KHI News Service

Kansas requests waiver from medical loss requirement

Without waiver, companies not meeting requirement would have to pay rebates to customers next year

By Dave Ranney | May 20, 2011

The Kansas Insurance Department is urging the federal government to let it phase in new rules that are of concern to insurance agents and that some insurers may struggle to meet.

The department has asked the U.S. Department of Health and Humans Services for a waiver to give health insurance companies three additional years to comply with a requirement in the health reform law that says they are to spend at least 80 percent of their premium dollars on health care services to their policy holders.

Without the waiver, companies that fall short of the so-called medical loss ratio in 2011 would have to pay rebates to customers, starting next year.

In Kansas, most health insurance companies already meet the requirement.

But department officials decided to apply for the waiver after learning that some companies fear they will be subject to penalties and have been cutting their agents’ commissions in an effort to reduce costs.

“Going to a graduated phase-in won’t address all the concerns that have been raised by the companies, but it should minimize the potential impact,” said Linda Sheppard, head of the insurance department’s accident and health division.

Insurance agents have long warned that if companies are forced to cut their administrative overhead, cuts in agent commissions are inevitable. That, they say, would force many agents to exit the health insurance market, leaving many beneficiaries to navigate a complicate marketplace on their own.

“Commissions on the individual market used to be 10 to 15 percent, now, since Jan. 1, they’re down to 5 to 10 percent,” said Robert Richey, an independent insurance agent in Wichita.

“On the small group market, they used to be 5 percent, now they’re 2 percent,” he said. “The carriers can live on those percentages, but the agents can’t. We’re being phased out.”

Eventually, Richey said, beneficiaries will be referred to toll-free call centers.

In 2014, the state is expected to comply with another requirement of the federal health reform law by establishing an online insurance purchasing exchange. Tens of thousands of Kansans, including many who are now uninsured, are expected to purchase coverage through the exchange, many with the help of federal subsidies.

“When that happens, consumers are not going to have an advocate,” Richey said. “It’ll be very impersonal.”

Richey testified during a March 14 hearing hosted by Kansas Insurance Commissioner Sandy Praeger.

“We included some of the agent testimony in our waiver application,” Sheppard said.

The department’s proposal calls for giving insurance companies three additional years to fully comply with the MLR requirement, reaching the 80-percent threshold in 2014 rather than this year.

Currently in Kansas, insurance companies are allowed to have a medical-loss ratio as low as 55 percent. The measure has not changed since 1981.

According to the U.S. Department of Health and Human Service website, Kansas is one of 12 states that have applied for a medical-loss ratio waiver.

In March, HHS granted Maine a three-year exemption after state officials warned that one of the state’s largest health insurers would not be able to meet the requirement and had threatened to pull out of market.

HHS denied a similar exemption for New Hampshire.

In its denial letter, issued last week, HHS suggested that New Hampshire consider a phasing in the requirement over three years, a proposal similar to what Kansas has requested.

Whether HHS’ suggestion bodes well for Kansas remains to be seen.

“We’ve not heard back from them yet,” Sheppard said, referring to HHS.

Kansas, she said, appears to be the first state to propose a three-year phase-in.

Earlier this year, Sheppard released a list of the five largest health insurance companies in Kansas, their medical-loss ratios, and their combined share of the individual and small-group markets in 2009:

• Blue Cross Blue Shield of Kansas, 93-7 medical-loss ratio, 48.5 percent of the market;

• Blue Cross Blue Shield of Kansas City, 91-9 medical-loss ratio, 16.1 percent market share;

• American Medical Security, 97-3 medical-loss ratio, 4.6 percent of the market;

• Time Insurance Company, 57-43 medical-loss ratio, 6.5 percent market share;

• Coventry Health and Life, 72-28 medical-loss ratio, 4.6 percent market share.

Michael Murphy, president and CEO at Coventry Health Care of Kansas, welcomed news of the insurance department's waiver application.

"We are pleased with the decision of the State of Kansas to proceed with a waiver request," Murphy wrote in an email to KHI News Service. "If it is approved, it will allow additional time for insurers to adjust administrative expenses on a more reasonable timeline. It will lessen the potential for disruption to our members and the loss of jobs due to more extreme cost cutting."

He declined to say whether Coventry Health Care of Kansas is meeting the medical-loss ratio requirement in 2011.

"The current minimum MLR in the state of Kansas is 55 percent," he wrote. "While each carrier is different, a typical industry target for individual business is to maintain an MLR closer to 65 percent. Actual MLR's tend to be very volatile and can swing dramatically from year to year, depending upon the health conditions that arise during a given year. The smaller the population base, the more volatile the MLRs will be."

Typically, the insurance department does not gather MLR data on large-group insurers because their administrative costs tend to be lower than those in the individual and small-group markets.