Correction to This Article
Earlier versions of this article, including in the print edition of The Washington Post, misstated the number of Americans with private insurance. About 180 million Americans have such coverage and will be affected by the new rules; the article omitted the word "million." This version has been corrected.

Health insurers face new federal rules on medical spending

The House of Representatives passed landmark legislation to overhaul the nation's health-care system, approving a Senate bill and a separate package of amendments.
By Amy Goldstein
Washington Post Staff Writer
Tuesday, November 23, 2010; 9:05 AM

The Obama administration issued far-reaching rules Monday to carry out a controversial promise that the new health-care law makes to consumers: insurers must spend at least $4 out of $5 they collect through premiums on direct medical services and other means to improve Americans' health.

Under the rules to take effect in January, the government will reach in novel ways into the workings of the insurance industry to try to drive down bureaucracy, profits and executives' pay.

For the first time, health plans will have to disclose many details about how they allot their money, calculate the portion of their spending that promotes good health, and - if they devote too much income to the wrong purposes - give customers refunds.

In announcing the new standards for what are known in insurance jargon as "medical loss ratios," Health and Human Services Secretary Kathleen Sebelius portrayed the rules as a "guarantee that consumers get the most out of their premium dollars."

At the same time, the regulations make a few concessions to the insurance industry. The administration has given new and small health plans extra time to meet the standards. Insurers will be allowed to deduct most of their taxes before doing the math. And states may ask for federal permission to exempt from the rules health plans sold to individuals - a relatively small but expensive and shaky part of the insurance market - if they can prove that meeting the requirements would prompt such plans to stop doing business within the state.

The regulation is the kind of important fine print that will determine how the sprawling health-care law enacted by Congress eight months ago will play out in practice. The rules will affect about 180 million Americans with private insurance.

The regulations represent the first time the federal government has specified the proportion of insurance premiums that must be devoted to patients' well-being. For the large groups of employees that make up most of the U.S. insurance market, at least 85 percent must go to coverage. For policies sold to individuals and small groups, the figure is at least 80 percent.

The administration's decision also is a window on the tug of war that is certain to persist in coming years as constituencies with competing stakes jockey over myriad federal and state decisions that translate legislative language into reality.

The standards culminate months of heavy lobbying by the insurance industry, health-care providers and consumers over how stringent the government should be in defining which activities health plans may count as beneficial to patients.

Within hours of HHS's announcement, most advocacy groups for patients and leading congressional Democrats praised the agency's work. Republicans were noticeably silent.

Some experts in health policy question the premise of trying to rein in insurance costs through this approach, pointing out that there are no restrictions on whether insurers can raise their premiums. "If you want to play the game, what you do is gut your program of cost containment" and thus avoid the administrative expenses of managing care, said Robert L. Laszewski, a consultant with clients across the health-care system. "It just makes no sense."

The standards set forth Monday adopt wholesale a set of recommendations given to the administration last month by the nation's state insurance regulators. The law gave the National Association of Insurance Commissioners, which wanted a large say, the task of developing regulatory language and submitting it to HHS to be "certified."

Federal health officials could have departed from those recommendations but did not. They did go beyond the association in several areas where the group did not give formal advice.

The federal rules say, for instance, that two small parts of the insurance market, bare-bones coverage known as "mini-med" policies and health plans sold to Americans living abroad, will not have to meet the standards for at least a year. HHS will collect more data on those two forms of insurance and decide whether to apply the rules to them.

One of the most significant uncertainties is how lenient HHS will be when a state asks for exemptions for its insurance market. Already, Maine, Iowa, Georgia and South Carolina have sought such exemptions.

After a news conference to announce the rules, several HHS officials convened a private phone call on Monday with the nation's insurance commissioners and reassured them that the department wanted to work closely with states, according to one participant who asked not to be identified because the call was private.

Karen Ignagni, president of the main industry trade group, America's Health Insurance Plans, said that her group would continue to pursue some ideas that HHS rejected: letting states ask for exemptions for small-group and large insurance plans, and letting insurers count fraud-prevention efforts and the cost of switching to new billing systems as part of their efforts to improve health-care quality.

An administration official declined to comment on whether HHS was open to reconsidering the insurance lobbyists' request.

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