Health Insurers Can Include Tax Cost in Spending Rule

Photographer: George Frey/Bloomberg

An imaging technician prepares a CAT scan machine at Timpanogos Regional Hospital in Orem, Utah. Close

An imaging technician prepares a CAT scan machine at Timpanogos Regional Hospital in Orem, Utah.

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Photographer: George Frey/Bloomberg

An imaging technician prepares a CAT scan machine at Timpanogos Regional Hospital in Orem, Utah.

U.S. health insurers can include the cost of federal taxes in determining whether they spend enough on patient care, increasing the amount that can be kept for administration or profit under new rules. Company shares rose.

Health plans led by Indianapolis-based WellPoint Inc. (WLP) may also win delays from the spending requirements if individual states show the federal government that the so-called medical-loss ratio rule will destabilize insurance markets, the U.S. Health and Human Services Department said in a statement today. The regulations are part of the U.S. health overhaul that President Barack Obama signed in March.

The industry may save about $704 million that would have been returned to consumers in 2011, when the rule takes effect, Matthew Borsch, a Goldman Sachs Group Inc. analyst, estimated in a note today. Companies must spend least 80 percent of member premiums on care they provide, or refund the difference.

“This suggests the administration is perfectly willing to be reasonable from an insurance point of view and try to preserve the private insurance market,” said Dave Shove, a BMO Capital Markets analyst in New York, in a telephone interview. “The nervousness among investors was over whether the administration would take the point of view that says insurers aren’t entitled to a fair profit.”

Shares Gain

Health insurer shares rose after the announcement, with WellPoint, the biggest plan by enrollment, climbing $1.36, or 2.3 percent, to $59.97 at 4 p.m. in New York Stock Exchange composite trading. The six-stock Standard & Poor’s Managed Care Index gained 1.7 percent.

The federal government expects as many as 9 million Americans will receive a total of $1.4 billion in rebates starting in 2012, the health department said in its statement.

“These new rules are an important step to hold insurance companies accountable and increase value for consumers,” U.S. Health Secretary Kathleen Sebelius said at a Washington press conference announcing the rules.

The regulations require health insurers to spend at least 80 percent of premium revenue on patient care for small and individual plans, and 85 percent for large plans. Health insurers have lobbied the federal government to make the definition of “patient care” as broad as possible, to deduct taxes from the calculation, and to create waivers in cases where the rules would disrupt the insurance market.

‘Collaborative Process’

America’s Health Insurance Plans, the industry’s Washington-based trade group, praised the “substantive, collaborative process” that produced the spending rule, in an e-mailed statement.

“These regulations acknowledge the potential for individual insurance market disruption and take a first step toward minimizing such disruptions,” Karen Ignagni, the group’s president, said in the statement.

Sebelius mostly kept to the spending rule recommended last month by the National Association of Insurance Commissioners, a group of state regulators, said Shove, the BMO analyst. The federal rule exempts expatriate insurance plans and so-called mini-med policies that employers offer to part-time and low-wage workers. Both decisions should benefit Aetna Inc. (AET) of Hartford, Connecticut, and Philadelphia-based Cigna Corp. (CI), Shove said.

Rebate Estimates

The top six for-profit insurers, led by WellPoint and UnitedHealth Group Inc. (UNH) of Minnetonka, Minnesota, will probably spend about $655 million in rebates for next year’s coverage, said Borsch, the Goldman Sachs analyst in New York. If federal taxes weren’t included in the formula, the rebates would have been $1.36 billion, Borsch estimated, based on 2010 spending patterns.

Tyler Mason, a UnitedHealth spokesman, referred questions to the industry group. The stock rose 46 cents, or 1.3 percent, to $36.46 in New York Stock Exchange composite trading.

Kristin Binns, a WellPoint spokeswoman, also referred questions to the insurance group.

The law will expand coverage to 32 million uninsured people, according to the Congressional Budget Office. It also limits insurer practices such as excluding from health coverage those with pre-existing medical conditions.

The administration gave insurers leeway on federal taxes as congressional Democrats argued that lawmakers hadn’t intended to do so. In an Aug. 10 letter to the state commissioners group, the chairmen of six congressional committees said they meant the law to omit only the insurance taxes created under the bill, not payroll or income levies.

The legislation says the medical ratio should be calculated “excluding federal and state taxes.”

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

To contact the editor responsible for this story: Adriel Bettelheim at abettelheim@bloomberg.net.

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