Feds Reject Texas' Request to Delay Insurance Reform

The U.S. Department of Health and Human Services has rejected the Texas Department of Insurance’s proposal to delay implementation of a federal health care reform provision aimed at curbing rising premiums. 

Under the federal Affordable Care Act, starting in 2012, insurance companies are required to maintain a “medical loss ratio,” or MLR, of 80/20 for individual insurance plans and 85/15 for the employer-provided insurance market starting. 

Put simply, that means insurance companies must devote 80 or 85 percent of premium dollars directly to health care services, and refund policyholders at the end of the year for spending on overhead costs above 20 or 15 percent. The intention of the provision is to pressure insurance providers to cut down on administrative, marketing and other non-health related operating costs in order to curb rising premiums.

“No adjustment to the 80/20 rule in Texas is warranted,” Gary Cohen, the acting director of HHS's oversight committee, said Friday. After a review of Texas’ application, the department determined that implementing the rule would not “destabilize the individual market in Texas,” he said.

“Practically speaking, this means lower premiums for consumers,” Cohen said. 

In July, TDI requested a delayed implementation of the new rule, and said implementing the 80/20 provision in the individual insurance market would "stifle competition in the market and constrain many Texans’ access to coverage.”

In a letter to HHS, then-TDI Commissioner Mike Geeslin proposed rolling out the change slowly, starting at 71/29 in 2011 and increasing the ratio by three percent each year until it reached 80/20 in 2014.

TDI had conducted a survey of insurance providers, and estimated the average medical loss ratio for individual insurance carriers in Texas was 71 percent in 2010. Some carriers had medical loss ratios as low as 45 percent.

Geeslin said in his letter to HHS that if insurance carriers had been required to abide by an 80/20 MLR in 2010, they would have been forced to refund $158.1 million to policyholders — “virtually eliminating the total net underwriting profits of $158.6 million.”

HHS received 12 letters opposing TDI’s application for a delayed implementation of the MLR rule, including one signed by 15 Texas state representatives, and one signed by eight U.S. representatives from Texas.

In a letter to TDI evaluating its application to delay the reform, Steve Larson, director of the federal Center for Consumer Oversight and Insurance Oversight, wrote, “The evidence presented does not establish a reasonable likelihood that the application of an 80 percent MLR standard will destabilize Texas’ individual market.”

Out of the 34 insurance providers in the individual market in Texas, only four have either withdrawn or begun to withdraw from the market. HHS said the circumstances behind their withdrawal were not relevant to the implementation of the MLR rule. Of the remaining 30 providers, 10 already meet the 80/20 MLR requirements and would not need to refund premiums to policyholders.

“For those issuers who have a different business model and know they’re going to pay rebates, they’re profitable, so there’s no reason they should leave,” Cohen said.

In response to the denial of its application, the TDI released a press release saying its application “clearly showed otherwise.”

“Of the 34 Texas carriers subject to the law, 23 will pay rebates based on 2010 data; at the 80 percent MLR threshold, these rebates will absorb the net underwriting profit for the entire individual market,” TDI officials wrote.

The department further criticized HHS’s decision, saying it would not allow sufficient time for insurance carriers to adjust their operating models. “A reasonable, responsible, phased-in approach would still have afforded rebates to Texas consumers without risking disruption, dislocation and withdrawal of carriers,” the release said.

As a result of HHS’s ruling, more Texans who buy individual health insurance policies could receive a check from their insurance company in August. Cohen estimated that Texas consumers would receive rebates totaling $476 million over the next three years, based on evaluations of 2010 data.

So far, HHS has made decisions on 16 states’ requests to adjust their MLR provisions. The department has granted at least partial relief to six states, and denied nine applications, including Texas’.

In 2010, more than 746,000 Texans bought health insurance in the individual market, according to TDI. But an additional 5.7 million Texans didn’t have health insurance at all, according to the 2010 American Community Survey conducted by the U.S. Census.