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Health reform rule could cost WellPoint

July 7, 2010

There are more than 1,000 regulations waiting to be written as part of the recently passed health care law, but Indianapolis-based insurer WellPoint Inc. has about $800 million riding on one arcane rule: how to calculate a medical-loss ratio.

The ratio quantifies the percentage of customers’ premiums that were spent on medical care, rather than on overhead or profits. The new health law, signed by President Obama in March, requires the ratios to hit at least 80 percent on insurance policies for individuals or small business and at least 85 percent for large businesses.

If they don’t, health insurers must refund premiums to make up the shortfall.

The Wall Street Journal called the rule a “game changer” in a July 2 article.

“This is the biggest issue right now for the companies,” Sandy Praeger, the Kansas insurance commissioner who is chairing the National Association of Insurance Commissioners committee writing the medical-loss ratio rule, told the Journal.

A key issue is whether health insurers will have to meet the new threshold at each of their subsidiary companies, or whether they’ll be allowed to aggregate their companies’ results and produce one, corporate-wide medical-loss ratio.

At WellPoint, if the 80- and 85-percent rules had been applied to all its subsidiaries in 2009, the company would have had to refund about $800 million, according to an IBJ analysis of data collected by the U.S. Senate's Commerce Committee and the California Department of Managed Care.

That’s roughly 2.5 percent of the $33 billion in medical premiums that WellPoint’s state-regulated subsidiaries collected last year. It also represents about 40 percent of WellPoint's 2009 adjusted pre-tax profit margin.

The losses at WellPoint's subsidiaries would have been about the same even if the company had been allowed to pool its results, which is one option the insurance commissioners are considering.

However, some observers fear that health insurers will simply leave markets where they are well below the threshold, which could reduce consumer options.

To soften the blow of the new rule, WellPoint would like to include its spending on wellness programs, which it formerly characterized as administrative costs. Now, WellPoint wants to count those dollars as medical expenses.

The difference, which WellPoint adopted in its accounting in April, would helped the company add 1 percentage point to its medical-loss ratio—which would translate to about $330 million of that $800 million that it would not have to refund to customers.

WellPoint officials continue to be upbeat about the company’s chances under the new law. Chief Strategy Officer Brad Fluegel told the Wall Street Journal that the company’s size—33 million insured customers—would allow it more opportunities than its competitors to reduce costs, thereby meeting the new medical-loss-ratio caps.

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