I am just as good a basketball player as President Barack Obama. I make that judgment the same way we measure the fairness of health insurance prices. I judge my skill in relation to myself – mid-fifties, overweight, lost a step, and down from six foot to five-eleven. Regulators judge insurance premiums in relation to the company itself. Regulators sometimes measure the price of coverage in relation to company expenditures on health care – the company’s loss ratio.

Like insurance, I don’t judge myself on total stats. I go by percentages. I still have a high field goal percentage because I only take the shots I can make – one or two shots here and there. Similarly, Premera Blue Cross might have higher prices than Regence Blue Shield; but, they may be spending a higher percentage of the money they collect on health care benefits. Just because a company has lower prices doesn’t mean the company has “fair prices.”

One reason for this relative measure of price performance is the near impossibility of finding comparable products.You can’t compare two major medical insurance policies the same way you could compare the price of two basketballs. If a basketball was a health plan, you’d have to hire a basketball broker to help you choose the best basketball for the price.

Washington State laws require some types of health insurance to pay a certain percentage of premium in benefits depending upon the health care market – individual, small group, or large group – and the type of insurance company. But, Washington’s laws are a mishmash of standards for judging the price of a health plan. For example, if you own and operate a health insurance company selling plans regulated by chapter 48.20 or 48.21, you’d have to prove that plans for sale have “loss ratios” of from 60 – 80% depending  on the size of the group including large groups. But not if you are an HMO or “Blues” plan.

If you thought math was hard when you were a kid, consider these terms defined in Washington’s “disability insurance loss ratio” regulation:

(1) The “expected loss ratio” is a prospective calculation and shall be calculated as the projected “benefits incurred” divided by the projected “premiums earned” and shall be based on the actuary’s best projections of the future experience within the “calculating period.”

(2) The “actual loss ratio” is a retrospective calculation and shall be calculated as the “benefits incurred” divided by the “premiums earned,” both measured from the beginning of the “calculating period” to the date of the loss ratio calculations.

(3) The “overall loss ratio” shall be calculated as the “benefits incurred” divided by the “premiums earned” over the entire “calculating period” and may involve both retrospective and prospective data.

(4) The “calculating period” shall be the time span over which the actuary expects the premium rates, whether level or increasing, to remain adequate in accordance with his best estimate of future experience and during which the actuary does not expect to request a rate increase.

(5) The “benefits incurred” shall be the “claims incurred” plus any increase (or less any decrease) in the “reserves.”

(6) The “claims incurred” shall mean:
(a) Claims paid during the accounting period; plus
(b) The change in the liability for claims which have been reported but not paid; plus
(c) The change in the liability for claims which have not been reported but which may reasonably be expected.
The “claims incurred” shall not include expenses incurred in processing the claims, home office or field overhead, acquisition and selling costs, taxes or other expenses, contributions to surplus, or profit. [WAC 284.60.030]

Yikes! If one train leaves Philadelphia traveling 90 mph…But that’s not the end of the story. If you are an HMO or a “Blues” plan in Washington, you get to join the insurance companies in meeting loss ratio standards but only for individual plans and with slightly different rules:

(d) “Earned premiums” means premiums, as defined in RCW 48.43.005, plus any rate credits or recoupments less any refunds, for the applicable period, whether received before, during, or after the applicable period.

(e) “Incurred claims expense” means claims paid during the applicable period plus any increase, or less any decrease, in the claims reserves.

(f) “Loss ratio” means incurred claims expense as a percentage of earned premiums.

These individual plans have separate minimum targets for loss ratios ranging from 74 – 77% depending upon the number of insurance applications the company rejects because of the applicant’s poor health.

There are also loss ratios for Medicare Supplemental health insurance, “Specified Disease” policies (e.g. cancer only),  Long-term care insurance, and others. While they all have loss ratio standards, the rules are slightly different depending upon the product, the market, and the type of company. For another example of the inexplicable diversity in a single standard for fair prices, look at the rule for Long-term care insurance (nursing home coverage) under chapter 284-54 WAC where loss ratio standards are set not only by the type of license a company was issued in Washington but also by such differences as company “grouping of similar contract forms.”

If you have read previous blog entries, you know where we are going. The federal health care reform act has set its own loss ratio standards for health plans. These rules have to be written by HHS with the help of the National Association of Insurance Commissioners by the end of the year.

Effective January 2011, health plans must meet minimum loss ratio standards for group and individual health plans (§2718 of the Act). The loss ratio standards for health plans will vary by market:

  • 80% loss ratio for individual and small group {§1304(b) permits states to define small group as under 50 employees; otherwise a small group is under 100 employees}.
  • 85% loss ratio for large group defined as 100 or more employees.

What worries me is the unknown. These loss ratio numbers can be set higher in each state. In the individual markets, HHS can intervene with a state’s higher loss ratios if HHS “determines that the application of such percentage with a state may destabilize the existing individual market in the state.”

Unlike Washington state law, the federal standards will apply across the board to all health plans no matter what type of license they hold and to all health plan markets. Moreover, if the companies do not meet the thresholds, the company must refund the excess premium to customers. Employers must also disclose the value of group health plan benefits on employee W-2 forms.

Of course, the details remain to be worked out. Federal agencies have requested comments in defining the loss ratio standards. At a minimum, we know that the Washington rules must be re-written and the federal law will trump state law conflicts. Maybe it’s time for the state Legislature to get rid of the archaic structure for regulating health insurers and health plans.

To do my part in health care reform, I plan to take my game up a notch. I will lose weight, move a little quicker and stand up straighter. Of course, I intend to gather comments so that I can appropriately define for myself what “taking it up a notch” means.


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