An Overview for Consumers of Selected Aspects of Health Care Reform

An Overview for Consumers of Selected Aspects of Health Care Reform

Health care reform is a very complex topic that will change the way insurance companies provide health care insurance for Americans. This paper addresses what we consider to be the most important issues to understand about how health insurance will change in the coming years. While we usually provide information about Medicare and related issues for people who have Medicare, this article provides information for people not yet eligible for Medicare, often referred to as pre-retirees between the ages of 50 and 64. In recent years, people in this pre-retiree group often have the toughest time finding and paying for health insurance coverage when they don’t have coverage through employment. If you are in this pre-Medicare, pre-retiree group, this paper will help you understand some of the changes that are taking place.


Health care reform remains a controversial topic, and the changes that will benefit consumers are poorly understood. The rules needed to implement health care reform are being developed at a breakneck pace to meet the 2014 deadline. By 2014, health care coverage must be available to everyone, even those with a health condition that makes them uninsurable today. Also, 2014 is when there will be no annual or lifetime limits on coverage, or low internal limits that unfairly restrict access to basic health care and treatment for serious illness. While 2014 seems far away, 4 years is an exceedingly short time frame to work out the thousands of complex and controversial details that will be required to make it easier for consumers to be insured. Some of these actions include:

  • Federal government actions: The federal government must develop a myriad of complex rules for insurance companies to follow, and must give the public, including insurance companies, time to review and comment on the proposed rules. The public’s comments and concerns must be seriously considered by 3 federal agencies: the Department of Health and Human Services (HHS), the Department of Labor (DOL) and the Treasury. Final rules could be changed to reflect the concerns expressed in those comments.
  • State actions: Once federal rules have been issued, states must then change their laws, giving them the authority to implement and enforce the new rules with companies that will be selling health care coverage in the states.
  • Company actions: Once states have changed their rules, companies can begin seeking state approval of new products in time for them to be available to consumers by 2014. Companies must begin complying with some of the new federal rules as early as 2011. This marks the beginning of a 3-year transition period, when requirements are being phased in, that ends in 2014 when all the new rules will be in effect.

This paper discusses 4 topics that are likely to have the most profound effect on the health care coverage companies will market and sell until you become eligible for Medicare at age 65, or sooner if you are disabled.

  1. Medical loss ratios (MLRs) will determine what percentage of the premiums you pay will be spent on health care services covered by the plan, so you can get the most value for your premium dollars.
  2. Standards and disclosure of unreasonable rate increases will give you information about what costs a company used to seek a rate increase in your state so you can make informed choices about where you want to spend your premium dollars.
  3. Standardized definitions of terms used in health care coverage contracts will help you understand the health care benefits you buy.
  4. A standardized summary of health care benefits will allow you to make side-by-side comparisons of health care coverage offered by different companies.

We also briefly discuss Exchanges,(1) the new marketplace for buying health care coverage in 2014.

Changing the Way Health Insurance is Designed

The Patient Protection and Affordable Care Act (PPACA, P.L. 111-148, March 23, 2010) charged the National Association of Insurance Commissioners (NAIC) (2) with the task of developing standards that the Department of Health and Human Services (HHS) can use to implement various parts of the health care reform law. The NAIC has been working since March on developing standards for Medical Loss Ratios (MLR), reporting requirements for unreasonable rate increases, standardized medical and insurance terms, and a benefit summary form, as well as many others details associated with changes required by the federal law. These 4 items form the basis for changing the way health insurance is designed and sold.

The NAIC delegated various committees within the organization to develop their recommended standards for the federal government. The Committee Chairs have used an open process of meetings and conference calls that include participation by states, consumer groups, and company and trade representatives. Meeting once or twice a week by phone, and at some face-to-face interim meetings, these committees are working to resolve complex actuarial issues as well as more practical problems involved with changing the way health insurance companies have done business for decades.(3)

As these committees proceed with their work, hundreds of technical and practical details have surfaced that need to be resolved before the NAIC can forward their recommendations to HHS. Some of those details can only be resolved by federal agencies during their rulemaking process. In the meantime, NAIC’s continues their work on the 4 subjects described below.

1. Medical Loss Ratio

A Medical Loss Ratio or MLR is a way for regulators to measure how much of a company’s premium dollars are being spent on benefits and how much is being retained for its administrative costs and profits. In general, state insurance departments must ensure that insurance premiums are not excessive with too much going to the company, or so low that the solvency of a company is threatened. Insurance departments must also ensure that insurance companies are not unfairly discriminatory and that they treat all similar groups and individuals fairly.

PPACA requires companies to pay out in health care costs 80% of the premiums paid to them by individuals and small groups (up to 50 people)(4), and 85% for larger groups. While this sounds simple to the average person, companies are very concerned about which expenses will be classified as health care and included in the 80% or 85%, and which will fall into the 20% or15% respectively that they can use for administrative costs and profits. If a company fails to meet the standard of returning the specified amount of premium in health care costs, it would have to “rebate” or refund the difference between the MLR required by HHS in its final regulations, and the lower amount a company actually spent.

The NAIC was charged with the difficult task of advising HHS on how these costs should be split up. Companies wanted many of their expenses classified as health care expenses while consumer groups considered many of those same expenses to be administrative costs that don’t directly benefit consumers. It has not been an easy task to decide which expenses are clearly health care expenses and which are clearly administrative. For instance, it’s clear that executive salaries are an administrative cost but not so clear whether the dollars a company spends to examine a claim and decide whether a service covered by the contract is medically necessary, and is therefore a health care expense or an administrative expense.

As the new law was being enacted, one company, WellPoint, quickly moved many of the expenses it had been counting as administrative costs into their medical costs column, saving half a billion dollars annually and increasing their value to their investors.(5) Some of those expenses may have to be moved back into the administration column once the new MLRs are in use.

Companies need time to transition to this new measurement between 2011, when the MLR begins, and 2014, when companies can no longer refuse health care coverage to people with a health condition, and annual and lifetime limits on benefits can no longer be imposed. Smaller companies, and companies with a small number of policyholders in one state, may have difficulty meeting the new MLR. Many of these smaller companies sell individual health insurance with very low or restricted annual limits, some as low as $1,000 annually. Some have higher annual limits but often have high out–of-pocket costs and internal limits on covered benefits. These plans are used by employers to offer low cost coverage, or sold to individuals who can’t get or afford better coverage. People covered by these policies are seldom aware of the benefit limits until a serious illness occurs.

These plans, known as “mini-meds,” were not designed to meet high loss ratio requirements and cannot be sold in 2014. Some companies selling these policies have said they will close their doors before then unless they are exempted from the new standard. The Superintendent of Insurance in Maine, Mila Kofman, has already requested a waiver of the MLR rules from HHS for smaller companies in her state until 2014, fearing that at least one of 3 companies writing these individual health insurance policies in her state would leave.(6)

Deciding whether to exempt these plans between 2011 and 2014 is controversial. On the one hand, the premiums of mini-med plans are lower than for comprehensive health care coverage. On the other hand, if they are not exempt, several million people across the country who have these low limit policies may lose coverage altogether. As a result, the federal government must carefully consider the loss of even limited health benefits until 2014 when everyone will be eligible for comprehensive health benefits without medical underwriting and without severe limits on their benefits.

2. Unreasonable Rate Increases

The new federal law requires companies to notify the federal government whenever they file for an unreasonable rate increase in a state. The definition of an “unreasonable rate increase,” however, was not defined in the law and has not yet been defined by HHS. The NAIC was requested to develop a form that companies will use to report an unreasonable rate increase request, and is now tackling both the required form and the instructions for completing it.

The form and instructions for completing it have raised many very complex technical issues since discussions began in March. Insurers have argued for limiting the information that will be required on the form, while consumer groups want detailed information and full disclosure of the costs used to request a rate increase. Insurance department actuaries, actuaries from companies and trade groups, and representatives of the American Academy of Actuaries, and consumer groups have all contributed their expert opinions and comments during the development of this form and the accompanying instructions. Once this process ends, and the form and instructions are completed, both will be submitted to HHS and the federal government will develop a definition of an unreasonable rate increase, issue interim regulations, receive public comments, and respond to those comments.

Beginning in 2014, companies that have an unreasonable rate increase must submit a copy of that request using the form currently under discussion along with supporting documentation for the increase. That information will then be posted on the federal government’s health care website, This information will enable consumers, more likely consumer groups, to analyze the financial information companies submit and see where the money went. For the first time, consumers will be able to access information about rate increases imposed on them and see how health care costs and other factors are affecting premiums. They can then decide whether to change to another company, since companies will no longer be able to turn them down because of their health conditions.

3. Standardized Terms

Medical insurance contracts are full of medical and insurance terms that are difficult for consumers to understand and apply to their health care coverage. These terms are seldom defined in the same way from one company to another. The new law requires standardization of these terms to ensure that they are consistent in definition and application from one company to the next. The list in the law is by no means comprehensive, but it tackles some of the most common terms used. The NAIC is charged with standardizing the terms on the list. It can also identify other terms it thinks need to be defined and suggest that they also be included in the rules HHS will develop. Below are some of the common terms that must be defined.

Insurance terms: premium; deductible; coinsurance; copayment; out-of-pocket limit (OOP); preferred and non-preferred provider; out-of-network; copayments; usual, customary and reasonable fees (UCR); excluded services; grievance and appeals.

Medical terms: hospitalization; hospital out-patient care; emergency room care; physician services; durable medical equipment (DME); home health care; skilled nursing care; rehabilitation services; hospice services; emergency medical transport.

These terms have proven difficult to define because there is so much variation in the way that companies use them to provide health benefits. For instance, the term “deductible” generally means a single amount you pay before a company begins paying its benefits. However, some companies apply a deductible to certain services, in addition to an annual deductible. Others apply the deductible at the beginning of a plan year, not on a calendar year basis, and some allow a deductible that is met in the third quarter of a year to be carried over into the next year. A simple and concise way of defining this term that includes all of the variations used in health care contracts today has been very difficult. These definitions will be limited to one or two short sentences and accompany a 4-page Summary of Coverage document described below.

4. Summary of Benefits

When you are considering the purchase of health care coverage, you are often given a summary of the benefits in the contract you want to buy. The form and content of these summaries today varies considerably from one company to another, making comparisons difficult, if not impossible. The new law requires the development of a new standardized summary of benefits form that each company will use beginning in 2012, to display the benefits their health care contract. This new summary will be limited to 4 pages and will be available from an agent, by phone from a company, or on a company’s Internet site.

The new form will enable you to compare one set of benefits with another, including deductibles and cost sharing for various types of benefits, and any limitations on those benefits. The form will use the standardized definitions for medical and insurance terms so you will have a greater understanding of what is covered and how your benefits will work. You will still need to read your policy when you receive it. But the summary should help you make a side-by-side comparison of coverage, make it easier to understand what’s covered and what your cost sharing will be.

You will also be able to see when you are required to use health care services within a certain network, and how your costs or benefits will change if you use services outside that network. You will also be able to see if any of the covered benefits are limited to a certain number of days or visits, and if there are separate deductibles for certain services in addition to an annual deductible. If your out-of-pocket costs are limited to a certain annual amount, you will be able to see if there are any covered services that don’t apply to that annual limit.

Between 2012 and 2014, when companies are not required to cover all essential health care services such as pregnancy, you will be able to easily see which benefits are excluded from coverage. This form and the definitions that will be part of the form are still under construction as of this writing.


Exchanges will begin in 2014. By that date companies cannot refuse to insure people with pre-existing health conditions. Exchanges are non-profit organizations designed to operate as a central purchasing point for health care coverage, although states have the discretion to set these up in a variety of ways. A state can have more than one exchange, or several states could participate in a single multi-state exchange.(7) Exchanges can establish standards, negotiate rates and benefits, and make those products available to individuals, and to small employers who want to purchase group insurance for their employees. Because Exchanges won’t need to generate a profit, and because they can negotiate favorable rates, they are expected to offer better coverage at lower cost than health care coverage available outside the Exchange, if a state allows health care coverage to be sold outside an Exchange. An Exchange can also help funnel people to various other public programs they might be eligible for, such as Medicaid, and evaluate their eligibility for subsidized premiums.

The success of this arrangement depends in large part on how many people buy their coverage through the state’s Exchange. A large pool of insured people helps to balance out the cost of health care across the whole group and moderate the amount paid by each individual to cover their risk of needing care. Success also depends on the rules a state adopts for these Exchanges.

The conversation about Exchanges and how they will operate has just begun. The NAIC will be developing regulatory criteria states can use to set up an Exchange for both the individual market and the small group market. States may want to combine their individual and small group products for great efficiency and to spread the cost across a larger number of covered people. Small states may want to partner with other states and set up an Exchange that operates in several contiguous states for the same reasons.

As discussions continue within federal agencies, among states, and at the NAIC, technical and practical issues are bound to arise. These issues will have to be addressed in rules and guidance that will be written to set up and guide the operation of Exchanges.


Almost all of the issues related to how various pieces of health care reform requirements will function have yet to be finalized. Some federal regulations have been issued to help guide the process but much more is still being decided within federal agencies, within the states, and at the NAIC. Even so, the enormous task has begun. Consumer groups from around the country are actively working to ensure that the rules for the hundreds of issues, and all of the moving parts of health care reform, will be written to protect and benefit consumers. We all agree that companies are entitled to a fair profit for the products they sell, but the money companies use are the premium dollars they collect from the people who buy their products, and in the last analysis their money must be used to provide adequate and fairly priced health care coverage.

As the work continues, California Health Advocates will continue to represent the interests of consumers and periodically report on the progress being made as the rules are developed and adopted.

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By Bonnie Burns, California Health Advocates, Training and Policy Specialist. Ms. Burns is an appointed member of the NAIC Statutory Working Group on Consumer Standards; a funded consumer representative to the NAIC from 1992–2006, and returning in 2010; and a member of the NAIC Board of the Funded Consumer Representative Program.


  1. Exchanges are intended to operate in some respects like a co-op and negotiate with companies for high quality coverage that consumers can buy at affordable rates, either in their state or from one set up by the federal government. States have immense discretion to design exchanges in a variety of ways. Discussions about how Exchanges will be set up and operated have just begun.
  2. The NAIC is an organization of the elected or appointed state government officials who, along with their departments and staff, regulate the conduct of insurance companies and agents in their respective state or territory.
  3. These meetings are in addition to the work of these individuals in their respective states as employees of their state’s insurance department.
  4. States have the option to increase the definition of a small group to 100 people. Enlarging the size of the group may help keep premiums lower for members of a group.
  5. See: Staff report for Chairman Rockefeller, Office of Oversight and Investigations, entitled, “Implementing Health Insurance Reform: New Medical Loss Ratio Information For Policymakers and Consumers,” published on April 15, 2010.
  6. See: State insurance chief wants federal waiver, Bangor Daily News, updated: 7/16/10 01:59 am.
  7. Two bills in the California legislature, AB 1602 and SB 900, set out the structure and operation of Exchanges in California.
Our blogger Karen J. Fletcher is CHA's publications consultant. She provides technical expertise, writing and research on Medicare, health disparities and other health care issues. With a Masters in Public Health from UC Berkeley, she serves in health advocacy as a trainer and consultant. See her current articles.