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New MLR rule requires payers to cut overhead costs

Despite insurers' fears, the Department of Health and Human Services today issued a new medical loss ratio rule that will require health insurers to spend between 80 percent and 85 percent of consumers' premium dollars on direct care for patients and improvements in quality of care.

For too long consumers have watched premiums rise more rapidly than their wages and other costs, HHS Secretary Kathleen Sebelius said at a press briefing today. "Yet, they haven't always received the quality medical care they should expect at that price."

She blamed overhead costs, including larger salaries and bonuses, that contribute little to care. "We believe that they have gotten out of hand," she said. In today's market, some insurers spend as little as 60 percent of premium dollars on healthcare, she noted.

The MLR will encourage insurers to work harder to control their overhead costs and give policy holders a better sense of how their premium dollars are spent.

The new regulations should be no surprise to anyone in the insurance industry, as they've been the topic of much discussion for the past five months. They reflect recommendations made by the NAIC, which the Affordable Care Act authorized to develop MLR standards. Insurers that fail to meet the MLR standards will have to give their customers rebates. The first round of rebates will go out to consumers by August 2012 based on insurers' 2011 MLRs.

Jay Angoff, director of the Office of Consumer Information and Insurance Oversight at HHS was optimistic about the MLR's future impact. "We think the MLR is a big win for the American people," he said. "Insurers will have an economic incentive to compete based on price and quality."

Angoff seemed convinced that insurers would have no trouble meeting the minimum MLR standards, given that profitability for many insurers has been at an all-time high.

Beginning in 2011, payers that issue policies to individuals, small employers and larger employers will have to report the following in each state where it does business:

  • total earned premiums;
  • total reimbursement for clinical services;
  • total spending on activities to improve quality; and
  • total spending on all other non-claims costs excluding federal and state taxes and fees.

Over the past few months as NAIC developed its MLR recommendations, insurers contended that an 80 percent MLR could destabilize markets. The Affordable Care Act allows Secretary Sebelius to adjust the state MLR standards. States may request such adjustments for up to three years.

To learn more:
- here's the HHS press release
- see more information about the medical-loss ratio
- here's the actual regulation
- here's the CNN story

Related Articles:
States want slower medical-loss ratio phase-in
Medical-loss ratio could include fraud prevention
Insurers lose battle as NAIC approves tough MLR rules

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