For months, a National Association of Insurance Commissionersworking group has been busily drafting regulations to implement akey provision of the health law — its medical loss ratiorequirement. This provision requires insurers in the individual andsmall group market to spend at least a minimum proportion of theirpremium revenues on health care services and activities thatimprove health care quality. Beginning in 2011, insurers who failto meet these targets must rebate to enrollees the differencebetween their actual expenditures and the target amount.

The law specifically charged the NAIC with creating thedefinitions and methodologies for implementing this requirement,subject to certification by the Department of Health and HumanServices (HHS).

When the long-awaited regs were released Sept. 23, news reportsproclaimed that there were "fewsurprises." Indeed, there were none for those of us who havefollowed the seemingly endless conference calls that led to thedocument's development. And this general lack of surprise was theworking group's intent. The draft regulations simply codify thedefinitions adopted unanimously by the insurance commissioners atthe NAIC's August plenary meeting in Seattle, and the finaldecisions already reached by the subgroup through its transparentand participatory process.

"But who are the winners and losers?" the news media ask.

Health insurance consumers — most of us — are definitelywinners. The part of the law that created this requirement isentitled, "Ensuring that Consumers Receive Value for their PremiumPayments," and, by increasing the share of premiums insurers spendon health care, the regulations will do exactly that.

But the insurance industry also won big when the NAIC opted tostick with its earlier decision excluding from premium revenues allfederal and state taxes (other than taxes on investment income,which is not included in the MLR formula). The chairs of thecongressional committees who wrote the health reform legislationhad informed the NAIC that they only intended new federal premiumtaxes to be excluded, but the organization stuck by its earlierreading of the statute. This approach should reduce the amountinsurers need to spend on health care by 1.5 to 2 percent,according to some analysts. The regulations also retained theNAIC's earlier expansive definition of "quality improvementactivities," which includes disease management, wellnessinitiatives, 24-hour hotlines and health IT programs that improvequality.

Other decisions will also benefit insurers. The draft ruleincludes a "credibility adjustment." This factor protects smallinsurers from having to pay rebates for low MLRs attributable tothe fact that their claims fluctuate randomly from year to year —many large claims one year, few the next. After the adjustment,small insurers could see as much as 14 percentage points added tothe amount of their premiums actually spent on claims and quality,eliminating potential rebates. Insurers with fewer than 1,000covered lives in a market will not have to pay rebates at all, atleast for 2011. This should dramatically reduce the law's immediateeffect on small insurers. (The statute further allows HHS to"adjust" temporarily the target medical loss ratios in theindividual market on a state-by-state basis to ease the transitionfor states whose insurers have high administrative costs, an issuebeyond the scope of the NAIC regulation.)

Many of proposed rule's requirements that insurers findobjectionable were determined by Congress, not the NAIC. Someinsurers want, for example, to blend their MLRs across affiliatesand states, but the statute explicitly applies this provision to"issuers," which the law defines as discrete licensed entities inindividual states. Congress did not intend that enrollees in stateswith low ratios would subsidize affiliated insurers in high-MLRstates.

In addition, agents and brokers would prefer to see theircommissions excluded from the ratio's calculation. But thelegislative history of the reform law clearly establishes thatCongress saw commissions as a prime component of insureradministrative costs. Insurers also would like to count utilizationreview and fraud control programs as quality improvement expenses,but Congress listed insurer quality improvement programs in section2717, and these two activities did not make the list.

The rules should not, however, be viewed as a contest in whichthere are winners and losers. Many consumers will never see arebate under the proposed rules. But the goal of the MLRrequirement is not to generate rebates but to drive insurers tospend less money on bureaucracy and more on health care. Consumersbenefit if efficiently-run small insurers stay in the market and ifa variety of types of plans remain available. The NAIC's proposedregulation recognizes and balances the claims of the variousstakeholders that have fully participated in its drafting. Itshould prove workable for insurers while benefiting consumers. Itpresents a sound foundation for moving forward and deserves to beadopted by the NAIC and certified by HHS.

Timothy Stoltzfus Jost is theRobert L. Willett Family Professor of Law at Washington and LeeUniversity School of Law and a consumer representative to the NAIC.This opinion piece does not necessarily represent the views of allconsumer representatives, nor does it speak for the NAIC.