Fulfilling one of its primary mandates under the Patient Protection and Affordable Care Act (PPACA), the National Association of Insurance Commissioners (NAIC)  has voted to adopt a model regulation containing the definitions and methodologies for calculating medical loss ratios.

When the PPACA signed into law on March 23, 2010, one of the stipulations was that beginning in 2011, insurance companies meet new medical loss ratio requirements designed to ensure  a large percentage of premium dollars go to health care. The PPACA required that the NAIC provide recommendations for the definitions and calculations of these ratios to Department of Health and Human Services (HHS) Secretary Kathleen Sebelius by the end of the year. Henceforth, the NAIC proposal is likely to define what counts as medical spending and what counts as administrative expenses going forward.

“I commend the work of our regulators and staff as we considered a number of very challenging issues as it moved through the committee process,” NAIC President and West Virginia Insurance Commissioner Jane Cline said in a statement. “The committee model regulation on MLR passed with only technical amendments, which is a testament to our inclusive and transparent process. It is with a great deal of pride we present these recommendations to the Secretary.”

Under the law passed in March, insurers' large groups' health plans must allocate at least 85 cents-per-premium dollar to medical care, not administrative costs or profit. Plans for individuals or small groups must spend 80 cents per dollar, notes a Reuters report. The stated rationale of the rule was that by capping the administrative expenses of insurers, customers would see some of those savings in the form of lower premiums.

However, insurers warned that a  Jan. 1 deadline to comply with new rules may not be feasible for many insurers, they say, and could drive them out of business, notes Kaiser Health News. "For that reason, insurers asked the NAIC to consider a 'transition' period that allows insurers to gradually phase in the higher requirement," notes the news site.  Nonetheless, Sebelius has said the agency would like to process the regulations this month.

The MLR changes would take effect on January 1, and affect companies such as Aetna, Cigna, UnitedHealth, Humana and others. MLR has historically been used on Wall Street as a gauge of insurers’ business health.

The PPACA also tasks the NAIC with a number of additional provisions to consider, including creating guidelines and recommendations to facilitate the implementation of health exchanges, due to be operational in the states by January 2014.

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