Insurance has traditionally been regulated at the state level. When health insurers sell policies, they charge premiums. The share of premiums NOT paid out on health care claims goes towards administrative expenses, marketing costs and profits. The share of premiums paid out is termed "medical loss ratio."
State imposed medical loss ratios vary widely. North Dakota currently requires a 55% medical loss ratio, New Jersey requires an 80% ratio. Medicare maintains a loss ratio of 97-98%.
Beginning in 2011, the Affordable Care Act will require health insurance companies to spend a minimum percentage of the premiums they collect on services and quality improvement activities for the people they insure and the Act creates a federal minimum medical loss ratio for all insurers.
Health insurers predict this new mandate will drive insurers out of business. The argue overly stringent ratios will stifle innovation and eliminate quality measures. Proponents believe the legislation will improve quality of care & keep premiums low by limiting administrative spending and improving transparency.
Beginning in 2011, insurers will have to report their 2010 ratio & adjust internal practices accordingly. By 2012, if a medical loss ratio exceeds the federal standard, insurers will be required to rebate policyholders. If an insurer fails to meet the ratio for three consecutive years, they could be banned from signing up new customers. If the problem continues for 5 years, HHS could terminate the contract for the health plan in question.
HHS Secretary Sebelius recognizes the potential for "unintended consequences" arising from the new rules but assures both sides that her office will work to ensure a smooth transition to 2014, when state exchanges will guarantee insurance coverage.
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The AMA—working closely with the National Association of Insurance Commissioners (NAIC)—supports HHS's decision to adopt the NAIC recommendations to spend 80 to 85 percent of consumers' premiums on direct care for patients and efforts to improve care quality.
The AMA aslo urges HHS to keep the health insurance industry from diverting premium dollars away from medical care.
"Patients deserve to get the maximum value from their health insurance premiums, and requiring that at least 80 percent of the patients' premium dollars be spent on medical care can accomplish this goal," said AMA President Cecil B. Wilson, MD. "We are pleased that HHS did not allow the health insurance industry to claim administrative expenses as medical losses, artificially inflate the medical-loss ratio or calculate their ratios at the national level."
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