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US health insurers' profit cap to include prescription drugs from 2014

World News | February 18, 2013


Lynne Taylor

US health insurers' profit cap to include prescription drugs from 2014

US federal rules requiring health insurers to spend 80%-85% of their revenues on clinical services and other benefits are to be extended to Medicare Advantage and prescription drug plans, which will be required to spend "at least" 85% of their revenues on clinical services including prescription drugs.

The change, to be introduced next January, is included in a proposed rule which extends the 2010 Affordable Care Act (ACA)'s medical loss ratio (MLR) requirements, which limit how much insurance plans can spend on marketing, overheads and profit, to Medicare Advantage and Medicare Prescription Drug plans.

Similar MLR requirements are already benefitting consumers in the private health insurance market, says the Centers for Medicare and Medicaid Services (CMS), which has sent the proposed rule to the White House Office of Information and Regulatory Affairs (OIRA).

"We are working to ensure that people with Medicare have affordable access to health and drug plans, while making certain that plans are providing value to Medicare and taxpayers," said Jonathan Blum, acting principal deputy administrator at the CMS and director of the agency's Center for Medicare.

The MLR rules note that many insurance companies spend "a substantial portion of consumers’ premium dollars on administrative costs and profits, including executive salaries, overhead and marketing." The ACA requires health insurers to submit data on the proportion of premium revenues spent on clinical services and quality improvement (which constitute MLR), and to issue rebates to enrolees if their spending on these benefits does not meet the minimum percentages.

The proposed new rule will require Medicare Advantage and Medicare Prescription Drug plans to meet a minimum MLR from the start of next year. "Plans must spend at least 85% of revenue on clinical services, prescription drugs, quality improvements, and or/direct benefits to beneficiaries in the form of reduced Medicare premiums. Enrolled seniors and individuals with disabilities will get more value and better benefits as plans spend more on health care," says CMS.

Failure to meet these percentage requirements for five consecutive years would lead to a plan's removal from Medicare Advantage, reports Washington newspaper The Hill, which points to the proposal's significant financial importance, as it is estimated to carry an economic impact of more than $100 million. However, it is not yet clear what will be defined as "quality care" and what will fall into "expenses and overhead," and this is very important, it says, quoting healthcare lawyer Bobby Guy, who suggests that how the prescription drug plans deal with the new caps could serve as a model for the rest of the health insurance industry.

- The initial MLR rule, first introduced in 2011, was a factor in the compression seen in health insurers' margins last year, according to a new report from ratings agency A M Best. The majority of health insurers have positioned themselves to implement strategies that will allow them to adapt to the new operating environment created by the ACA and to maintain profitability, says the firm, although it "has concerns" about the profitability of smaller, more specialised companies, particularly over the near to medium term, given the minimum MLR requirements.

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