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Small Business Employee Benefits and HR Blog

How Health Care Reform Affects Insurance Carriers Today

health reform insurance carriersWhile the major pieces of health care reform (e.g. insurance exchanges) do not go into effect until 2014 and beyond, there are many smaller provisions of the legislation that will have a huge and immediate affect on insurance companies.

This post will outline five of these "smaller provisions":

  1. Medical loss ratios (MLRs)
  2. Removal of lifetime and annual limits
  3. Mandated coverage of preventive care
  4. No pre-existing condition exclusions for children under 19
  5. Mandated dependent coverage for adult children up to age 26

1. Medical loss ratios (MLRs)

A medical loss ratio (MLR) is the percentage of insurance premium dollars spent on health care claims.

Beginning on January 1, 2011, insurance companies will be required to report the proportion of premium dollars spent on clinical services and other costs. If the amount of premium that is spent on clinical services and quality is less than 85% (for large group plans) or 80 % (for small group and individual plans), then the insurance company must refund their policy-holders the difference.

These MLR regulations may force insurance companies to:

    • reduce administrative costs by reducing prevention and wellness programs that do not qualify as "clinical services"

    • invest in computer systems to electronically streamline processes for providers, policy-holders and insurance agents 

    • cut executive salaries 

    • increase payment rates to doctors in order to meet MLR minimums 

2. Removal of lifetime and annual limits 

Beginning September 23, 2010, insurance companies will be prohibited from placing lifetime and annual limits on health plans. This applies to both individual health plans and group health plans. 

The removal of lifetime limits will likely increase an insurance company's cost of re-insuring (i.e. purchasing "insurance for insurance companies" for) their health plans. This administrative cost increase will likely be passed on to policy-holders in the form of higher premiums.

3. Mandated coverage for preventive care

Beginning September 23, 2010, insurance companies are required to cover 100% of preventive care expenses and cannot impose any cost-sharing requirements (e.g. doctor co-pays or deductibles).

Under this provision, insurers must provide coverage for all services recommended by the United States Preventive Services Task Force.

While most plans today already cover preventive expenses, they usually require a doctor co-pay. Because this provision eliminates the insurance companies ability to require a co-pay, the insurance companies cost of covering these preventive expenses will increase. These increased expenses will likely be passed on to policy-holders in the form of higher premiums.

According to the Congressional Budget Office (CBO), "the evidence suggests that for most preventive services, increased utilization leads to higher, not lower, medical spending."

4. No pre-existing condition exclusions for children under 19

Beginning September 23, 2010, insurance companies will be required to cover pre-existing conditions for children 19 and under.

In the individual insurance market, insurance companies often exclude coverage for a child's pre-existing medical conditions (e.g. Blue Cross might cover a family of five with a child who has a heart defect, but they would exclude treatment of the child's heart defect from coverage under the policy). 

The intent of this requirement is to eliminate an insurance company's ability to decline or exclude coverage for a child below the age of 19. Because this provision will require insurance companies to cover these pre-existing conditions, the insurance company's costs will increase. These increased expenses will likely be passed on to policy-holders in the form of higher premiums.

5. Mandated dependent coverage for adult children up to age 26

Beginning September 23, 2010 insurance companies will be required to extend family coverage to adult children up to age 26. 

This provision might help ensure that more young and healthy people stay in the insurance plan's risk pool. If more younger/healthier people join a plan, the insurance company might be able to reduce premiums.

However, there will be an administrative burden of altering all policies to comply with this provision, which will add to an insurance company's costs.

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