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Health Insurance Companies Shifting Costs To Protect Profits From New Law

First Posted: 06/15/10 06:12 AM ET Updated: 05/25/11 05:10 PM ET

Health Insurance

Health insurance companies are already starting to game a key element of health care reform months before it even takes effect, according to a new report from the Senate Commerce Committee.

As in past years, the largest for-profit health insurers are still spending a phenomenal chunk of each premium dollar not on health care but on administrative costs -- and profits. The report found that in the individual health care market, for example, the largest health insurers spent on average more than 26 cents out of every premium dollar on administrative costs and profits, with some spending as much as 32 cents. That's on average; some state-based subsidiaries spent considerably more.

Enter the health care bill. Effective January 1, 2011, health insurers will be required to spend at least 80 cents out of every premium dollar in the individual and small group markets, and at least 85 cents in the large group market -- or refund the difference to consumers in the form of rebates.

So what's a health insurance company to do? Reclassify non-medical expenses as medical, of course.

I predicted as much in my March 31 story, "Insurance Industry Already Finding Ways To Game New System". (There are lots of other predictions there, too.)

The Senate report now identifies specific "questionable changes" in some companies' accounting practices. For instance:

At least one company, WellPoint, has already "reclassified" more than half a billion dollars of administrative expenses as medical expenses, and a leading industry analyst recently released a report explaining how the new law gives for-profit insurers a powerful new incentive to "MLR shift" their previously identified administrative expenses.

What's the MLR? It's an acronym that really tells the whole story of for-profit health insurance. It's the "medical loss ratio" -- which for insurance company means the percentage of the premium dollar "lost" to actual medical care.

You can actually see Wellpoint bragging about reclassifying "clinical health policy" and other expenses in a PowerPoint presentation right here.

"Making sure health insurance companies spend more of the money they collect from premiums on actual medical care was a key component of health care reform," Sen. Jay Rockefeller (D-W.V.), the chairman of the committee, said in a statement.

"We've been pressing on this issue in the Commerce Committee for over a year, tracking and analyzing previously overlooked data, to make sure Americans know just how their hard-earned money is being spent by health insurance companies.

"We wanted to know: were health insurance companies using consumers' premium dollars to pay for actual health care - or were they pumping up corporate profits and executive salaries and implementing the ugly business practices that denied people care when they needed it most?"

Yeah, that would be the latter.

The reports also urges the two entities charged with writing the specific regulations for the new law -- Health and Human Services Department (HHS) and the National Association of Insurance Commissioners (NAIC) -- to make sure "creative accounting" isn't rewarded.

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