The Affordable Care Act's new medical loss ratio requirements are an important way that the law improves the value consumers receive for their health insurance payments and will place downward pressure on premiums over time. Commonwealth Fund analysis has found that, for some small employers, as much as 30 percent of premium payments go to administration, and some individuals see 40 percent of their payments spent on administration. High marketing expenses, underwriting, churning, benefit complexity, and brokers’ fees explain the bulk of the problem. Our country now leads all other industrialized nations in the share of health care expenditures devoted to administration.

The new requirements are reasonable and achievable. Several significant coverage and system reform provisions in the new law will help insurers reduce wasteful spending and meet the targets. The creation of state and regional health insurance exchanges and essential standard benefits packages will more efficiently pool risk, reduce benefit complexity, and lower advertising expenses. Requiring individuals to carry coverage and restricting carriers from varying premiums on the basis of health, age, and gender will significantly reduce insurers’ underwriting costs. And improving the portability of coverage will reduce churning and increase efficiency across individual and small group markets.

The health insurance industry’s own data shows that significant reductions in administrative costs are not only achievable but likely under reform. According to recent analysis by the Sherlock Company, 9.9 percent of premiums for Blue Cross/Blue Shield plans were spent on administration in 2008. By contrast, with lower marketing costs, limited underwriting, and less benefit complexity, just 5.4 percent of premiums were spent on administration for the Blue Cross/Blue Shield standard option in the Federal Employees Health Benefits Program. Similar savings can be expected once essential standard benefit packages are established and health insurance exchanges become operational in 2014. Further reductions will be realized as investments in health information technology mature; the United Health Group estimates that up to $332 billion in savings is possible through innovations in electronic payment and data interchange, 30 percent of which would accrue to private payers.

The targets can also be hit without sacrificing efforts to improve quality of care and curb medical cost growth. The Sherlock analysis outlined above indicates that only 2 percent of premiums are currently spent on provider network and care management activities, suggesting that overall administrative targets of 15 percent for large groups and up to 20 percent for small firms should be achievable. It is critical that the industry stay focused on reducing complexity for patients and clinicians and look for ways to minimize overhead costs.

Too many Americans have struggled under the weight of administrative expenses and double-digit premium increases for too long. We must ensure that the rulemaking and implementation of reform encourages insurers to do their part to increase efficiency and lower costs, rather than simply change accounting practices. In doing so, the new health reform law will deliver on its promise to increase value and return real savings to families, businesses, and our country.

It should not be surprising that in legislation as complex as PPACA and that did not benefit from House-Senate conference, contraditions would emerge. One notable one is regulation of medical loss ratios (MLR). One of the major purposes of health insurance exchanges is to make the health insurance market for individuals and small groups more competitive. Exchanges do this by facilitating consumers' process of gathering information about plans and making informed comparisons. In contrast, MLR regulation is designed for situations where competition is not possible and approaches more suitable to public utilities must be used. Any need for MLR regulation will clearly be lower starting in 2014 than it is today.

A second contradiction concerns innovation in the organization and delivery of care. Recognizing that we do not have the answers today about how to get care that is higher quality and less expensive, the legislation has numerous provisions designed to increase innovation in this area. Payment reforms strike me as having particularly large potential. Private insurers have a very important role to play in payment reform and many other areas of fostering improved delivery of care. But there are real risks that much of this activity could be precluded if administrative costs incurred to support reformed delivery are treated in the same way as selling costs and profits. The last thing that we would like to see is insurers deciding that the only path open to them is to do little beyond processing claims--that can lead to very high MLRs. Constraints on Medicare's administrative budget has led to a program that is very efficient in paying claims but does little to make the delivery of care more effective.

There is widespread agreement among health care experts, stakeholders, and policymakers that our health care system needs to do far more to promote quality, reward value, and incentivize prevention and wellness. In fact, as part of the new health care reform law, policymakers are experimenting with new quality initiatives in Medicare, such as patient-centered medical homes, medication management programs, pay-for-quality initiatives, and the development and maintenance of high-quality, accountable provider networks.

Health plans have pioneered these important initiatives. Patients today rely on health plans’ care coordination, disease management, continuous quality improvement, prevention, and wellness programs. These programs have yielded significant results in improving health outcomes, reducing medical errors, reducing complications, and enhancing patients’ quality of life. In addition, many health care experts believe that by improving health outcomes and advancing quality care, these programs and services will also help to reduce the long-term growth rate of health care costs.

As regulators develop the new mandatory Minimum Loss Ratio (MLR) standards – which place a cap on health plan administrative costs and profits – it is vital that these requirements do not turn-back-the-clock on efforts to improve the quality and safety of patient care. That is why policymakers specifically stated in the new law that “activities that improve health care quality” should be counted towards the MLR requirement.

In determinitng which activities should be included in this category, it is important to consider existing quality criteria established by the Institute of Medicine (IOM) and the DHHS’ Agency for Healthcare Research and Quality (AHRQ) as well as comments by the current Administration and other independent experts on the types of activities that improve health care quality. Moreover, the new health care reform law specifically refers to a number of health plan programs as quality improvement activities, including chronic disease management, care coordination, quality reporting, wellness and health promotion activities, and pay-for-quality initiatives.

Preserving patients’ access to health plan programs and services that are designed to improve health care quality and meet individual patient needs is essential to creating a 21st century, evidence-based health care system.

Now that the legislation requires that 80% to 85% of health insurance premiums need to be spent on medical services or quality improvements, regulations need to determine what should count as a medical expenditure. Making health insurance into the equivalent of a regulated public utility introduces all sorts of complications including what should constitute administrative costs, medical costs and profits.

The notion that spending more on direct medical expenses, particularly at the expense of disease management, quality improvement strategies, patient safety initiatives and other such strategies seems to be directly contradicting all that we know of what is wrong with American health care spending. What we really want to do is to encourage spending for health care that is medically appropriate and produced in an efficient environment. That means spending on quality improvements and patient safeguards should be encouraged—not discouraged. Medicare, which has low administrative health care costs, spends the least on quality improvement strategies and improving spending safeguards. If we aren’t careful, we are likely to mimic exactly what’s most wrong with Medicare onto the rest of health care. Hardly a move in a positive direction.

Public utility models of regulation rarely are consistent with innovation and change. This—even more than some of the specifics of the definitions of what counts as a medical expenditure—should be what worries us the most.

While NAHU strongly support the goals of reducing health care costs, improving health outcomes for patients and providing better value for health care consumers, we are extremely concerned that narrow medical loss ratio (MLR) definitions would adversely impact spending on such important health plan activities as case management, wellness, disease management, and fraud and abuse prevention programs. If these important aspects of medical care and health plan coverage are no longer supported, the quality of care delivery for consumers will deteriorate and health care costs will surely increase.

NAHU strongly believes that health care consumers will best be served by a definition of clinical services and activities that improve health care quality which is comprehensive and inclusive, so that it adequately accounts for the wide spectrum and types of insurer activities that contribute to better health outcomes and health care delivery and provides a level playing field among different types of insurers and products.

Many insurer activities are designed to assure that consumers get the best care at the best time―which leads to higher overall quality of health. Some of these activities improve quality through information sharing, while others work to reduce medical errors, improve provider services, or protect consumers from problematic services. Ultimately, all of these functions lead to better outcomes and lower premiums for consumers. A reasonably broad definition of quality improvement activities will allow plans to advance new patient health and wellness programs that ultimately could “bend the cost curve” and help make coverage more affordable.

There are often many misconceptions about insurance carrier costs related to tools, information and services which help to improve the quality of care. The types of information, service and tools that health insurance agents and brokers provide consumers are important and effective components of a better overall health care strategy. Agents and brokers allow consumers to call and receive information on qualified medical professionals in their area, as well as the costs associated with each one. This information is valuable in helping individuals find and choose the best health care that meets their individual needs.