The Obama Administration vs. Consumer Directed Health
Many folks have been asking me questions regarding the impact that the Obama administration's new Medical Loss Ratio rule released last week will have on Health Savings Accounts and High Deductible Health Plans.
For the non-wonks reading this, the MLR issue hinges on the requirement within Obamacare that forces insurers to spend no more than 20% of each insurance premium on non-health care costs in the small group and individual market, and 15% in the large-employer market. Shorthand: it’s basically a hard cap for insurers’ profits, which is odd, not just because such a thing is fundamentally un-American, but because insurers are not very profitable to begin with—averaging about 4 percent in profit.
One of the key questions in advance of the administration’s rule was whether HHS would allow for Consumer Directed Health Plans—essentially a phrase that describes high deductible health plans + HSAs—to even exist within the government managed marketplace of the exchanges. This combo package has been steadily increasing in popularity, surpassing 10 million people last year despite being gutted in some respects by other rules within Obamacare (mostly limitations on what you can use HSA funds to purchase which made them a lot less attractive to families with young kids).
A new Obama administration rule could drive out of the market the low-cost, high deductible plans that are supposed to be available under ObamaCare. That would likely mean a sharp jump in taxpayer subsidies.
The problem stems in large part from contradictions in the hastily written health care overhaul.
Starting in 2012, ObamaCare requires insurers in the individual or small group (small business) market to spend at least 80% of premiums on medical costs, leaving 20% for salaries, advertising, fraud prevention, profit, etc. For large groups, this medical loss ratio (MLR) must be 85%. But another section of the law establishes the actuarial value of plans that can be sold on exchanges, which will cater to individuals and small groups. A bronze plan is allowed to have an actuarial value of 60%, meaning the insurer pays 60% of health care costs and the policyholder 40%. A silver plan can have a 70% value. Lower-actuarial plans tend to have lower MLR requirements.
Insurers offering bronze and silver plans must meet the 80% MLR under the final rule issued by the Department of Health and Human Services this week.
For those confused on what this means for the marketplace, Dan Perrin of the HSA Coalition has an answer, and it’s not good:
For example, the health savings account qualified health plan, and other health plans with healthy deductibles, cannot meet the MLR limits set by the rule. Not because HSA qualified plans are inherently incapable of meeting the MLR limits, but because the rules of how MLR is computed discriminates against HSAs and other health plans with higher deductibles. How does the MLR rule discriminate against bronze plans and HSAs? Here’s how: any payment for a health care service below the deductible by an individual or family does not count in the weird and bizarre world of the government bureaucrats MLR. Payments for health care services by insurers do count, but not payments by individuals.
To repeat, just so everyone is clear: If an insurer pays for a health care service for their insured, the MLR rule counts that in their MLR rule. But if an individual pays for a health care service to meet their deductible, the MLR rule does not count that expenditure.
Only five percent of those with an HSA qualified health plan in a year have any claims paid by their insurance. Therefore, it is a mathematical impossibility for HSAs to meet the MLR limits when the new HHS rule allows only five percent of HSA payments for health care services to count towards their MLR limit.
HSAs were essentially the only thing conservatives got out of the passage of Medicare Part D, and their ability to survive continued nibbling from the feds in the past three years is a testament to their popularity. But this may be too much of a hit for them to survive now. As Transom subscriber and health policy guru Greg Scandlen passes along this illustration of how it works:
- I buy an insurance policy with no deductible that costs $5,000.
- I have $4,000 in medical expenses.
- That is 80% of my premium, so the health plans is in compliance.
Flip side with an HSA/HDHP plan:
- If I buy a policy with $1,000 deductible for $4,000 in premium,
- And still have $4,000 in medical expenses.
- I pay the first $1,000 directly to meet my deductible.
- The health plan pays the remaining $3,000
- That is only 75% of my $4,000 premium, so the plan is not in compliance.
The left continues to argue that one of the reasons Obamacare is unpopular (roughly 34% support in the most recent poll) is that all its wonderful benefits haven’t kicked in yet; I continue to argue the reverse is true. Once the rules start to really impact the marketplace, where you arbitrarily take popular plans away from people who were promised they could keep them, I expect this law to become even less popular.
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Comments:
Jul '11
Re: The Obama Administration vs. Consumer Directed Health
The insurance lobby represents scum sucking pigs that care not one whit about humanity. The insurance industry is responsible for most of the anti-HSA legislation. Anything that interposes the insurance industry between the doctor and the patient is seen as a good thing. The government sees the insurance industry as a willing partner in their desire to erode liberty and the insurance industry loves overbearing government regulations they bribe their crony congress to approve.
Edited on December 12, 2011 at 11:54pmRe: The Obama Administration vs. Consumer Directed Health
As someone who has an HSA and really loves the way they work, this news is absolutely infuriating. Essentially ObamaCare set an arbitrary MLR ratio for the express purpose of setting a profit ceiling on an entire industry, and the 10 million of us with HSAs are either forced to pay much higher premiums as a result, or lose our plans altogether.
Is this an intended or unintended consequence of ObamaCare? At this point, I'm not even sure which is worse.
Aug '11
Re: The Obama Administration vs. Consumer Directed Health
This doesn't make sense to me.
The cap is on non-health care costs, or what are known technically as associated loss adjustment expenses (alae) plus profit.
Assume the company takes 4% as profit and that the scheme is in the 20% cap category. In the first scenario above, that's $200 of the $5000 as profit, leaving a maximum of $800 for alae which includes legal costs, admin costs, specialist opinions etc. The claim can be anything up to $4000 without the need to access the reserve pool. If anything is left over of that $4000 in the insured period it goes back into the pool.
In the second scenario, there's $160 in profit and $640 in alae. Maximum claim size of $3200 before needing to dip into the pool. The insurance company has less overhead to dicker around with the claim in this case, but then their potential loss is smaller. Actually the proportions end up being the same as in the first case.
It's up to the insurance company actuaries to come up with the right discount to apply to any given level of deductible. This is just what they normally do.
Jul '11
Re: The Obama Administration vs. Consumer Directed Health
Diane Ellis, Ed.: As someone who has an HSA and really loves the way they work, this news is absolutely infuriating. Essentially ObamaCare set an arbitrary MLR ratio for the express purpose of setting a profit ceiling on an entire industry, and the 10 million of us with HSAs are either forced to pay much higher premiums as a result, or lose our plans altogether.
Is this an intended or unintended consequence of ObamaCare? At this point, I'm not even sure which is worse. · Dec 12 at 2:29pm
This is absolutely intended. I believe intentional harm is worse than harm done through ignorance, unless it's your HSA that goes and you are forced in to Company X's expensive and highly regulated plan.
May '10
Re: The Obama Administration vs. Consumer Directed Health
Doc, we're kind of curious about your real views on insurers; don't hold back, now. Be frank.
And, given that a healthy chunk of insurance is ERISA self-insurance administered on behalf of the underwriting company by third-party administrators, then the scum sucking pigs are the actual employers, aren't they?
(BTW, I don't have any connection to the health insurance business)
Jul '11
Re: The Obama Administration vs. Consumer Directed Health
No the employers are not anywhere near as bad nor even the issue Duane. Unfortunately regulations and a whole host of factors have the costs of the system spiraling out of control.
Here is a great conversation I had today with a reviewer for insurance company X regarding patient Y. I ordered an MRI on a man who is being crippled by knee pain. The insurance company doctor asks me what physical therapy he has done. I say no formal PT because he is crippled in so much pain in spite of multiple shots and drainages. He says he might not be able to approve it because his flow chart demands physical therapy visits prior to any knee MRI. I asked him if they have provisions for severe debilitating pain and whether urgent surgery is required. He finally found some way to get it authorized because he knew what a complete idiot he would sound like in denying the test. This merry go round is repeated daily.
I suppose I should mention I went broke years ago partially from lousy insurance contracts and insurance practices. I take NO insurance now and I am quite happy with that.
Edited on December 13, 2011 at 1:28amJun '11
Re: The Obama Administration vs. Consumer Directed Health
DocJay, I wish you were my doctor.
I've carried an individual insurance policy for twenty years now and it's made me quite aware of the insanity of our health care insurance system- which is about to get a lot worse.
I have a high deductible plan now ($10,000- to keep the family monthly premium down to a mere $700 here in lovely New York State, and it would be much more if it were not a self-employed business policy.) I do not have an HSA because as far as I could figure it's a whole lot of aggravation and paperwork to save at most a few hundred dollars in taxes every year, and I really resent having to jump through those hoops.
If high deductible plans are eliminated my family will be without insurance at all, thanks to Obamacare.
May '10
Re: The Obama Administration vs. Consumer Directed Health
But, Doc, the point is that most of these reviewers are not doing so on behalf of the insurance company.
For example, AT&T would be self-insured. They would put out a request for proposals for an administering company to manage their program, let's just say that CIGNA turns in the low bid, a combination of administration cost and a promise of claims exposure control for what the employer-company has to pay out for its employees' care. CIGNA does so by assuming cost guidelines and ugly rules, slow-rolling payments, and mistreating doctors and patients (same old thing we all know and hate). But if AT&T told them "We don't want you to do that", CIGNA would adjust its bid- and lose the contract- because the cost to AT&T goes up up up.
It is AT&T in this purely hypothetical example that is ultimately setting the system standards.
We absolutely need retail health care and true competition. I wonder, though, if the care providers are ready for what that would really mean.
Jul '11
Re: The Obama Administration vs. Consumer Directed Health
Duane your points are on target and well spoken.
Nov '10
Re: The Obama Administration vs. Consumer Directed Health
The dismantling of private insurance markets has been the intent of Obamacare all along. Insurance companies may indeed be as bad a Docjay says they are but it’s hard to believe they are complicit in their own destruction. Government has long stifled the free market in insurance and now intends to destroy it altogether. A simpler explanation for the behavior of insurance companies is stupidity and incompetence.
A truly free market in health insurance is the only fix for that. I don’t think we’ll see that anytime soon, however.
Jul '11
Re: The Obama Administration vs. Consumer Directed Health
Ducatsia
Why dismantle when you can convert them in to stooges for government policy that removes individual liberty. The blame goes to the "private" entity that follows the orders from big brother. This is closer to the Randian nightmare I envision.
Insurance companies have a state monopoly system only enjoyed by major league baseball. This monopoly if broken would expose the industry to real free market competition and lower costs perhaps by 25%. Harry Reid threatened the lobby with this unless they signed on to Obama's fiasco and they agreed out of fear.
Companies that bribe politicians to create unnecessary regulations that expand costs for me and profit for them are evil(rather than incompetent) in my book. Federal control of our health care will unquestionably be both incompetent and evil. The goal of obamacare was to ultimately gain control of one of the newer commanding heights(as Lenin would say) of the economy. Liberty, the Constitution, privacy,choice, and just plain decency will fall by the wayside in the long run as impersonal federal regulations creep their tendrils in to our daily lives. I believe those consequences are at least partially intended which makes obamacare evil.