The week began with the unveiling of the Obama administration’s budget request for the upcoming fiscal year. Meanwhile, in Congress, lawmakers are in the midst of debating a spending measure to provide current year funding for the federal government. As the action unfolds, the burning question is whether Republicans will try to “defund” health care reform and, if so, what strategy might they employ to do it. In fact, the defunding has already begun.

A key provision of the health law that will provide 19 million consumers with tax credits to help afford their health insurance has been raided once. Now, Republicans are planning to raid it again.

Here’s the background: In late December Congress was looking for money to help pay for a plan to stop dramatic scheduled cuts in doctors’ Medicare reimbursements. As a temporary fix, the lame duck Congress changed a part of the new health law so that some consumers will have to pay back a hefty chunk of their tax credits. That change is expected to save the government $16 billion over 10 years.

Now Congress is again looking for money – this time to offset the funds lost with the repeal an unpopular health law provision that involves 1099 tax reporting requirements. Republicans are proposing another increase in the liability of tax credit recipients to raise the necessary revenue.

To understand why the proposal is worrisome, it is necessary to understand the function of the new tax credits. They are designed to help finance insurance premiums beginning in 2014, and are, perhaps, the most important provision in the new law for making health care affordable to middle-class Americans. They will be available on a sliding scale to families with incomes up to 400 percent of the federal poverty level. This is $88,200 for a family of four, but most of the money will go to families with far less income.

Here’s how they work. The amount of the tax credit for which people are eligible is based on annual income for the year the credits are received. But, because people will likely need help paying their insurance premiums during that tax year, the law provides for advance payments of the credits. These payments are made directly to the insurer on a monthly basis. The insurance exchanges, through which individuals will purchase health coverage, will determine eligibility for tax credits based on a taxpayer’s prior year tax return. (Taxpayers can provide more recent information if their income or family circumstances have changed.) At the time taxpayers file their annual tax return, the advance payments will be reconciled against the tax credit for which the taxpayers are eligible using their annual income reported on their return. If the advance payments are greater than the final tax credit, the taxpayer will get a bill from the Internal Revenue Service.

Excess advance payments can happen easily and will happen often. The income of hourly-wage lower and middle-income Americans often fluctuates from week to week and is difficult to predict. Dependents may leave or return home. Family members may become eligible for Medicaid or CHIP. Taxpayers may be eligible for a premium tax credit in the early months of the year while unemployed but then get a job with coverage and no longer need premium assistance. Or they may lose a job part way through the year and face dramatically reduced income, even though their full year reported income remains high.

All these changes will affect the subsidy calculation. It will be difficult for the exchanges to keep up with changes in family circumstances and for families to know what changes they should report and to whom. It is inevitable that there will be some inconsistency between advance payments based on estimated income for the year and the final credit determined at tax time.

Originally, when the health overhaul was signed into law, the amount the government could recover was capped at $400 for families with incomes below 400 percent of poverty. The amendment adopted in December increases the amount families will owe on a sliding-scale basis. Under the December amendment families with incomes at 200 percent of poverty will have to pay back as much as $1,000; families with incomes at 400 percent will have to pay back up to up to $2,500. It also, however, puts some limits on overpayments for families up to 500 percent of poverty.

The “1099 fix” legislation, which is likely to be considered this week by the House Ways and Means Committee, would require families at 200 percent of poverty to pay $1,500, and families earning a dollar more than 400 percent of poverty to pay back their entire tax credit.

It is important to understand what is at stake here.

Fear of potential end-of-year liability could be a substantial deterrent to participation in the advance premium tax credit program. It was estimated that the December amendment increased the likely number of uninsured after 2014 by about 200,000 people, who would rather be uninsured than face substantial repayments. Millions more consumers will face unanticipated financial burdens. This is likely to create a powerful backlash, as Americans who thought they were receiving a tax credit to help them purchase insurance find out it was in fact only a loan, and that they owe the IRS a substantial debt.

These changes are not needed to deter any potential gaming of the system. The health law provides separately for substantial fines for providing false information, even negligently. The December-passed amendment simply increased the penalty for failing to accurately make a very difficult projection of future income and family circumstances, and the new proposal would increase the penalty even more.

The December amendment was a compromise, improving some aspects of the legislation while diminishing tax credit protection. But it also set a bad precedent by cutting premium subsidies before they even become available. It can only be hoped that Congress does not adopt the proposed amendment, again increasing the risk of Americans who accept premium tax credits, as it attempts to find ways to cut the budget during this session.

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The Republicans are too late if they want to roll back the law completely; some parts have already become reality. Many employers, including some that bankrolled that Republican resurgence, are taking advantage of its retiree reinsurance program. Small businesses across the country are taking advantage of the small employer tax credit to expand coverage for their employees while more than 1.8 million Medicare beneficiaries have received the $250 checks as they hit the dreaded donut hole. Other provisions of the legislation — coverage to adult children up to age 26, the end of annual limits on coverage, or the end of rescissions for unintentional mistakes — will become a reality for millions of Americans as their new plan year begins on Jan. 1.

Yes, the Affordable Care Act remains the law of the land, but much more needs to be done soon if it is to realize its promise.

Vital protections promised by the reform — the right to have at least 80 percent of your insurance premiums actually spent on medical care or quality improvement activities; the right to be told why your insurer is demanding an unreasonable premium increase; the right to a simple, plain language explanation of what your insurance actually covers — will only become real when the Department of Health and Human Services issues rules implementing them.

The National Association of Insurance Commissioners toiled throughout the summer and early fall performing its duty under the law to deliver to HHS recommendations for resolving technical issues under the law. The state commissioners who make up the NAIC carried out their responsibilities with courage and considerable cost to themselves, as many of them faced reelection or reappointment in a hostile political environment.

Now it is up to HHS to finish the job.

Of course, some argue that the midterm elections were a referendum of health reform, and that the reform was overwhelmingly rejected. I have seen no indication, however, that voters went to the polls demanding that pre-existing condition exclusions for children be restored, that insurers be allowed to spend 35 percent of premiums or more on administrative expenses and profits (as some do now), or that insurers be able to raise their premiums unreasonably without offering a justification (as is now legal in some states). Neither did voters cast their ballots enraged that the reform law creates a right to know why coverage was denied or to appeal a claims denial within 72 hours when life or limb is at stake.

Nonetheless, emboldened by the election, insurers are demanding that HHS delay or dilute reform implementation and let business continue as usual.

The Affordable Care Act is the law. The president retains a solemn obligation under the Constitution to “take care that the laws be faithfully executed.” The reform law affords HHS discretion regarding some implementation issues, and HHS has been exercising this discretion flexibly to achieve a practical interpretation of the law. But on other issues the law is clear and brooks not variance. For example, the NAIC, in its final recommendations, correctly concluded that removing agent commissions from insurer administrative costs to calculate the amount insurers must spend on health care is simply not allowed. On these issues the federal government must move resolutely ahead without regard to special interest lobbying.

Whatever the midterm elections meant, they cannot be read as a resounding endorsement of our current failed health insurance system. We must get the job of reform implementation done.

Timothy Jost is the Robert L. Willett Family Professor of Law at Washington and Lee University School of Law. He also is 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 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.

When the long-awaited regs were released Sept. 23, news reports proclaimed that there were “.” 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 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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We can all agree that the high and rapidly growing cost of health care has reached crisis proportions.  Indeed, many have criticized the health law for not doing enough to control costs.  But health care costs as experienced by consumers include not just the cost of clinical health care services, but also the administrative costs of private health insurance. 

A recent article reports that some insurers spend 65 percent or less of their premiums on health care services. Before we ration access to health care services or cut the pay of health care providers, shouldn’t we encourage health insurers to be more efficient? That was the judgment of Congress in enacting section 2718 of the new health law, which requires insurers to spend at least 80 percent of their premium revenues in the individual and small group and 85 percent in the large group market on clinical health care services and on “activities that improve health care quality.” 

Under section 2718, insurers that fail to achieve these “medical loss ratio” targets must rebate the difference between their actual expenditures and the target to their customers. Although insurers can still apply all of their investment income to administrative costs and profit, they will face a significant incentive to spend more of their revenues on health care. The grandfathering rules announced this summer should also encourage greater efficiency, since like the MLRs, they discourage unreasonable cuts in benefits as a share of premiums.

Far from being the bludgeon that Holtz-Eakin and Ramlet condemn, however, section 2718 is a finely-tuned instrument.  First, it allows for various deductions from the premium revenues counted in the denominator, excluding some taxes, regulatory fees, and risk adjustment payments. Second, it permits the Department of Health and Human Services to “adjust” the required ratios on a state-by-state basis during a transitional period to avoid destabilization of the individual market. Third, it requires implementing regulations to take into account the circumstances of newer, smaller and different types of plans. Finally, and most importantly, the law delegates to the NAIC, the nation’s recognized experts on insurance regulation, the task of establishing definitions and methodologies for implementing section 2718, leaving to HHS only the task of certifying the regulations.

The NAIC has taken this responsibility very seriously. It established two working groups to implement 2718.  One has designed a form for insurers to report the expenses that go into calculating the MLR and established the definitions to be used to complete that form. The NAIC unanimously approved this form at its Seattle summer meeting. A second group is still working out the rules that will be used in actually calculating the MLRs. This group has struggled with difficult problems such as how to treat small health plans whose experience varies considerably from year to year or plans that pay for services on a capitated basis, as well as how to deal with the transition between now and 2014. 

Accommodations being made will assure that many Americans will be able to keep the insurance plan they now have, even if it does not initially meet the targets. Both working groups have carried out their assignments through open conference calls, sometimes involving over 400 participants, in which the industry, consumer groups and other interested parties have had their say. The working groups have met from two to four hours a week over a nearly four month period.

One important issue has been defining the activities that improve health care quality. The NAIC definition is broad and flexible. Expenditures for activities that improve health outcomes, prevent rehospitalizations, protect patient safety, promote wellness and some health information technology expenditures, are all allowable. If insurers devise new approaches to quality improvement, they can request that these activities be recognized as well. 

The yet unfinished task of defining the taxes that can be excluded from the ratio has also been contentious. A deduction for “federal taxes” was added to the MLR formula by the Senate right before it passed the legislation in December 2009. The chairs of the six committees that drafted the legislation have explained that only the three new federal insurance taxes added by the health law were intended to be excluded, and unless one is prepared to call them liars, this must be accepted as what they meant. 

The statute links federal taxes with premium revenues and licensing and regulatory fees in the same sentence, making the intended reading quite plausible. Taxes have always been administrative costs under state MLR formulas. To say that including taxes in premium revenues is double taxation is silly.  Rebates are payments to consumers, not to the government, and thus are simply not taxes. 

The claim of Holtz-Eakin and Ramlet that Congress’ “interjection” into the regulatory process is “unprecedented” is surely disingenuous. Congress has always kept a close eye on legislative implementation, as Holtz-Eakin must remember from his days in the Bush White House. Political circumstances required Congress to pass the health overhaul without a conference committee report, making it likely that Congress will continue to clarify what it intended.  

For the present, however, both the NAIC and HHS are pursuing a careful, open process to implement the MLR legislation. Once implemented, the efficiencies driven by section 2718 will benefit millions of American health insurance consumers by holding down the cost of health insurance. 

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The health overhaul does establish new national requirements that insurers must meet. It also establishes a federal program for subsidizing the purchase of private health insurance. It imposes nationwide requirements that individuals be insured and that employers that do not offer health insurance help cover the cost of public subsidies for their employees.

But the jobs of enforcing the insurance regulations, of operating the health insurance exchanges and generally of regulating insurance are left to the states. Indeed, the health overhaul leaves state insurance law in place, only preempting laws that prevent its application.

To help coordinate state regulatory efforts, health reform looks to the National Association of Insurance Commissioners. The NAIC has for nearly 140 years orchestrated the efforts of the state insurance commissioners. Until 1944, states exclusively regulated insurance. But in that year the Supreme Court decided that the business of insurance was within the regulatory purview of Congress. The following year, however, Congress passed the McCarran-Ferguson law, handing responsibility for insurance regulation back to the states.

Although federal regulatory authority has expanded over the decades, the states have by and large continued to be the primary regulators of health insurance. The NAIC coordinates their efforts to sustain a national insurance market and to assure the efficient use of state resources.

In 10 provisions, the new health law explicitly assigns reform responsibilities to or requests help from the NAIC. One section requests the NAIC to amend its Medigap plan standards; another asks the NAIC to establish definitions and methodologies to be “certified” by the Department of Health and Human Services for determining whether insurers pay out enough of their premiums for claims or quality improvement costs (the “medical loss ratio” requirement). A number of other provisions require HHS to consult with the NAIC or to take its advice into account in drafting implementing regulations.

The NAIC website explains, “A state regulator’s primary responsibility is to protect the interests of insurance consumers, and the NAIC helps regulators fulfill that obligation.” The NAIC has 29 consumer representatives this year, 18 of whom are “funded representatives,” for whom the NAIC covers the expenses of participating in NAIC proceedings. They represent groups like the cancer and diabetes societies, the heart and multiple sclerosis associations, Consumers’ Union and state-based insurance consumer advocacy organizations.

Regulators are often accused of being influenced by the industries they regulate, and the NAIC has also been criticized for being too close to the insurance industry. It’s true, the industry is a continual presence at all NAIC proceedings. But as a funded consumer representative actively participating in the NAIC health overhaul implementation process, I have been impressed with the transparency and participatory nature of that process to date and the seriousness with which the NAIC has taken its responsibility to implement the new health law.

There are several reasons why the NAIC was singled out for a key role in implementing the legislation. Most obviously, the federal government needed its expertise. Although the Departments of Labor and Treasury regulate some health insurance plans and HHS has partial responsibility for administering the Health Insurance Portability and Accountability Act, the federal government has had little experience with regulating the individual and small group insurance market, the primary concern of the health overhaul. The NAIC is the repository of state expertise in regulating these markets.

Second, the NAIC is the ideal partner for coordinating federal laws across states. No other institution has as much experience or expertise in coordinating insurance regulatory efforts among the states or between the states and the federal government.

Finally, the state insurance commissioners, the NAIC’s constituent members, are natural partners for the federal government in implementing the new law. While the political grandstanding that attended Congress’ enactment of health reform has continued unabated at the state level, the insurance commissioners have approached reform as a practical, not a political, challenge.

Even in states whose governors have vociferously opposed the health overhaul, insurance commissioners are quietly working together with the NAIC to fulfill their obligation to implement the new law of the land.

The NAIC has been hard at work implementing health reform since it was signed into law in March. Working groups and committees have held hours of conference calls and already drafted a complex form needed for the medical loss ratio instructions and another for justifying unreasonable premium increases. An NAIC committee that is working on the health insurance exchanges will hold hearings on July 22 and 23.

As implementation proposals adopted by the working groups are passed on to be voted on by all the commissioners, the NAIC process seems to be coming under increasing political pressure. I hope and trust, however, that the NAIC will fulfill the expectations of Congress; that it will prove a worthy partner in the task of reforming the health insurance industry to better serve American consumers.

Timothy Jost is the Robert L. Willett Family Professor of Law at Washington and Lee University School of Law.

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The week began with the unveiling of the Obama administration’s budget request for the upcoming fiscal year. Meanwhile, in Congress, lawmakers are in the midst of debating a spending measure to provide current year funding for the federal government. As the action unfolds, the burning question is whether Republicans will try to “defund” health care reform and, if so, what strategy might they employ to do it. In fact, the defunding has already begun.

A key provision of the health law that will provide 19 million consumers with tax credits to help afford their health insurance has been raided once. Now, Republicans are planning to raid it again.

Here’s the background: In late December Congress was looking for money to help pay for a plan to stop dramatic scheduled cuts in doctors’ Medicare reimbursements. As a temporary fix, the lame duck Congress changed a part of the new health law so that some consumers will have to pay back a hefty chunk of their tax credits. That change is expected to save the government $16 billion over 10 years.

Now Congress is again looking for money – this time to offset the funds lost with the repeal an unpopular health law provision that involves 1099 tax reporting requirements. Republicans are proposing another increase in the liability of tax credit recipients to raise the necessary revenue.

To understand why the proposal is worrisome, it is necessary to understand the function of the new tax credits. They are designed to help finance insurance premiums beginning in 2014, and are, perhaps, the most important provision in the new law for making health care affordable to middle-class Americans. They will be available on a sliding scale to families with incomes up to 400 percent of the federal poverty level. This is $88,200 for a family of four, but most of the money will go to families with far less income.

Here’s how they work. The amount of the tax credit for which people are eligible is based on annual income for the year the credits are received. But, because people will likely need help paying their insurance premiums during that tax year, the law provides for advance payments of the credits. These payments are made directly to the insurer on a monthly basis. The insurance exchanges, through which individuals will purchase health coverage, will determine eligibility for tax credits based on a taxpayer’s prior year tax return. (Taxpayers can provide more recent information if their income or family circumstances have changed.) At the time taxpayers file their annual tax return, the advance payments will be reconciled against the tax credit for which the taxpayers are eligible using their annual income reported on their return. If the advance payments are greater than the final tax credit, the taxpayer will get a bill from the Internal Revenue Service.

Excess advance payments can happen easily and will happen often. The income of hourly-wage lower and middle-income Americans often fluctuates from week to week and is difficult to predict. Dependents may leave or return home. Family members may become eligible for Medicaid or CHIP. Taxpayers may be eligible for a premium tax credit in the early months of the year while unemployed but then get a job with coverage and no longer need premium assistance. Or they may lose a job part way through the year and face dramatically reduced income, even though their full year reported income remains high.

All these changes will affect the subsidy calculation. It will be difficult for the exchanges to keep up with changes in family circumstances and for families to know what changes they should report and to whom. It is inevitable that there will be some inconsistency between advance payments based on estimated income for the year and the final credit determined at tax time.

Originally, when the health overhaul was signed into law, the amount the government could recover was capped at $400 for families with incomes below 400 percent of poverty. The amendment adopted in December increases the amount families will owe on a sliding-scale basis. Under the December amendment families with incomes at 200 percent of poverty will have to pay back as much as $1,000; families with incomes at 400 percent will have to pay back up to up to $2,500. It also, however, puts some limits on overpayments for families up to 500 percent of poverty.

The “1099 fix” legislation, which is likely to be considered this week by the House Ways and Means Committee, would require families at 200 percent of poverty to pay $1,500, and families earning a dollar more than 400 percent of poverty to pay back their entire tax credit.

It is important to understand what is at stake here.

Fear of potential end-of-year liability could be a substantial deterrent to participation in the advance premium tax credit program. It was estimated that the December amendment increased the likely number of uninsured after 2014 by about 200,000 people, who would rather be uninsured than face substantial repayments. Millions more consumers will face unanticipated financial burdens. This is likely to create a powerful backlash, as Americans who thought they were receiving a tax credit to help them purchase insurance find out it was in fact only a loan, and that they owe the IRS a substantial debt.

These changes are not needed to deter any potential gaming of the system. The health law provides separately for substantial fines for providing false information, even negligently. The December-passed amendment simply increased the penalty for failing to accurately make a very difficult projection of future income and family circumstances, and the new proposal would increase the penalty even more.

The December amendment was a compromise, improving some aspects of the legislation while diminishing tax credit protection. But it also set a bad precedent by cutting premium subsidies before they even become available. It can only be hoped that Congress does not adopt the proposed amendment, again increasing the risk of Americans who accept premium tax credits, as it attempts to find ways to cut the budget during this session.

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The Republicans are too late if they want to roll back the law completely; some parts have already become reality. Many employers, including some that bankrolled that Republican resurgence, are taking advantage of its retiree reinsurance program. Small businesses across the country are taking advantage of the small employer tax credit to expand coverage for their employees while more than 1.8 million Medicare beneficiaries have received the $250 checks as they hit the dreaded donut hole. Other provisions of the legislation — coverage to adult children up to age 26, the end of annual limits on coverage, or the end of rescissions for unintentional mistakes — will become a reality for millions of Americans as their new plan year begins on Jan. 1.

Yes, the Affordable Care Act remains the law of the land, but much more needs to be done soon if it is to realize its promise.

Vital protections promised by the reform — the right to have at least 80 percent of your insurance premiums actually spent on medical care or quality improvement activities; the right to be told why your insurer is demanding an unreasonable premium increase; the right to a simple, plain language explanation of what your insurance actually covers — will only become real when the Department of Health and Human Services issues rules implementing them.

The National Association of Insurance Commissioners toiled throughout the summer and early fall performing its duty under the law to deliver to HHS recommendations for resolving technical issues under the law. The state commissioners who make up the NAIC carried out their responsibilities with courage and considerable cost to themselves, as many of them faced reelection or reappointment in a hostile political environment.

Now it is up to HHS to finish the job.

Of course, some argue that the midterm elections were a referendum of health reform, and that the reform was overwhelmingly rejected. I have seen no indication, however, that voters went to the polls demanding that pre-existing condition exclusions for children be restored, that insurers be allowed to spend 35 percent of premiums or more on administrative expenses and profits (as some do now), or that insurers be able to raise their premiums unreasonably without offering a justification (as is now legal in some states). Neither did voters cast their ballots enraged that the reform law creates a right to know why coverage was denied or to appeal a claims denial within 72 hours when life or limb is at stake.

Nonetheless, emboldened by the election, insurers are demanding that HHS delay or dilute reform implementation and let business continue as usual.

The Affordable Care Act is the law. The president retains a solemn obligation under the Constitution to “take care that the laws be faithfully executed.” The reform law affords HHS discretion regarding some implementation issues, and HHS has been exercising this discretion flexibly to achieve a practical interpretation of the law. But on other issues the law is clear and brooks not variance. For example, the NAIC, in its final recommendations, correctly concluded that removing agent commissions from insurer administrative costs to calculate the amount insurers must spend on health care is simply not allowed. On these issues the federal government must move resolutely ahead without regard to special interest lobbying.

Whatever the midterm elections meant, they cannot be read as a resounding endorsement of our current failed health insurance system. We must get the job of reform implementation done.

Timothy Jost is the Robert L. Willett Family Professor of Law at Washington and Lee University School of Law. He also is 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 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.

When the long-awaited regs were released Sept. 23, news reports proclaimed that there were “.” 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 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.

This <a target="_blank" href="/insurance/093010jost/">article</a&gt; first appeared on <a target="_blank" href="">KFF Health News</a> and is republished here under a <a target="_blank" href=" Commons Attribution-NonCommercial-NoDerivatives 4.0 International License</a>.<img src="/wp-content/uploads/sites/8/2023/04/kffhealthnews-icon.png?w=150&quot; style="width:1em;height:1em;margin-left:10px;">

We can all agree that the high and rapidly growing cost of health care has reached crisis proportions.  Indeed, many have criticized the health law for not doing enough to control costs.  But health care costs as experienced by consumers include not just the cost of clinical health care services, but also the administrative costs of private health insurance. 

A recent article reports that some insurers spend 65 percent or less of their premiums on health care services. Before we ration access to health care services or cut the pay of health care providers, shouldn’t we encourage health insurers to be more efficient? That was the judgment of Congress in enacting section 2718 of the new health law, which requires insurers to spend at least 80 percent of their premium revenues in the individual and small group and 85 percent in the large group market on clinical health care services and on “activities that improve health care quality.” 

Under section 2718, insurers that fail to achieve these “medical loss ratio” targets must rebate the difference between their actual expenditures and the target to their customers. Although insurers can still apply all of their investment income to administrative costs and profit, they will face a significant incentive to spend more of their revenues on health care. The grandfathering rules announced this summer should also encourage greater efficiency, since like the MLRs, they discourage unreasonable cuts in benefits as a share of premiums.

Far from being the bludgeon that Holtz-Eakin and Ramlet condemn, however, section 2718 is a finely-tuned instrument.  First, it allows for various deductions from the premium revenues counted in the denominator, excluding some taxes, regulatory fees, and risk adjustment payments. Second, it permits the Department of Health and Human Services to “adjust” the required ratios on a state-by-state basis during a transitional period to avoid destabilization of the individual market. Third, it requires implementing regulations to take into account the circumstances of newer, smaller and different types of plans. Finally, and most importantly, the law delegates to the NAIC, the nation’s recognized experts on insurance regulation, the task of establishing definitions and methodologies for implementing section 2718, leaving to HHS only the task of certifying the regulations.

The NAIC has taken this responsibility very seriously. It established two working groups to implement 2718.  One has designed a form for insurers to report the expenses that go into calculating the MLR and established the definitions to be used to complete that form. The NAIC unanimously approved this form at its Seattle summer meeting. A second group is still working out the rules that will be used in actually calculating the MLRs. This group has struggled with difficult problems such as how to treat small health plans whose experience varies considerably from year to year or plans that pay for services on a capitated basis, as well as how to deal with the transition between now and 2014. 

Accommodations being made will assure that many Americans will be able to keep the insurance plan they now have, even if it does not initially meet the targets. Both working groups have carried out their assignments through open conference calls, sometimes involving over 400 participants, in which the industry, consumer groups and other interested parties have had their say. The working groups have met from two to four hours a week over a nearly four month period.

One important issue has been defining the activities that improve health care quality. The NAIC definition is broad and flexible. Expenditures for activities that improve health outcomes, prevent rehospitalizations, protect patient safety, promote wellness and some health information technology expenditures, are all allowable. If insurers devise new approaches to quality improvement, they can request that these activities be recognized as well. 

The yet unfinished task of defining the taxes that can be excluded from the ratio has also been contentious. A deduction for “federal taxes” was added to the MLR formula by the Senate right before it passed the legislation in December 2009. The chairs of the six committees that drafted the legislation have explained that only the three new federal insurance taxes added by the health law were intended to be excluded, and unless one is prepared to call them liars, this must be accepted as what they meant. 

The statute links federal taxes with premium revenues and licensing and regulatory fees in the same sentence, making the intended reading quite plausible. Taxes have always been administrative costs under state MLR formulas. To say that including taxes in premium revenues is double taxation is silly.  Rebates are payments to consumers, not to the government, and thus are simply not taxes. 

The claim of Holtz-Eakin and Ramlet that Congress’ “interjection” into the regulatory process is “unprecedented” is surely disingenuous. Congress has always kept a close eye on legislative implementation, as Holtz-Eakin must remember from his days in the Bush White House. Political circumstances required Congress to pass the health overhaul without a conference committee report, making it likely that Congress will continue to clarify what it intended.  

For the present, however, both the NAIC and HHS are pursuing a careful, open process to implement the MLR legislation. Once implemented, the efficiencies driven by section 2718 will benefit millions of American health insurance consumers by holding down the cost of health insurance. 

This <a target="_blank" href="/insurance/082510jost/">article</a&gt; first appeared on <a target="_blank" href="">KFF Health News</a> and is republished here under a <a target="_blank" href=" Commons Attribution-NonCommercial-NoDerivatives 4.0 International License</a>.<img src="/wp-content/uploads/sites/8/2023/04/kffhealthnews-icon.png?w=150&quot; style="width:1em;height:1em;margin-left:10px;">

The health overhaul does establish new national requirements that insurers must meet. It also establishes a federal program for subsidizing the purchase of private health insurance. It imposes nationwide requirements that individuals be insured and that employers that do not offer health insurance help cover the cost of public subsidies for their employees.

But the jobs of enforcing the insurance regulations, of operating the health insurance exchanges and generally of regulating insurance are left to the states. Indeed, the health overhaul leaves state insurance law in place, only preempting laws that prevent its application.

To help coordinate state regulatory efforts, health reform looks to the National Association of Insurance Commissioners. The NAIC has for nearly 140 years orchestrated the efforts of the state insurance commissioners. Until 1944, states exclusively regulated insurance. But in that year the Supreme Court decided that the business of insurance was within the regulatory purview of Congress. The following year, however, Congress passed the McCarran-Ferguson law, handing responsibility for insurance regulation back to the states.

Although federal regulatory authority has expanded over the decades, the states have by and large continued to be the primary regulators of health insurance. The NAIC coordinates their efforts to sustain a national insurance market and to assure the efficient use of state resources.

In 10 provisions, the new health law explicitly assigns reform responsibilities to or requests help from the NAIC. One section requests the NAIC to amend its Medigap plan standards; another asks the NAIC to establish definitions and methodologies to be “certified” by the Department of Health and Human Services for determining whether insurers pay out enough of their premiums for claims or quality improvement costs (the “medical loss ratio” requirement). A number of other provisions require HHS to consult with the NAIC or to take its advice into account in drafting implementing regulations.

The NAIC website explains, “A state regulator’s primary responsibility is to protect the interests of insurance consumers, and the NAIC helps regulators fulfill that obligation.” The NAIC has 29 consumer representatives this year, 18 of whom are “funded representatives,” for whom the NAIC covers the expenses of participating in NAIC proceedings. They represent groups like the cancer and diabetes societies, the heart and multiple sclerosis associations, Consumers’ Union and state-based insurance consumer advocacy organizations.

Regulators are often accused of being influenced by the industries they regulate, and the NAIC has also been criticized for being too close to the insurance industry. It’s true, the industry is a continual presence at all NAIC proceedings. But as a funded consumer representative actively participating in the NAIC health overhaul implementation process, I have been impressed with the transparency and participatory nature of that process to date and the seriousness with which the NAIC has taken its responsibility to implement the new health law.

There are several reasons why the NAIC was singled out for a key role in implementing the legislation. Most obviously, the federal government needed its expertise. Although the Departments of Labor and Treasury regulate some health insurance plans and HHS has partial responsibility for administering the Health Insurance Portability and Accountability Act, the federal government has had little experience with regulating the individual and small group insurance market, the primary concern of the health overhaul. The NAIC is the repository of state expertise in regulating these markets.

Second, the NAIC is the ideal partner for coordinating federal laws across states. No other institution has as much experience or expertise in coordinating insurance regulatory efforts among the states or between the states and the federal government.

Finally, the state insurance commissioners, the NAIC’s constituent members, are natural partners for the federal government in implementing the new law. While the political grandstanding that attended Congress’ enactment of health reform has continued unabated at the state level, the insurance commissioners have approached reform as a practical, not a political, challenge.

Even in states whose governors have vociferously opposed the health overhaul, insurance commissioners are quietly working together with the NAIC to fulfill their obligation to implement the new law of the land.

The NAIC has been hard at work implementing health reform since it was signed into law in March. Working groups and committees have held hours of conference calls and already drafted a complex form needed for the medical loss ratio instructions and another for justifying unreasonable premium increases. An NAIC committee that is working on the health insurance exchanges will hold hearings on July 22 and 23.

As implementation proposals adopted by the working groups are passed on to be voted on by all the commissioners, the NAIC process seems to be coming under increasing political pressure. I hope and trust, however, that the NAIC will fulfill the expectations of Congress; that it will prove a worthy partner in the task of reforming the health insurance industry to better serve American consumers.

Timothy Jost is the Robert L. Willett Family Professor of Law at Washington and Lee University School of Law.

This <a target="_blank" href="/news/071510jost/">article</a&gt; first appeared on <a target="_blank" href="">KFF Health News</a> and is republished here under a <a target="_blank" href=" Commons Attribution-NonCommercial-NoDerivatives 4.0 International License</a>.<img src="/wp-content/uploads/sites/8/2023/04/kffhealthnews-icon.png?w=150&quot; style="width:1em;height:1em;margin-left:10px;">