Defined Contribution?

The Defined Contribution (DC) approach to employer paid health coverage has been getting lots of press lately. DC allows an employer to have greater control over health insurance contributions by setting a fixed dollar amount that will be applied against employee premiums. (Example: $300 per month) By using this approach, the employer innoculates themselves against unexpected premium increases and gains greater budgetary control.


Ideally, a Health Insurance Exchange would facilitate this approach by allowing plan participants to select plans that make the most of employer contributions using online comparison tools. If an employee chooses a plan whose premium exceeds the employer’s DC allowance, the excess premium would be deducted from an employees pay on a pre-tax basis. DC contributions operate much like current Sec.125 Cafeteria plan contributions.


Proponents of exchanges have touted this approach as a boon for employers and a compelling reason why exchanges will reinvent the employer paid health insurance market. Granted, many employers have been using a DC approach for years but exchanges will bring the concept to a new level of operation and acceptance.


Beware the dark side.


Defined Contribution may control employer’s premium expense but it does nothing to control premiums. If employers elect to limit their contributions in the face of rising premiums, employees are left to shoulder the increases. This may seem obvious, but it never seems to be discussed in the glowing presentations of the DC approach. If employees are faced with rising premiums and a fixed employer contribution they’ll be forced into an annual downgrading of benefits in order to meet their budgetary constraints. Eventually, employees may drop coverage because they just can’t handle the annual increases. That may not be an entirely rational response, but it’s an entirely human one.


How do we correct this flaw with DC? Employers should review their contribution levels annually and make reasonable adjustments. Even though their costs are fixed, they should continue to seek out cost saving alternatives as a service to their employees. And, employers should support legislation aimed at actually reducing the cost of medical care and bringing down premiums.


Defined Contribution is a tool that’s only useful in the context of a greater solution.


JL Sugden

Will PPACA MLR Rules Kill HDHPs?

When the details of PPACA emerged in 2010, many of us feared that the law would place severe restrictions on High Deductible Health Plans and Health Savings Accounts. These complimentary products reward consumers with premium savings and tax deductions. The law made no changes in HSA contribution or deduction limits although it did impose lower deductible limits on Qualified Health Plans.


About 30% of consumers currently take advantage of HDHPs and HSAs, often with significant savings for themselves and the health care delivery system as a whole. However, recent discussions of the new Minimum Loss Ratio (MLR) rules have brought to light a ticking time-bomb in PPACA. MLR rules might make High Deductible Health Plans unworkable for insurers.

Since HDHPs dramatically reduce claims but only marginally reduce administration costs and commission costs, the math might no longer work.


Here’s a hypothetical example:     Male - n/s age 35

High Benefit PPO Plan – $500 deductible - Annual Premium $ 3,768

Typical Admin Expense $ 754
Hypothetical Average Claims $ 3,014 (80%)


High Deductible Plan - $3,000 deductible - Annual Premium $2,208.00

Hypothetical Admin Expense - $700
Hypothetical Average Claims $ 1,508 (68%)


Although this hypothetical HDHP contract released $1,560 in premium savings to the consumer, it doesn’t meet the 80% MLR test and therefore might have to be pulled from the market. Carriers that I’ve contacted acknowledge that the MLR arithmetic is working against them. They are concerned but would probably not pull HDHP plans from the market before 2013.


Will PPACA kill the HDHP market? Hard to tell, there are lots of possible scenarios before 2013. However, if PPACA stands, the numbers don’t look good. Perhaps it’s time for carriers and brokers to kick their creativity into high gear. Don’t be surprised if you see major carriers introducing some innovative products including shared-funding arrangements for small groups of 5+.


In Colorado, Senate Bill 200, the Health Benefit Exchange bill, states that its goal is to provide consumers with greater access, affordability and choice. Looks like someone needs to tell Washington about the “choice” part.

JL Sugden

Essential Benefits

Be careful what you ask for, especially if you're a state legislator.

HHS has issued its long awaited bulletin on essential benefits. The feds will allow states to decide on the scope of health plan benefits provided in their state as long as they allow for benefits in 10 defined categories. These include the benefits that are already covered under most medical plans, including inpatient and outpatient medical services, prescription drugs, maternity care, preventive care, lab services, emergency services and care for mental illness.

Also included are a couple of items that may not appear in most health policies. The mandate to cover pediatric care is also accompanied by a requirement that pediatric dental and vision services be provided. The directive also includes a mandate for rehabilitative and “habilitative” services. Rehabilitative services are directed toward regaining lost abilities.  Whereas, habilitative services are aimed at attaining some level of ability for those who’ve not previous had that ability. This brings to mind patients with hearing, sight, speech, motor and cognitive impairments. T he scope of coverage for those benefits will have to be weighed against the effect those benefits will have on premiums. Not an easy task.  It also appears that what is allowed in the way of essential benefits must also conform to PPACA’s provisions for unlimited benefits under qualified health plans.

Additionally, states may consider services deemed “non-essential” by HHS. These include autism, chiropractic, acupuncture and infertility services. These services may have lifetime and/or annual limits imposed on them but may still drive dramatically premium costs.  

Although states seem to be relieved and perhaps pleased by HHS’ announcement that they would be given latitude in implementing the Essential Benefit provisions of PPACA, it does seem that HHS just punted this hot potato issue. The battle of the details now moves to the states and I would guess that that exact nature and scope of “habilitative benefits” and the inclusion of non-essential benefits will be hotly contested in many state houses this year.

Since Washington doesn’t seem to be very good making hard decisions we now must look for more courageous leadership from the states.

JL Sugden

Health Insurance Exchanges and MLRs

Health Insurance Exchanges and MLRs


HHS has recently issued a ruling that the original ratios set out in PPACA for Medical Loss Ratios will stand. This means that carriers will need to structure their individual health products to allocate at least 80% of each premium dollar to claim costs or face the prospect of paying rebates to consumers.



My last post dealt with MLRs and their effect on both consumers and brokers. I noted that the 80% loss ratio for small group and the 85% loss ratio for large group did not seem to be creating much of a stir in the industry because the market was already dictating those loss ratio levels. However, the individual health plan market has been more problematic. In order to conform to the new MLR rules carriers have lowered broker commissions by as much as 50%. This radical adjustment has caused many brokers to leave the individual market or at least cut back on services to clients.  This costs jobs and would limit consumer options.


Now, there might be a ray of hope from an unlikely source, health insurance exchanges.  A recent white paper published by Ceridian Corp. suggests that there may be a way for exchanges to structure their administrative and marketing expenses to comply with the MLR rules while allocating a bit more toward broker commissions.


The gist of their argument is that in calculating the MLR, “regulatory fees” paid by carriers are exempted from non-claim (administrative) costs. This means that if an exchange were to provide enrollment, billing, marketing or sales services on behalf of carriers and were to bill carriers for these services as “regulatory fees”, those charges might be exempted from the MLR calculation. This would mean that broker commissions paid by the exchange could be exempted from the MLR calculation.


Is this a “silver bullet” for brokers?  Hardly.  Be assured that any move to dilute the effect of MLR rules on health plan premiums will be met with strong resistance from HHS and consumer advocacy groups. However, the concept offers a glimmer of hope that a bit more sanity might be applied at the exchange level when considering the marketing and service costs associated with individual health plans.


The entire Ceridian white paper, The Path to Sustainability: MLR, Exchanges and Carrier Services by Manny Munson-Regala is only 5 pages and worth a read.

Back to Work!




OK, I'm back. 

I've taken a vacation from blogging for a few months.  However, there's so much going on these days that I can't stay quiet any longer.  I'll be posting a new entry about once a week and I'd love to hear your comments.

This week I'll take a look at a hot topic Minimum Loss Ratios.

PPACA imposed Minimum Loss Ratios for health insurance products and the Department of Health and Human Services (HHS) is imposing these new rules.  Their claim was that insurers were reaping unfair profits on their products and that consumers were getting a bad deal. Where they did their research or got their "facts" for this assertion is unclear. However, in the absence of a monopoly, it seems to me that the imposition of Minimum Loss Ratios is counter-productive.  It's based on the belief that government needs to control the cost of goods sold, the allocation of private resources and of course, profit margins. 

The imposition of an 85% MLR on large group health plans and an 80% MLR on small group coverage was not detrimental to those markets. That's because consumers were already dictating those ratios.  Consumers had already decided how much they were willing to pay for administration, customer service and profit the market was pretty much in sync without government intervention.

But, when PPACA dictated an 80% loss ratio for individual health insurance, it impaired the system.  In order to meet the new rules, carriers responded rationally. They couldn't squeeze enough out of admin costs or their already dwindling profits. So, they trimmed broker commissions by about 40%. HHS said that the MLR rules were about reigning in huge insurer profits but, profits weren't really the issue, even non-profit insurers were forced to cut broker commissions.

The National Assn. of Insurance Commissioners (NAIC)recently passed a resolution in support of health insurance brokers by asking that HHS revisit the MLR rules. HHS has chosen to ignore NAIC's advice.  Meanwhile in Congress, House Bill 1206 has been introduced to revise how MLRs are calculated it has 140 bi-partisan co-sponsors. Colorado's Representative Mike Coffman will be chairing a House hearing on the issue and Mitchell West, a Colorado broker will be testifying as to effect of the new rules on his business.

The MLR rules may allow for some modest premium reductions and perhaps even consumer rebates under the law.  However, they will also affect consumers by forcing a fair number of brokers out of business and limiting consumer options. If you doubt this, contact me for the names of 5 capable brokers I know that have left the business this year.  These departing brokers take with them all the personal service and pro-bono work they've been doing over the years.  They've eliminated support staff jobs as well. That hurts the possibility of an economic recovery. 

There will always be consumers who value courteous, competent, personal service and are willing to pay a bit more for it. When government imposes limits on how much a business can charge for administration and customer service or how much they can make in profit, they limit choice and stifle competition. Why not let the market dictate the amount that it's willing to pay and how much they're willing to reward companies with exceptional products and service?

Or perhaps, the feds are just getting us ready for the kind of service we can expect under a government run system.

JL Sugden