For months, a National Association of Insurance Commissioners working group has been busily drafting regulations to implement a key provision of the health law — its medical loss ratio requirement. This provision requires insurers in the individual and small group market to spend at least a minimum proportion of their premium revenues on health care services and activities that improve health care quality. Beginning in 2011, insurers who fail to meet these targets must rebate to enrollees the difference between their actual expenditures and the target amount.

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

When the long-awaited regs were released Sept. 23, news reports proclaimed that there were "few surprises." Indeed, there were none for those of us who have followed the seemingly endless conference calls that led to the document's development. And this general lack of surprise was the working group's intent. The draft regulations simply codify the definitions adopted unanimously by the insurance commissioners at the NAIC's August plenary meeting in Seattle, and the final decisions already reached by the subgroup through its transparent and participatory process.

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

Health insurance consumers — most of us — are definitely winners. The part of the law that created this requirement is entitled, "Ensuring that Consumers Receive Value for their Premium Payments," and, by increasing the share of premiums insurers spend on health care, the regulations will do exactly that.

But the insurance industry also won big when the NAIC opted to stick with its earlier decision excluding from premium revenues all federal and state taxes (other than taxes on investment income, which is not included in the MLR formula). The chairs of the congressional committees who wrote the health reform legislation had informed the NAIC that they only intended new federal premium taxes to be excluded, but the organization stuck by its earlier reading of the statute. This approach should reduce the amount insurers need to spend on health care by 1.5 to 2 percent, according to some analysts. The regulations also retained the NAIC's earlier expansive definition of "quality improvement activities," which includes disease management, wellness initiatives, 24-hour hotlines and health IT programs that improve quality.

Other decisions will also benefit insurers. The draft rule includes a "credibility adjustment." This factor protects small insurers from having to pay rebates for low MLRs attributable to the 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 to the amount of their premiums actually spent on claims and quality, eliminating potential rebates. Insurers with fewer than 1,000 covered lives in a market will not have to pay rebates at all, at least for 2011. This should dramatically reduce the law's immediate effect on small insurers. (The statute further allows HHS to "adjust" temporarily the target medical loss ratios in the individual market on a state-by-state basis to ease the transition for states whose insurers have high administrative costs, an issue beyond the scope of the NAIC regulation.)

Many of proposed rule's requirements that insurers find objectionable were determined by Congress, not the NAIC. Some insurers want, for example, to blend their MLRs across affiliates and states, but the statute explicitly applies this provision to "issuers," which the law defines as discrete licensed entities in individual states. Congress did not intend that enrollees in states with low ratios would subsidize affiliated insurers in high-MLR states.

In addition, agents and brokers would prefer to see their commissions excluded from the ratio's calculation. But the legislative history of the reform law clearly establishes that Congress saw commissions as a prime component of insurer administrative costs. Insurers also would like to count utilization review and fraud control programs as quality improvement expenses, but Congress listed insurer quality improvement programs in section 2717, and these two activities did not make the list.

The rules should not, however, be viewed as a contest in which there are winners and losers. Many consumers will never see a rebate under the proposed rules. But the goal of the MLR requirement is not to generate rebates but to drive insurers to spend less money on bureaucracy and more on health care. Consumers benefit if efficiently-run small insurers stay in the market and if a variety of types of plans remain available. The NAIC's proposed regulation recognizes and balances the claims of the various stakeholders that have fully participated in its drafting. It should prove workable for insurers while benefiting consumers. It presents a sound foundation for moving forward and deserves to be adopted by the NAIC and certified by HHS.

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

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The NAIC's Effort to Find Balance in Its MLR Regulation

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