KHI News Service

Health reform without cost control unsustainable, insurers predict

Flurry of activity as insurers and regulators gear up for first stages of health reform

By Mike Shields | June 28, 2010

For health insurers there are still at least as many questions as answers about the new federal health reform law that is expected to dramatically alter the insurance marketplace.

“This is not the statute that everyone expected to pass,” said Matt All, vice president of public policy and human development at Blue Cross and Blue Shield of Kansas. “So they (Congress) didn't have the opportunity to define many of the terms.”

Much of that detail work has been left for rule making by the U.S. Department of Health and Human Services in consultation with the National Association of Insurance Commissioners.

Both those bureaucracies have been working at an unusually quick pace since the law was signed about 90 days ago to craft rules and guidelines.

Insurers such as Blue Cross of Kansas also have been hustling to respond to the first wave of new requirements the law is bringing though much remains uncertain about what lies ahead.

Blue Cross of Kansas is the state's largest private health insurer. As of May 31, there were 686,362 people enrolled in the company's group or individual plans. In 2009, Blue Cross of Kansas processed more than 16.6 million claims and paid out about $2 billion for health care, according to company officials.

“It's such a change and there are so many dynamics in this complex system that it is hard to know what the new market is going to look like,” All said, describing the consequences of the new law. “We can make some guesses about what it might look like. But I think it will remain very dynamic even past 2014,” when major coverage provisions of the law take effect.

In 2014, Medicaid eligiblity will be expanded to include all adults earning 133 percent or less of federal poverty guidelines. Also, millions more Americans will be eligible for subsidies to buy private insurance through exchanges run either by state or federal government or designated non-profit organizations.

Blue Cross, All said, and other major insurers are predicting that the majority of insurance plans after 2014 will be sold through the exchanges.

These are some of the key reform provisions that insurers are expected to implement this year notwithstanding the bigger changes in store between now and 2014:

Changes for 2010

  • They must provide dependent coverage for adult children up to age 26 on individual or group policies. The deadline for that under the new law is Sept. 23, but Blue Cross and most other major companies have already started.
  • They must eliminate lifetime limits on the dollar value of coverage. And insurers can rescind coverage only in cases of fraud or misrepresentation of claims.
  • Children can no longer be denied coverage because of pre-existing medical conditions.
  • Insurers must provide coverage without cost-sharing for preventive services for children, including recommended immunizations.
  • They must report the ratio of premium dollars collected to those spent for medical services, quality improvement or disease prevention.
  • Premium rates will be reviewed by state or federal regulators and any increases must be justified.

Grandfathered plans

Until June 21, insurance companies hadn't seen the final guidelines from HHS on which of their plans could be “grandfathered,” or deemed acceptable coverage under the new law.

Insurers considered those guidelines essential for moving forward and the companies and their major policyholders continue to sort through the details and ramifications.

“I think it is too early to fully understand what grandfathering will mean to specific plans that are in place today,” said Mary Beth Chambers, corporate communications manager for Blue Cross of Kansas. “It would seem that employers who often determine the amount of their contribution and the amount of cost-sharing they expect of their employees through deductibles, coinsurance, copays, etc., have some room to make changes and retain grandfathering status, but not too much room.”

Generally speaking, plans that eliminate or decrease benefits after March 23, the date the reform law was signed, will lose their grandfather status. Likewise, employers cannot significantly decrease their contributions to worker health plans without losing grandfather status.

Chambers said it is likely each plan will need to be reviewed in light of the new law and guidelines.

“Who stays grandfathered and for how long will be determined on a group-by-group case in the vast majority of cases,” she said. “There are many nuances of the rules that each group will need to understand to determine, with assistance from their sales rep, legal counselor and tax advisor, as to what is the best situation for them.”

Medical-loss ratio

Another key provision of the reform law that kicks in this year as new insurance plan years are launched is the requirement that insurers spend at least 85 percent of the premium dollars they collect for group plans on medical care, quality improvement or prevention. The other 15 percent could go for administration, profits and other business costs.

For individual plans the so-called medical loss ratio would be 80/20.

Blue Cross photo

Matt All

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But Congress left it to the National Association of Insurance Commissioners to craft the guidelines for what is acceptable expense for use in the medical loss calculations and NAIC committees are working to have those written by the end of July, according to Kansas Insurance Commissioner Sandy Praeger.

She chairs the NAIC committee that is drafting the guidelines.

“One of the subcommittee's working on this is still haggling over how to define these things,” Praeger said. “For example, IT (information technology) investment in a company can be used for administrative things, but it also can be used to measure quality. It's those kinds of things that need to be worked out. We're trying to come up with a process that would allow flexibility and not be real rigid but put the onus on the company to prove,” it is spending the proper percentages on medical care or health improvement.

How the medical-loss ratio rules settle out is expected to have major influence on the outcome of the premium rate reviews also required under the new law.

Blue Cross of Kansas currently operates with about a 92-8 medical loss ratio, company officials said. That puts it well within the new percentages required by health reform. The 85-15 ratio for group plans included in the law were based on a Congressional Budget Office report that most U.S. Insurance companies were already operating within that range.

It is possible the new guidelines will allow Blue Cross to count some things it currently logs as administrative expense as medical cost.

For example, All said Blue Cross would like the guidelines or definitions to be broad enough to allow for things such as follow-up calls from care management nurse to policyholders with chronic health conditions or public education campaigns that emphasize healthy living.

Controlling costs

When President Obama signed the health reform law, insurance company spokesmen warned it would do too little to control health care costs, something they said was essential if the reform were to work.

“Ultimately, the success of health care reform will depend on whether or not soaring costs are brought under control and coverage becomes more affordable for working families and small businesses,” said Karen Ignagni, president of America's Health Insurance Plans, the lead lobbying group for the health insurance industry.

All echoed that concern, saying health care costs are “ultimately the big issue.”

“None of this will work long term without handling health care costs,” he said. “We don't believe there is enough in the statute to bring down costs.”

All said Blue Cross officials believe replacing the current fee-for-service medical model with a capitated system would help hold down costs.

“But that's controversial,” All said, “and it's difficult for a provider to make that change for just one health insurer.”

He said for that reason Blue Cross is hoping that the federal Medicare and Medicaid programs will get involved in moving the health system more toward a capitated model.

“Anything they can do to address that sooner rather than later can't be anything but beneficial,” All said. “There is no simple answer.”

In a typical capitated health plan, the providers are paid a set fee per individual whether they see the person or not. But they also eat the cost if the person needs more care than the set fee covers. In short, the medical provider assumes some of the risk that now rests with the insurer.

More expensive insurance

As the reform law now stands, All predicted insurance premiums will probably increase.

One point of concern for insurers is whether the new law's mandate that individuals have health insurance comes with a stiff enough penalty to encourage compliance.

“It remains to be seen how effective that will be,” All said.

Many people, especially those who are relatively young and healthy, will find it easier to pay the penalty and not buy insurance until they need it, All predicted. The consequence of that would be a smaller risk pool and greater expense for insurers and ultimately their policyholders.

All said he thought insurance for most people after reform would probably be “more expensive than it is today, though there are some subsidies that will help. We'll just have to see how all the dynamics play out. The statute creates a lot of pressure upward on the cost of health insurance.”