The nation's biggest insurers -- not happy with provisions of the four-month-old health care reform law that would force many of them to spend more of the money they collect in premiums for their policyholders' medical care -- are pressuring regulators to disregard what members of Congress intended when they wrote the law, so that they can keep raking in huge profits for their Wall Street owners. If they are successful, many policyholders will soon be shelling out even more than they do today to enrich insurance company shareholders and CEOs. Billions of dollars are at stake, which is why the insurers and their symbiotic allies are pulling out all the stops to gut a key part of the law that would require them to spend at least 80 cents of every premium dollar they take in for medical care.

Wall Street financial analysts are pretty confident the insurers will ultimately have their way with the commissioners and, in so doing, stiff consumers. They have good reason to feel confident: As the Center for Public Integrity reported [3] this week, (and the increasingly irresponsible mainstream media ignored), five of the nation's biggest for-profit insurers -- Aetna [4], CIGNA [5], Humana [6], United and WellPoint [7] -- are considering using $20 million of their policyholders' premiums to set up a new group to influence how government agencies regulate them, as well as to help replace Democrats who voted for reform with more industry-friendly candidates.

Insurers' Real Goal: Bigger Profits, Higher Stock Prices

The reform law requires that numerous new rules be written to regulate the way health insurers do business, a responsibility that Congress passed on to various federal agencies and the National Association of Insurance Commissioners [8] (NAIC).

Among other things, the law mandates that beginning next year, health insurers must spend at least 80% of what they collect in premiums from small businesses -- and also from individuals who can't get coverage through their employers -- on medical care. The minimum for health policies sold to large businesses is 85%. Insurers that don't comply with the law will have to refund to policyholders and their dependents the difference between the minimums and their actual spending on health care.

As the Center for Public Integrity [9] noted in its report, insurers are especially upset about that provision of the law because it likely will have an adverse affect on their profits if Congressional intent is carried out:

The high financial stakes mean insurers have been pushing hard with state regulators to allow for broader definitions of what constitutes patient welfare expenditures. This issue is ‘probably the most important one right now,' explains a source.

The stakes are indeed high. One Wall Street analyst recently calculated that if the new law had been in effect in 2009, the largest for-profit health insurance companies would have been required to refund almost $2 billion to their customers for that year alone. But analyst Carl McDonald of Oppenheimer and Co. didn't appear to be too worried that insurers will ever have to issue many refund checks to their policyholders. He even predicted that the stock prices of for-profit insurers -- which now dominate the industry -- will shoot up as soon as the NAIC bends to their demands.

"Managed care stocks are valued as if the law will be implemented as written," McDonald wrote in a May 21 report for investors. When "reform gets reformed," he added, managed care stocks should get a big boost.

You read that right: "When reform gets reformed." It's just a matter of "when," in McDonald's opinion, not "if."

Insurers consider the amount of money they pay in claims to doctors, hospitals and pharmacies to be a loss, which is why they refer to the percentage of premium dollars they spend on care, compared to what they collect in premiums, as the "medical loss ratio," or MLR for short.

As recently as 1993, the average MLR was 95%. Fifteen years later, after the insurance industry had come to be dominated by a cartel of large for-profit insurers, the average MLR had dropped to around 80%, largely due to pressure from Wall Street investors and analysts. At many insurers, the MLR frequently dips into the 70s or lower -- often much lower. Wall Street loves it when that happens.
Prior to enactment of health care reform last March, about the only people who knew anything about the MLR, much less paid any attention to it, were insurance company executives, shareholders and analysts. The MLR is of particular interest to them because the less money an insurer pays out in claims, the more is available for profits and to pay executives and to cover insurers' overhead. That overhead includes premium dollars spent on efforts to attract healthy policyholders and to exclude or dump sick ones.

Insurance Company Lobbyists Launch Into Overdrive

Members of Congress wanted to be sure insurers spent considerably more on medical care than on outrageous CEO compensation and overhead. But under the category of "no good deed goes unpunished," they included language in the reform law that will allow insurers to reclassify some of their overhead expenses as medical expenses, so long as the money is used to "improve quality." The problem is that the new law doesn't explain what that means. Congress gave the NAIC the responsibility of deciding which expenses will qualify for reclassification. That's why the insurers have been conducting a PR and lobbying campaign to influence the commissioners that is every bit as intense, sophisticated, multipronged and deceptive as the one it conducted to influence members of Congress.

Unlimited Funds Being Spent to Weaken Health Care Reform

To be able to meet the minimum MLRs without breaking a sweat, insurers, as you might expect, are trying to persuade the commissioners to let them reclassify just about all of their administrative costs as medical expenses. And they are not just lobbying the commissioners. They are also trying to get friendly governors and members of Congress to lean on the commissioners. One large insurer, using a tactic the industry often uses, provided one friendly freshman Democratic senator with a set of talking points that they encouraged him to use in drafting a letter to the NAIC leadership supporting the industry's wish list. The insurer also asked him to persuade several of his colleagues to co-sign the letter.

As Senator Jay Rockefeller [10] (D.-West Virginia), chair of the Senate Commerce, Science and Transportation Committee, wrote in a letter of his own last week to his state's insurance commissioner, Jane L. Cline, the current NAIC president:

It is clear that health insurance companies are sparing no expense to weaken the new law and the protections it promises to America's consumers... Health insurance companies and their allies have been furiously lobbying the NAIC to write the medical loss ratio definitions in a way that will allow them to continue doing business as they did before the passage of health care reform. The resources health insurance companies are throwing into their effort to weaken the medical loss ratio law appears almost limitless.

Rockefeller is right. The resources they are spending are, for all practical purposes, limitless: the pot of money they use for such things is replenished every month when policyholders send in their premiums.

As Rockefeller pointed out, the administrative expenses insurers are claiming really and truly are quality improvement expenses include money they spend to:

• Process and pay claims;
• Create and maintain their provider networks;
• Update their information technology systems to code medical conditions and process claims payments;
• Protect them against fraud and other threats to the integrity of their payments systems; and
• Conduct "utilization review" of paid claims to detect payments the insurers deem inappropriate and retroactively deny them.

At least one insurer has been so confident that the NAIC would do whatever the industry demanded that it began reclassifying expenses before the ink from President Obama's signature was even dry. WellPoint told analysts and investors in the spring—before the commissioners had even held their first meeting on the subject -- that it already had begun reclassifying $500 million worth of administrative expenses, an action that had the effect of immediately and automatically increasing its MLR by nearly two percentage points.

Falling Back on Fear-Mongering

As it did during the debate on reform, the insurance industry is resorting to fear-mongering to get its way. Insurers and their allies have been trying to scare the commissioners into thinking that insurers will stop devoting resources to some worthwhile activities like disease management programs and health plan accreditation if they can't reclassify them as medical expenses. One of the industry's symbiotic allies, the National Committee for Quality Assurance, which accredits health plans, has joined the insurers in making multiple pleas to the commissioners to permit the reclassification of accreditation expenses. Of course they have: The NCQA charges insurers a boatload of money (money that comes from policyholders, of course) to accredit their health plans. In 2008, the NCQA's revenues topped $30 million. More than $700,000 of that went to pay the organization's president, Margaret O'Kane, that year. (If you ever wondered why the U.S. has the most expensive health care system in the world, just listen in to one of the NAIC's MLR conference calls. Every special interest that owes its existence to our uniquely American profit-oriented system joins the calls every week trying to persuade the commissioners to write the regulations in such a way that its revenue stream and profit margins will not be negatively impacted.)

The reality is that the fear-mongering is, as usual, not based on any factual evidence. Insurers will not stop developing and offering disease management programs if their costs are not reclassified. That's because good disease management programs that actually do benefit individual health plan enrollees with chronic conditions such as asthma, diabetes and heart disease also typically reduce insurers' expenses. As a former insurance company insider, I know that insurers will not offer a disease management program in the first place unless executives have been persuaded that it will either generate additional revenue or reduce costs -- or do both.

The NAIC undoubtedly will allow insurers to reclassify expenses associated with disease management programs that have been proven to actually improve the health of enrollees. Most of the 28 consumer representatives to the NAIC, of whom I am one, believe that that would be an appropriate reclassification. In the spirit of compromise, we also are not pushing back against the reclassification of some information technology expenses and part of insurers' spending on so-called "nurse hotlines" as long as insurers can prove that the money spent in those areas improves the health of their individual health plan enrollees.

Insurers Hoodwinking Vendors

We consumer representatives strongly oppose the reclassification of most of the other expenses insurers' are lobbying for, including expenses related to accreditation, because they are by their very nature administrative in nature. This is not to say that accreditation, for example, is not a worthwhile expense. It is or employers wouldn't demand that insurers obtain accreditation as a condition of doing business with them. That will continue regardless of how accreditation expenses are classified.

The NCQA and other industry allies, including vendors that develop and implement disease management programs for them (yes, insurers outsource much of that work) should realize that they are being hoodwinked by insurers in this fight. The truth is that, despite what insurers are saying, it is more likely that expenses related to disease management programs and accreditation and other worthy administrative activities will be reduced or eliminated in the future if they are reclassified.

Here's why and here's what will happen: Reclassification of these expenses will temporarily boost insurers' MLRs by a few percentage points, as shareholders know and expect. But over the course of time, shareholders will demand that insurers reduce their MLRs to just barely meet the new law's minimums. I know this will happen because I spent 10 years handling financial communications for one of the country's largest insurers. There was relentless pressure on company executives to find ways to reduce the MLR (read: spending on medical care). If they failed to do so, many shareholders would head for the exits. I once saw the stock price of a large competitor lose 20% of its value in a single day when the company reported as part of its quarterly earnings that its MLR had gone up a little more than 1% compared to a previous quarter.

Big Insurers Spend Policyholder Money on Big Lobbying

It is worth noting, by the way, that the insurers that have been the most vocal on this issue are the five biggest for-profit insurers, the same ones that reportedly are about to divert $20 million of policyholders' money to pay for a massive new PR, lobbying and political action campaign. With the exception of a few Blue Cross [11] plans not yet owned by WellPoint, the nonprofits have been largely silent. That's because they don't have to answer directly to Wall Street. At least not yet.

What this means is that the pressure from investors on for-profit insurers to reduce their medical spending after the new MLR regulations go into effect next January 1 will be just as intense as it is today, if not more so. Insurance commissioners and the industry's unwitting allies need to understand that any administrative expenses that are reclassified as medical costs will be an easy target for cutting by insurance company bean counters in the future. And the more overhead that is reclassified as medical spending, the more capacity is freed up on the administrative expense side of the MLR equation for executive compensation and profits. Both will soar if insurers have their way with the commissioners.

So far, the commissioners who have been spending the most time on the MLR issues have rejected many of the items on the insurers' wish list, but insurers know that every commissioner, including those who haven't spent a minute on the MLR conference calls, will have a vote before the NAIC's recommendations go to the U.S. Department of Health and Human Services later this summer for final adoption. So please contact your state insurance commissioner and tell him or her to give top priority to the interests of consumers, not insurers and their allies. This is too important not to get involved. Commissioners will be doing a great disservice to their constituents if they fall for insurers' disingenuous arguments. If they do, the real winners in this fight will be insurance company executives and their Wall Street masters. If they win this, that cartel of profit-driven corporations will be more firmly in control of our health care system than ever before.