Health insurers must spend most of the premiums they collect for medical care, or issue rebates to consumers, the Obama administration said in regulations issued Monday.
The rule unveiled by the Health and Human Services department requires insurance companies to spend at least 80 cents of the premium dollar on medical care and quality. For employer plans covering more than 50 people, the requirement is 85 cents.
Part of the new health care law, the rule is meant to give consumers a better deal. Administration officials said it will prevent insurers from wasting valuable premiums on overhead, marketing and executive bonuses. "These new rules are an important step to hold insurance companies accountable and increase value for consumers," said Health and Human Services Secretary Kathleen Sebelius.
But the insurance industry says the approach is heavy handed, and doesn't take into account some of the costs of marketing to individuals and small employers. Indeed, some companies are threatening to pull out of the individual market, and four states have already asked the federal government for an exemption from the rule, fearing it could lead to loss of coverage.
Currently, there is no uniform requirement that health insurers spend a fixed proportion of premiums on medical care. Consumer groups say somewhere in the range of 80 to 85 cents on the dollar represents good value, and some plans are able to operate even more efficiently. However, officials said there are also many plans spending 50 to 65 cents for every dollar they collect in premiums.
The rule goes into effect Jan. 1, and applies to plans that currently insure about 75 million people. Starting in 2012, as many as 9 million customers could get rebates averaging $164, officials estimate. That could be a discount on premiums or a payment by check or credit card.
Consumers shopping for health insurance in the future will be able to compare what plans in their area spend on medical care. But they may have to learn some new jargon: the proportion insurers spend on care is termed the "medical loss ratio."
One major exception to the new rule involves large employer plans. Generally major companies pay their employees' health care expenses directly, hiring an insurance company to act as an outside administrator. To employees, it looks like they are covered by an insurer, but it's actually their company that's paying. Because most big firms pay up front, they already have a strong incentive to be as efficient as possible.
Administration officials say they don't anticipate the kinds of dire disruptions that some health insurance companies have warned about.
"These rules were carefully developed through a transparent and fair process with significant input from the public, the states, and other key stakeholders," said Jay Angoff, head of the HHS office of insurance oversight.
But just in case, the regulation provides for a series of adjustments to ease the impact of the requirements.
Very small insurers with fewer than 1,000 enrollees will not be required to provide rebates, and those with fewer than 75,000 enrollees will get an adjustment. Limited benefit plans popular in the food service industry will also be able to claim an adjustment. States can apply for a waiver if state regulators conclude that the requirement would destabilize local markets, for example if a large insurer pulled out.