The failure by state regulators to decide how much insurers must spend on patient care is scaring investors from health-plan stocks and complicating company decisions on premiums, commissions and cost cutting.
The National Association of Insurance Commissioners’ decision, expected in June, has slipped to October, and U.S. officials must weigh in after that, said Jane Cline, the group’s president. How to count federal taxes in the calculation, the most pivotal decision remaining, may cost the industry, led by WellPoint Inc., an extra $264 million next year, said Ana Gupte, a Sanford C. Bernstein & Co. analyst in New York.
The health law requires companies to spend at least 80 percent of their premiums on medical care or return the difference to customers. It assigned the commissioners’ group to decide how to calculate that figure, known as the medical-loss ratio. Their delay has helped drive insurer stocks down for six months, Gupte said in a telephone interview.
The formula and “the federal tax issue have become a proxy for the broader political risk facing the industry,” she said. “There are many people that will not invest at all until they know for sure what the definitions look like.”
Cline and commissioners from Florida, Kansas and Iowa met today with President Barack Obama to discuss how to implement the health overhaul. While the tax issue wasn’t raised, many states would like some of the spending requirements phased in over three years to lessen the risk that insurers will drop out of markets, said Kevin McCarty, Florida’s commissioner. The law calls on companies to start paying rebates next year.
“If our goal is to minimize disruption” in insurance markets, “then a way to do that is to do some kind of phase-in.” McCarty said after the White House meeting.
Administration officials asked for more evidence on the chances insurers would drop out, he said.
Shares of insurers, led by Indianapolis-based WellPoint, have dropped 3.3 percent since the health overhaul was approved March 22 by Congress, as measured by the Standard & Poor’s 500 Managed Health Care Index. The broader S&P 500 has lost 2.7 percent in that time.
Before today, WellPoint, the biggest insurer by enrollment, had declined 12 percent since March 22. Coventry Health Systems Inc., a Bethesda, Maryland-based insurer, lost 18 percent. The two face the biggest potential rebates as a percentage of earnings next year because of their reliance on policies for individuals and small employers, where administrative costs and profit margins tend to be higher, Gupte said.
WellPoint rose 89 cents, or 1.6 percent, to $56.64 in New York Stock Exchange composite trading at 4 p.m. Coventry fell 7 cents, or less than 1 percent, to $21.34.
Kristin Binns, a WellPoint spokeswoman, and Drew Asher, Coventry’s senior vice president for corporate finance, didn’t return messages seeking comment.
For insurers, the most important issue yet to be decided is how to treat federal payroll and income taxes paid by the companies, Gupte said. If taxes are subtracted from premiums, as insurers want, the six biggest for-profit plans would rebate $859 million next year, she estimated in an Aug. 31 note to clients. Including taxes, as some lawmakers demanded in August, would raise the potential giveback to $1.12 billion.
The uncertainty has left insurers to set rates, negotiate broker commissions and craft budgets without knowing their ultimate costs, Gupte said. Most publicly traded plans have chosen simply to price according to their expected medical costs and desired profit, even if it means risking a bigger rebate in 2011, she said.
A subcommittee of the Kansas City, Missouri-based commissioners’ group initially sided with industry on the tax question. The controversy prompted the association to withdraw the ruling and leave the decision to its 17-member executive committee. The panel hopes to issue final recommendations for the medical-loss ratio at its national meeting in Orlando, Florida, starting Oct. 18, said Cline, West Virginia’s insurance commissioner.
The deliberations have been necessary to sort through questions over what spending may be considered medical care and how quickly the regulation can be imposed without driving insurers from the market, Cline said in a Sept. 17 interview.
‘Spirit of the Law’
“I have had more input from consumer groups, interest groups and the industry on the subject of medical-loss ratios than I have on any other subject in my 10-year tenure,” Cline said. “Ultimately, we’ll have to make the best determination that fits with the spirit of the law.”
Even after the group makes its decision, the law gives the final say to Obama’s Health and Human Services Department. Cline declined to predict how closely the agency would follow her group’s advice. She also declined to give her position on the tax issue.
The legislation says the medical ratio should be calculated “excluding federal and state taxes.” In an Aug. 10 letter, the Democratic 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.
America’s Health Insurance Plans, the industry trade group, responded with its legal interpretation, citing the law’s “plain, unambiguous language” for subtracting “the broad array of taxes and fees.”
If insurers lose the argument, they may sue, blocking a key provision of Democrats’ overhaul, said Peter Harbage, a Sacramento, California-based health-policy consultant to unions, foundations and county governments.
“There’s a pretty good chance that any part of this could end up in court,” Harbage, a former adviser to John Edwards, who was a Democratic presidential candidate and senator from North Carolina. “There’s so much money at stake. I think the insurance industry is likely to use every approach possible to try to make sure they’re getting the best deal possible.”
Federal officials have the power to waive rebates in specific states and sectors of the industry “if the market would be destabilized,” said Kathleen Sebelius, the Health and Human Services secretary, in a Sept. 20 forum in Washington sponsored by National Journal magazine.
That determination will be “step two in the process,” she said. For now, the agency has asked commissioners to wrap up their work so “the market will know what’s in and what’s out” of the ratio, she said.
The comments should be “a positive catalyst” for insurers, showing the Obama administration is willing to work with them, said Thomas A. Carroll, a Stifel Nicolaus & Co. analyst in Baltimore. The medical-spending uncertainty has bothered investors more than insurers, who consider the regulation manageable, he said by telephone.
The rule will impose the biggest costs on insurers focused on selling to individuals or small employers and those with higher administrative expenses or profit margins, Gupte said.
WellPoint would pay rebates as high as $341 million next year if it can’t exclude taxes and trim its projected earnings by 8.5 percent a share, she said. Coventry may rebate as much as $52 million, cutting earnings 10.9 percent, she said.
Overall, Gupte said the regulation is likely to shave earnings by 5 percent to 6.4 percent a share next year for the top six plans: WellPoint; Coventry; UnitedHealth Group Inc. of Minnetonka, Minnesota; Aetna Inc. of Hartford, Connecticut; Humana Inc. of Louisville, Kentucky and Cigna Corp. of Philadelphia.