Obama Insurer Spending Rules Draw New Waiver Requests

The letter sent to U.S. health secretary Kathleen Sebelius. Photo illustration: Bloomberg Close

The letter sent to U.S. health secretary Kathleen Sebelius. Photo illustration: Bloomberg

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The letter sent to U.S. health secretary Kathleen Sebelius. Photo illustration: Bloomberg

Health insurers may abandon some markets unless the Obama administration waives a rule set to take effect next year on how much companies must spend on patient care, state insurance commissioners said.

The rule, part of the new health law, mandates that UnitedHealth Group Inc. (UNH), WellPoint Inc. (WLP) and rivals spend at least 80 percent of customer premiums on medical care, or return the difference in rebates. Insurers that sell to the 14 million people who buy their own coverage may be hurt because those policies cost more to administer, the commissioners said in a letter to U.S. health secretary Kathleen Sebelius.

The correspondence urges delaying the rule in some markets until as late as 2014, when provisions take effect that may cut insurer costs. The waiver request is the latest adjustment sought in the overhaul as President Barack Obama’s allies in Congress face midterm elections next month. The administration last month waived rules affecting 1 million part-time workers who won’t be eligible for subsidized coverage for four years.

The premium rule “could threaten the solvency of insurers or significantly reduce competition in some insurance markets,” an effect that may “limit consumer choices,” according to the letter, from the National Association of Insurance Commissioners.

The administration looks forward to reviewing the commissioners’ recommendations, Jessica Santillo, a spokeswoman for Sebelius, said in an e-mail. The department “remains committed to implementing the law in a way that minimizes disruption to coverage that is available today,” she said. The letter to Sebelius, sent yesterday, was made public today.

Decision Coming

The health-insurance committee of the Kansas City, Missouri-based association unanimously approved a draft of the medical-spending rule on a conference call today, without making a decision whether to recommend a nationwide phase-in. The group’s full membership is expected to take a final vote next week at a meeting in Orlando, said Sandy Praeger, Kansas’ insurance commissioner, on the call.

The health-care legislation signed in March by Obama seeks to tighten rules on insurers and expand coverage to as many as 32 million Americans. Many of its provisions don’t take effect until 2014 and the administration has been making adjustments to help companies and consumers get through until then.

“You want to be smart about transition,” said Len Nichols, director of George Mason University’s Center for Health Policy Research and Ethics in Fairfax, Virginia, in a telephone interview. “The key is to signal very clearly, ‘We’re going to move in this direction, and we’d just as soon get there with fewer bumps than more.’”

Exemptions Granted

Last month, Obama’s Health and Human Services Department exempted plans covering 1 million people from a rule that would have required lower out-of-pocket costs for part-time workers.

Sebelius said yesterday that insurers have the right to charge higher premiums for sick children, in a bid to lure health plans back into the market for child-only policies. Insurers, among them UnitedHealth, based in Minnetonka, Minnesota, and WellPoint, of Indianapolis, said last month that they’d stop selling those plans because health-law changes make it harder to predict costs.

Sebelius’s announcement on children’s premiums, along with the commissioners’ letter on spending rules, are “positive data points” suggesting regulators will be flexible implementing the law, said Justin Lake, a UBS analyst in New York, in a note to clients today.

Shares Rise

UnitedHealth, the biggest U.S. health plan by sales, rose 46 cents, or 1.3 percent, to $35.78 at 4 p.m. in New York Stock Exchange composite trading. WellPoint, the No. 2 plan, gained 26 cents, less than 1 percent, to $57.06.

WellPoint has fallen 12 percent since March 30, when Obama signed the overhaul into law. UnitedHealth has climbed 8 percent in that time, after raising profit estimates for the year and boosting its stock dividend.

The spending rules may cut industry profit by 3 percent to 5 percent next year from current projections, Lake said. The impact could be less if Sebelius postpones the requirement in “key undecided states,” he said. Iowa, Maine and South Carolina have already requested waivers for their individual markets, according to the association’s letter.

Stephanie Cutter, an assistant to the president for special projects, wrote in an Oct. 7 post on the White House blog that Obama realized, “part of getting it right is ensuring a smooth transition in the marketplace between now and 2014, when the law is fully implemented, so that consumers don’t become worse off along the way,”

Standardized Plans

Starting in 2014, insurers can sell standardized plans on state exchanges where consumers can shop, and companies will be restricted in how much they can vary premiums from one consumer to another. Those changes, among other in the law, will lower administrative costs for health plans and make it easier to meet the spending rules, the commissioners’ letter said.

In its letter, the insurance commissioners group also recommended that international and expatriate insurance policies be exempt from the 80 percent requirement. That may help Cigna Corp. (CI), the Philadelphia-based insurer that collects about $500 million to $600 million in international premiums that would be subject to the new rule, Lake said.

About 14 million people younger than age 65 buy individual insurance coverage, according to the Menlo Park, California-based Kaiser Family Foundation.

Only Cigna among the six largest U.S. insurers met the 80 percent threshold for the individual market in 2009, according to an April report from Sen. Jay Rockefeller, a West Virginia Democrat who pushed the spending rule into the overhaul law.

Medical-Care Spending

Cigna spent 88.1 percent of premiums from individual policies on medical care in 2009, according to the report, which used state data. UnitedHealth spent 70.5 percent and WellPoint, 74.9 percent, it said. Aetna Inc. (AET), based in Hartford, Connecticut, spent 75.7 percent; Coventry Health Care Inc. of Bethesda, Maryland, was at 71.9 percent; and Humana Inc. (HUM) of Louisville, Kentucky, was at 68.1 percent, the report found.

The administration may give exemptions elsewhere in the law using discretionary powers Congress wrote into the legislation. “Methodologies shall be designed to take into account the special circumstance of smaller plans, different types of plans, and newer plans,” the law reads.

To contact the reporters on this story: Alex Nussbaum in New York anussbaum1@bloomberg.net; Drew Armstrong in Washington at darmstrong17@bloomberg.net

To contact the editor responsible for this story: Reg Gale at Rgale5@bloomberg.net

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