Yes, insurers are price-gouging small companies. Bills in the House and Senate would help them fight back

By Joshua Kendall

Acme Illustration

Entrepreneurs have long groused that their health plans are charging them premiums far in excess of the amount required to provide care for their employees. Now a Senate Commerce Committee analysis of just how much insurers spend on health care offers some support for that complaint. In 2008, five large insurers—WellPoint (WLP), UnitedHealth (UNH), Aetna (AET), Humana (HUM), and Coventry Health Care (CVH)—spent just 80% of the premiums they collected from small companies on actual health care. (The rest goes to items such as marketing, administration, and profits.) For big-company clients, the five paid out slightly more—84%. Len Nichols, director of the health policy program at the New America Foundation, says that for companies with fewer than 10 employees, that number—known in the industry as the medical-loss ratio, or MLR—is often as little as 75%. Says Wendell Potter, the former director of media relations for Cigna (CI) who alerted the Senate to this issue in June testimony: "These data prove that America's small businesses have repeatedly been and continue to be the biggest victims of price-gouging by insurance companies."

The health-care legislation passed by the House of Representatives requires minimum MLRs of 85%, and represents the first effort on the part of the federal government to address this problem. The Senate version of the bill requires MLRs of 80% in the large- and small-company markets, and an MLR of 75% for individual policies. Insurers that don't meet this target will be required to pay rebates to their customers. "Establishing a medical-loss ratio will ensure that the dollars small businesses spend on covering their employees will actually go to provide medical care and not CEO pay or insurance company profits," says Representative George Miller (D-Calif.), chairman of the House Education & Labor Committee. Senator Jay Rockefeller (D-W. Va.), chairman of the Senate Commerce Committee, says he was prepared to bring up an MLR amendment on the Senate floor should the Senate bill have omit tedit. Says Rockefeller: "It's time for health insurance companies to spend more of the money they collect from premiums on actual medical care for people, not just marketing campaigns or purging tactics to appease Wall Street."

UNINTENDED EFFECTS?

Although regulators can ask tough questions, they ultimately depend on the insurers to determine their own MLRs. That's why the House bill also calls for the establishment of a uniform definition of medical-loss ratios and a standard methodology with which to calculate it. For its part, the industry challenges the very notion that MLRs contain any information that is useful. "The real problem is the underlying cost of medical care, not the rise in premiums," says Robert Zirkelbach, the spokesman for America's Health Insurance Plans, an industry trade group.

Some policy analysts worry that regulating MLRs might lead to some unintended consequences. To keep their MLRss at 85%, insurers might, for example, be inclined to reduce investments in areas such as information technology. They can also raise their MLRs just by paying doctors more. "MLRs are an imperfect instrument," says Nichols, who calls the House plank "better than nothing." Just because a health insurer meets its MLR minimum, he notes, does not necessarily mean that it is providing good outcomes at an affordable price.

The proposed federal legislation builds on the states' experience trying to regulate health care on their own. "I am not aware of any other way to regulate health insurance," says Eric Dinallo, former Superintendent of Insurance for New York State and now a candidate for State Attorney General, of MLRs. He considers an MLR floor an essential tool because it can ensure that insurers do what they're supposed to: pass back a large percentage of premiums to policyholders. About a dozen states have already enacted MLR floors for small businesses, choosing minimums that range from 60% in Oklahoma to 82% in Minnesota, with 75% prevailing in Maine, Maryland, South Dakota, and New York. In 2008, New Jersey boosted its MLR requirement to 80% from 75%. Over the past couple of years a half-dozen more states have drafted bills that would either set or raise MLR minimums but have failed to pass them. Sometimes it gets ugly: This spring, Maine tried to increase its MLR to 80%, but failed. "The MLR plank was a flash point because legislators were concerned that insurers would all decide to leave the state," says Sharon Treat, a Democratic state representative and the House chair of the Joint Standing Committee on Insurance & Financial Services. Unlike larger states with bigger markets, Maine has little leverage with insurers, says Treat.

The industry's vigorous opposition is not surprising. In 2008, Aetna had to return $6.6 million to 1,000 small companies in Maine that were found to have been overcharged from 2004 to 2007. Joel Allumbaugh, who heads National Worksite Benefit Group, a benefits consulting firm in Hallowell, Me., received a check for $1,800, roughly the same as the monthly premium for his three-person company. Says Allumbaugh: "I was pleasantly surprised. I wasn't expecting it." In 2008 a total of $50 million in rebates went out to 37,000 small employers in New York because the Oxford Health Plans' (UNH) MLR dipped to 70.58%, well below the state's minimum of 75%, in 2006. If the federal government does manage to bring similar legislation to the rest of the country, more small companies may well get a dose of relief.