WASHINGTON -- A rift has developed over language in the healthcare reform law mandating how much money insurers must devote to patient care and in how federal taxes paid by insurers are treated in determining the formula.
The simmering debate approached a rolling boil days after President Obama cancelled a planned speech at a National Association of Insurance Commissioners (NAIC) meeting in Seattle this week.
The healthcare reform law requires that, starting in 2011, insurance companies' medical loss ratios -- the ratio of an insurance company's spending on healthcare for policyholders to its revenues -- must be 85% or higher in large-group markets and 80% or higher in individual and small-group markets.
The Department of Health and Human Services asked the NAIC to propose specifics for the medical loss ratio, and that definition was due by June 1. The NAIC missed that deadline and explained to HHS Secretary Kathleen Sebelius that it needed more time to figure out a formula that wouldn't harm the insurance market.
Although the Patient Protection and Affordable Care Act (PPACA) stated that federal taxes would be excluded from the formula used to calculate the medical loss ratio, the NAIC, the insurance industry, members of Congress, and others, are locked in a debate about what, exactly, constitutes a "federal tax."
Ultimately, HHS will have the final say.
One NAIC committee has already recommended that all federal taxes be removed from medical loss ratio calculations except for investment income taxes. Under that scenario, insurance companies stand to benefit because the more federal taxes that are excluded from the denominator, the less money insurance companies would be required to devote directly to patient care.
For instance, for a $10,000 policy, the insurer would need to devote 80%, or $8,000 to benefit payments. That money couldn't be spent on anything not relating to medical care for the patient, such as advertising or insurance executive salaries.
But if the plan spends an additional $1,000 on taxes, and that money is not excluded from the medical loss ratio calculation, then the insurer must devote 80% of $11,000, or $8,800 to patient care, Jim Capretta, a fellow at the Ethics and Public Policy Center, and former associate director at the Office of Management and Budget explained on a Monday call sponsored by the Galen Institute, a free-market think tank.
Six members of Congress wrote to the NAIC last Friday to argue that "federal taxes" should be better defined. Translation: federal taxes should be included in the calculation so insurers have to pay more for patient care.
"As the NAIC works to craft proposed definitions, we are writing to clarify legislative intent as it pertains to the exclusion of Federal taxes from revenue calculations," wrote the members of Congress, who are all chairmen of committees involved in passing the healthcare reform bill. The letter was signed by Sens. Max Baucus (D-Mont), Christopher Dodd (D-Conn.), and Tom Harkin (D-Iowa), and Reps. Sander Levin (D-Mich.), Henry Waxman (D-Calif.), and George Miller (D-Calif.)
They argued that "federal taxes and fees" that were meant to be excluded in the law refers only to taxes levied on insurance companies by the reform law, including an annual fee imposed on each health insurance plan and a tax on high-benefit, so-called "Cadillac" plans.
Federal income taxes and payroll taxes should not be excluded, the lawmakers said.
In response to the letter from the lawmakers, the health insurance lobby America's Health Insurance Plans (AHIP) sent a letter to NAIC, urging the group to draft language that "clearly describes the broad array of taxes and fees -– both federal and state – excluded from the MLR calculation in the denominator."
Obama's speech to NAIC may have provided some guidance on the medical loss ratio debate, but several right-leaning policy experts on the Galen call told reporters that administration officials should allow the experts -- the NAIC -- to formulate a policy on its own.
"I was surprised to see the members of Congress try to influence this process," said Doug Holtz-Eakin, former director of the Congressional Budget Office and president of the think tank American Action Forum.
"From a clear analytic perspective, there is only one way for this to come down, and that's to exclude all taxes from this calculation," he said.