a pattern emerge where, over time, the current MLR regulations will reduce the number of insurers willing to write health insurance in the individual and small-group markets, or both, which will leave consumers underserved, reduce competition and cause countless insured individuals to lose coverage,” Trautwein said in a statement to National Underwriter.

By “most,” the GAO report  refers to “at least 64% of all credible insurers would have met or exceeded the 2011 PPACA MLR standards.”  The individual market did not meet or exceed the standards to the same extent that the large and small group markets did.

The percentage of insurers in the large and small group markets that met or exceeded the standards were 77% and 70%, respectively, compared to a lowly 43% in the individual market, where most of the turmoil has been anecdotally.

Beginning in 2011, PPACA required insurers to meet minimum PPACA MLR standards of 85% in the large group market and 80% in the small group and individual markets or pay rebates to their enrollees. The Department of Health and Human Services (HHS) includes an adjustment for certain insurers to help address the disproportionate impact of claims variability on smaller health plans.

Insurers that cover at least 1,000 but less than 75,000 life years (partially credible insurers) get to use a “credibility adjustment.” Insurers that cover 75,000 or more life years don’t get to do this.

Some would argue that the MLR provisions are working, because most covered  “lives” were associated with insurers that would have met or exceeded  the standards;  most “lives” were covered by large and small group market insurers.

The average adjusted PPACA MLRs for individual, small group, and large group market insurers in 2010 were 7.5, 6.5, and 4.8 percentage points higher, respectively, than the average MLRs for these markets calculated without the “credibility adjustment” and using the traditional MLR formula, so it could be argued the adjustment works.  

The health care reform act’s mandated MLR allows insurers to include under the expenses numerator any spending on activities to improve health care quality and to deduct from their revenues certain tax payments and fees. These differences will generally act to increase insurers’ MLRs, although there is much discussion on what constitutes expenses relation got health care quality. Many state regulators want it to include agent commissions.

 “The combined effect of the credibility adjustment and the new components of the PPACA MLR formula resulted in greater increases in average adjusted PPACA MLRs for individual and small group market insurers compared to those in the large group market,” the GAO report stated.

The report also found a wide range of reported MLRs for multistate insurers. The GAO noted that a draft of this report was submitted to both the Department of Health and Human Services and the National Association of Insurance Commissioners for comment. Both the HHS and the NAIC provided technical comments, which were incorporated as appropriate.

The report was commissioned by Rep. Robert Andrews, D-NJ, ranking member of the Subcommittee on Health, Employment, Labor, and Pensions for the Committee on Education and the Workforce.

The performance audit on which it is based ran from August 2011 through October 2011, and was done under generally accepted government auditing standards and using data reported to the NAIC, the GAO stated.

The first set of data subject to the requirements will be for insurer experience for calendar year 2011, which are to be submitted to HHS in June 2012.

But in the interim, in April 2011, insurers submitted preliminary MLR data to the NAIC  based on their 2010 experience using the PPACA  MLR definition.

Although these data are considered “transitional,” there was interest in early indications of what can be learned from these data given that they are the first data insurers reported using the new MLR definitions, the GAO reported stated.

The NAIC and many industry organizations did not have a response by press-time. The report was dated Oct. 31 and included  technical comments from the NAIC and HHS, which was incorporated “as appropriate,” it said.

The NAIC has been sharply divided on the MLR issue and its impact, and as a body voted in favor of action to relieve stress on falling independent agent and broker commissions as factors in the MLR.

Update: America’s Health Insurance Plans (AHIP) had this to say as a response: “The MLR requirement includes a number of unintended consequences including: disrupting health care choices for consumers, turning back the clock on quality improvement initiatives and stifling innovation by health plans. At a time when the nation is facing a health care cost crisis, we believe the MLR regulation should recognize the promising new strategies that health plans are employing to achieving cost containment. To discourage investment in these initiatives is penny-wise and pound-foolish.”


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