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NEW MEDICAL LOSS RATIOS: 

INCREASING HEALTH CARE VALUE OR JUST 

ELIMINATING JOBS? 

HEARING 

BEFORE THE

SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT 

AND REGULATIONS 

OF THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

HEARING HELD DECEMBER 15, 2011 

Small Business Committee Document Number 112–049 

Available via the GPO Website: www.fdsys.gov 


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(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

SAM GRAVES, Missouri, Chairman 

ROSCOE BARTLETT, Maryland 

STEVE CHABOT, Ohio 

STEVE KING, Iowa 

MIKE COFFMAN, Colorado 

MICK MULVANEY, South Carolina 

SCOTT TIPTON, Colorado 

JEFF LANDRY, Louisiana 

JAIME HERRERA BEUTLER, Washington 

ALLEN WEST, Florida 

RENEE ELLMERS, North Carolina 

JOE WALSH, Illinois 

LOU BARLETTA, Pennsylvania 

RICHARD HANNA, New York 

ROBERT SCHILLING, Illinois 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

KURT SCHRADER, Oregon 

MARK CRITZ, Pennsylvania 

JASON ALTMIRE, Pennsylvania 

YVETTE CLARKE, New York 

JUDY CHU, California 

DAVID CICILLINE, Rhode Island 

CEDRIC RICHMOND, Louisiana 

JANICE HAHN, California 

GARY PETERS, Michigan 

BILL OWENS, New York 

BILL KEATING, Massachusetts 

LORI SALLEY, Staff Director 

PAUL SASS, Deputy Staff Director 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 


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C O N T E N T S 

OPENING STATEMENTS 

Hon. Mike Coffman .................................................................................................. 1 

Hon. Kurt Schrader ................................................................................................. 2 

WITNESSES 

Mitchell West, Insurance Broker, HealthChoiceOne, Greenwood Village, CO, 

Testifying on behalf of the National Association of Health Underwriters ...... 3 

Gary Livengood, Principal, What a Stitch, LLC, Mt. Airy, MD .......................... 5 

Grace-Marie Turner, President, Galen Institute, Alexandria, VA ...................... 7 

Timothy Stoltzfus Jost, Robert Willett Family Professor of Law, Washington 

and Lee University College of Law, Lexington, VA .......................................... 8 

APPENDIX 

Prepared Statements: 

Mitchell West, Insurance Broker, HealthChoiceOne, Greenwood Village, 

CO, Testifying on behalf of the National Association of Health Underwriters ............................................................................................................ 23 

Gary Livengood, Principal, What a Stitch, LLC, Mt. Airy, MD ................... 31 

Grace-Marie Turner, President, Galen Institute, Alexandria, VA ............... 35 

Timothy Stoltzfus Jost, Robert Willett Family Professor of Law, Washington and Lee University College of Law, Lexington, VA ....................... 50 

Questions for the Record: 

None 

Answers for the Record: 

None 

Additional Materials for the Record: 

National Association of Insurance Commissioners Statement for the 

Record ............................................................................................................ 57 

Communicating for America, Communicating for Agriculture, Communicating for Seniors Statement for the Record ........................................... 90 

United States Chamber of Commerce Statement for the Record ................. 92 

NAHU Broker Compensation Statement for the Record .............................. 96 


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NEW MEDICAL LOSS RATIOS: INCREASING 

HEALTH CARE VALUE OR JUST ELIMINATING JOBS? 

THURSDAY, DECEMBER 15, 2011. 

HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, SUBCOMMITTEE ON INVESTIGATIONS, OVERSIGHT AND REGULATIONS, WASHINGTON, DC. 

The Subcommittee met, pursuant to call, at 10:00 a.m., in Room 

2360, Rayburn House Office Building. Hon. Mike Coffman [chairman of the Subcommittee] presiding. 

Present: Representatives Coffman, Bartlett, Landry, West, and 

Schrader. 

Chairman COFFMAN. Good morning. I call this hearing to order. 

I want to welcome our witnesses. We appreciate your participation and look forward to your testimony today. 

Under the Health Care Reform Law and its final rule, insurers 

must spend 80 percent of premium dollars for individual and small 

group policies on health claims. This medical loss ratio means the 

amount that can be spent on administrative expenses is limited to 

20 percent. If an insurer fails to meet the minimum requirements 

it must issue rebates for the difference to its customers. Insurance 

agent commissions are counted as administrative cost under the 

HHS rule. The agents, often small business owners themselves, assess the unique health insurance needs of small firms, recommend 

appropriate coverage, and help to process claims. 

In several letters to the Department of Health and Human Services, the National Association of Insurance Commissioners (NAIC), 

the organization of state insurance commissioners which HHS entrusted with recommending the MLR formula, expressed concern 

about the adverse effects of the MLR on insurance producers, both 

agents and brokers. On November 27th of this year, NAIC endorsed 26–0, a formal resolution urging HHS to ‘‘take whatever immediate actions are available to the Department to mitigate the adverse effects the MLR rule is having on the ability of insurance 

producers to serve the demands and needs of customers and to 

more appropriately classify producer compensation in the final 

rule.’’ Unfortunately, HHS did not include NAIC’s recommendations in its rule, and agent and broker compensation remains a 

part of the administrative calculation. 

We want quality health care and affordable insurance premiums, 

but the MLR is likely to deter small insurers from entering the 

market and hasten the exit of established ones. Instead of protecting consumers, the MLR may dissuade insurers from making 


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investments in anti-fraud, anti-waste customer service and transparency tools because they are considered administrative and those 

costs must be kept low. The MLR is an incentive for insurers to 

increase, not reduce, premiums because they will need to improve 

their medical ratio and forgo administrative tools that can ultimately save money. And as NAIC’s resolution said, the MLR requirements ‘‘have had profound, detrimental marketplace effects 

for insurance producers, agents, and brokers.’’ 

In a recent study on implementation of the new MLRs, the U.S. 

Government Accountability Office said that ‘‘almost all of the insurers’’ it interviewed had decreased or planned to decrease commissions to brokers or reduce their MLRs so they can avoid issuing rebates. The National Association of Health Underwriters reports 

that nearly three-quarters of agents have experienced reductions in 

their income because of MLRs, and more than a fifth have eliminated jobs at their agencies. Clearly, federal medical loss ratios are 

a bad idea for small business. 

I look forward to hearing from our witnesses today. I now yield 

to the ranking member for opening remarks. Mr. Schrader. 

[The information follows:] 

Mr. SCHRADER. Thank you, Mr. Chairman. 

I appreciate holding this hearing today. While I am not so sure 

that the medical loss ratio is all together in itself a bad piece of 

policy, I am concerned about its effect on our agents and our brokers. That was never our intent, I do not think, in passing the 

medical loss ratio. We are looking for feedback to see if the ratios 

that were instituted in the Affordable Care Act are actually real, 

and I think it is very, very important to have this hearing because 

the agents for small businesses are absolutely critical. There is no 

way in my small little veterinary practice I was able to delve into 

the pluses or minuses of the various insurance products that are 

out there. So these folks are absolutely essential, I think, to make 

sure that small businesses keep their health care costs down, 

which is the ultimate goal of the Affordable Care Act. 

So we want to really work with a group out here and see if we 

can modify some of the rules that are coming out and make sure 

that you guys are part of the benefit, not part of the problem going 

forward. So thank you all for coming here. And I yield back. 

[The information follows:] 

Chairman COFFMAN. Thank you. 

If Subcommittee members have an opening statement prepared, 

I ask that they submit that for the record. 

I would like to take a moment to explain the timing lights for 

our witnesses today. You will each have five minutes to deliver 

your testimony. The light will start out as green. When you have 

one minute remaining the light will turn yellow. Finally, it will 

turn red to signify that you are at the end of your time, five minutes. I ask that you try to adhere to the time limit. 


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STATEMENTS OF MITCH WEST, INSURANCE BROKER, HEALTH 

CHOICE ONE; GARY LIVENGOOD, PRINCIPAL, WHAT A 

STITCH, LLC; GRACE-MARIE TURNER, PRESIDENT, GALEN 

INSTITUTE; TIMOTHY STOLTZFUS JOST, ROBERT WILLETT 

FAMILY PROFESSOR OF LAW, WASHINGTON AND LEE UNIVERSITY COLLEGE OF LAW 

Chairman COFFMAN. It is a pleasure for me to welcome our first 

witness, a fellow Coloradan and constituent, Mitchell West, to this 

Subcommittee. Mr. West is an independent insurance broker with 

Health Choice One in Greenwood Village, Colorado. He provides 

customized assessments of insurance products for small business 

clients and assists them with any claims. He holds a B.S. from the 

University of Southern California. He is testifying on behalf of the 

National Association of Health Underwriters. I must also mention 

that Mr. West and his wife, Jamie, have three children. Their son, 

Trenton, graduated with honors from the U.S. Air Force Academy 

and is currently stationed in Seattle, Washington. As a U.S. Marine Corps combat veteran, I commend your son for his service to 

our country. Mr. West. 

STATEMENT OF MITCH WEST 

Mr. WEST. Chairman and Ranking Member, my name is Mitch 

West and I am an independent broker in Centennial, Colorado. 

And I believe I share the sentiments of 22,000 licensed agents in 

Colorado, as well as the over one million agents across the U.S. 

I am a small business owner. I have one full-time employee and 

this is typical of health insurance agents. I am glad for this opportunity to address what the MLR has meant to us as we have 

moved forward since its implementation this year. I have a bachelor’s degree in biomedical engineering, followed by graduate 

course level work in industrial systems engineering, electrical engineering, and business administration. 

In 2002, I was thrown into a new environment. I was laid off as 

a result of the dot-com and telecom busts, and I had to find health 

insurance for my family and I had never been in that situation before. In spite of my background and all the training I had, I was 

inundated with information. I could not make sense of it. I could 

not discriminate between what was good, what would not be so 

good, and at that time it was only with the help of a professional 

agent that I was able to figure out what to do. And boy was I glad 

that I had assistance. I realized what the mistake was that I might 

have made if I had proceeded on my own. 

A couple of months later I began my career as a licensed agent 

and that recent experience was fresh in my mind. As I met with 

my clients I began to understand that they all had a common element. They had more misconceptions about health insurance than 

they had real facts, and they did not even know what questions to 

ask as they were seeking to figure out what would be best for 

themselves and their families. 

I have since worked with over 5,300 clients in 27 states and I 

have come to the realization that my primary job is to educate my 

clients. In my written testimony I listed 14 areas and topics which 

I consider to be essential in covering with my clients, and while 

this is a very time-consuming approach, I think it is essential and 


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it is very much appreciated by my clients and it is why I have hundreds and hundreds of clients that have been with me for over 

eight years. 

None of these activities generate one penny of revenue for my 

business. My only source of income is the commission stream paid 

after the sale of health insurance policies and all of these commissions come through the insurance companies which I represent. As 

a direct result of MLR requirements effective January 1 this year, 

every insurance company I represent, without exception across the 

United States, severely reduced commission levels. My overhead 

expenses are unchanged for 2011, and in fact, they will go up next 

year. The net result to my practice has been a decrease to my bottom-line of 50 percent. You all have business experience. You can 

imagine the gravity of a 50 percent impact to your bottom-line as 

a small business. 

Many agents, especially those that were in the building phases 

of their practices, have simply exited the industry. They just could 

not make cash flow. Others have chosen to move into other areas 

of insurance where they can be more successful, and for the majority of remaining agents the current situation is not sustainable in 

the long run. 

Millions of Americans are in need of health insurance for a variety of reasons. Put yourself in their shoes. The health insurance 

environment has never been more complex and confusing and they 

have never been more in need of professional assistance. I cannot 

stay in business operating the way I used to, and so my time must 

be allocated differently. Pro bono work, I just cannot do it anymore. 

I will be forced to spend less time with all of my current clients 

and that inevitably means in the long run they will pay more for 

their insurance and gain lesser benefits. Insurance companies are 

also cutting staff for the same pressures and reasons that we are, 

so the double whammy of insurance agents being restricted and insurance companies cutting back on support staff is a negative impact on consumers in general. 

HHS was given sole responsibility for implementing and defining 

the MLR calculation, and they have the power to recognize these 

facts and make changes. Despite the best efforts of industry 

groups, consumer groups, the National Conference of Insurance 

Legislators, the National Association of Insurance Commissioner, 

and many members of Congress, HHS has been unwavering in 

their position and has chosen to not act. Therefore, the only solution is a legislative one, and it is needed immediately. Much damage has already been done to tens of thousands of agents and numerous consumers nationwide, the tide must be changed, and it 

must be changed before the agent community reaches a point of no 

return. 

I appreciate the opportunity to share these thoughts. MLR is an 

example of legislation which I think has resulted in unintended 

negative consequences to both small businesses and consumers, 

and members of Congress need to be aware of these facts and on 

the behalf of the American people to work with a sense of urgency 

to correct these issues. 

There is significantly more information in my written testimony 

which I hope will be helpful to the Committee. Thank you. 


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[The statement of Mr. West follows:] 

Chairman COFFMAN. Thank you, Mr. West. 

I now yield to Mr. Bartlett to introduce Gary Livengood. 

Mr. BARTLETT. Thank you very much. It is really my pleasure to 

introduce our next witness, Gary Westfall Livengood. He is a graduate of West Virginia Institute of Technology with post-graduate 

training at the University of Maryland and University of Virginia. 

Mr. Livengood has a background which really is relevant to what 

we are discussing today. First of all, you started out as a journalist 

in the U.S. Army. Thank you, sir, for your service. You organized, 

developed, and directed all functions for claims offices in a 29 state 

region for Self-Insured Rail Transportation Corporation. You directed the overall marketing and operational efforts for a 14 office 

company, one of the nation’s largest investigative services companies. You had organizational responsibility for a 200-member cost 

containment department within a large regional health maintenance organization really relevant to what we are talking about 

today. And now you are principal of What a Stitch for operational 

financial, as well as federal and state compliance responsibilities 

for an embroidery small business with 21 employees providing apparel enhancement for companies and individuals principally 

throughout the mid-Atlantic region. Thank you very much to Capitol Hill and our hearing. 

STATEMENT OF GARY LIVENGOOD 

Mr. LIVENGOOD. Thank you, sir. And good morning. 

As was indicated, my name is Gary Livengood. I am a principal 

with What a Stitch, LLC, which is a small commercial embroidery 

business in Mount Airy, Maryland. I would like to thank the members of the Small Business Committee for the honor of testifying 

before you today about the health reform law. 

To tell you a little bit about me, after serving my country in Vietnam, I worked in a variety of operational positions from various industries for over 35 years. Then my wonderful wife, Louann, somehow got me to agree not to spend my retirement on the golf course 

like I planned, but rather on helping to grow her hobby into a business that now employs 21 people. 

We started What a Stitch in 2002 with one single head sewing 

machine. The company grew and grew, but then like business owners everywhere, 2008–2009 hit. We are very committed to maintaining the business and keeping the employees, so we dug very 

deeply into our personal savings just to keep the doors open and 

we were able to do that. Times still are not great for us but they 

are better than what they were. I wish I could say that even better 

times were ahead, but unfortunately, the future continues to look 

uncertain. I know the intent of the new health law was to help 

business owners like us, but thus far I do not see it. The new law 

weighs heavily on my mind anytime we are thinking about hiring 

new employees or what the future may bring for our small business. It has already put regulatory burdens on our company, and 

I suspect that there are more compliance issues that are going to 

be coming forward. 

Before we started What a Stitch, my wife was a director of 

human resources with Amtrak, and I spent my last 13 years as 


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vice president of operations with United Health Care. Well, eventually with United Health Care. So we may be a little bit more conversant about the administration of group health insurance than 

your average day-to-day small business owner. Consequently, the 

day-to-day reliance on our health care agent, Paul Younkins, who 

is also the co-owner of Allied Resource Management, is not as extensive as many small business owners. But even with our experience, Louann and I just would not consider dropping the services 

of our agent. He is our insurance policy within an insurance policy. 

And so far our company has been very lucky. We have not had 

claims disaster or medical crises that required the full use of Paul’s 

capabilities, but I know that Paul and some of these clients do. And 

other agents like Paul have far-reaching services to small businesses across the country. 

But I understand that our company could experience similar 

needs at any point in time. If and when that day comes, I am one 

employee and to have somebody that we know and can trust at no 

additional cost so that my wife and I will be—they will get the job 

done for us and my wife and I can concentrate on keeping the company profitable. 

Paul, on the other hand, is a businessman like me and he deserves to make a fair living. And when I pay our company’s insurance premiums each month, it is clear that a portion of my check 

is really our agent’s fee that is included in our tax bill for tax and 

convenience purposes. 

It is also obvious that our company’s total insurance premium 

rate has nothing to do with the amount the agent gets paid. Our 

premium costs are driven by the costs of medical care in Maryland, 

as well as the age and the size of the group of our employees. 

Paul’s fee is just a small percentage of whatever our insurance premium will be, and it is worth every penny. 

Unfortunately, it is my understanding that the new health reform law’s medical loss ratio requirements are hurting Paul’s business and similar business nationally. My company went through 

several years of declining revenues, so on a personal level I feel for 

Paul. But I worry about the impact that it is going to have. And 

if Paul needs to change the nature of his business and cannot afford to handle our account anymore, we may have to seriously consider just dropping our group coverage, saving the money that we 

put into our employees’ premiums, and if the government takes 

over such benefits and administration, I am hard pressed to believe 

that we will continue to have the same kind of access to customer 

service that Paul currently provides. 

And I see my time is up, so I thank you for the honor of testifying before this Committee today. 

[The statement of Mr. Livengood follows:] 

Chairman COFFMAN. Thank you, Mr. Livengood. Thank you. 

Our next witness is Grace-Marie Turner. Ms. Turner is president 

of the Galen Institute of Public Policy Research Organization that 

she founded in 1995 to promote free market ideas for health reform. Earlier in her career she was executive director of the National Commission on Economic Growth and Tax Reform and 

served as president of Arnette and Company, a health policy analysis and consulting firm. 


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Welcome. You have five minutes to present your testimony, Ms. 

Turner. 

STATEMENT OF GRACE-MARIE TURNER 

Ms. TURNER. Thank you, Chairman Coffman. Thank you for 

holding this hearing. Thank you, Ranking Member Schrader, Congressmen Bartlett, West, Landry, and Tipton for this hearing 

today. 

I think it is tremendously important to look at the impact of this 

otherwise obscure and complex regulation on the real world of 

health agents, health costs, businesses, and job creation. The Affordable Care Act already is leading to a loss of affordable options 

in health insurance for small employers. It is leading to a loss of 

jobs inside and outside the health sector, and to higher health care 

costs that make hiring workers more difficult, especially for struggling small businesses. Large employers can self-insure and better 

insulate themselves from the early changes inflicted by the health 

law, but not so small businesses. They are more exposed to changes 

in the marketplace. 

And as I document in my testimony, many carriers already are 

leaving the market for individual and small group insurance. When 

fewer carriers offer insurance and when fewer options are available 

for coverage, small businesses are hit first and hardest. The percentage of small businesses offering health insurance has declined 

from 68 percent in the year 2000 to 59 percent in 2011. The health 

law that so many small businesses had hoped would benefit them 

by lowering costs is instead harming their ability to continue to 

offer health insurance at all, at least partly because of early provisions in PPACA. Premiums in the job-based health insurance market rose in 2011 by an average of 9 percent, by $1,300 a year for 

a family to $15,000 a year for a policy. The medical loss ratio which 

mandates that health insurance carriers spend most of their money 

on premiums is contributing to dislocations in the small group and 

individual markets. 

A growing number of carriers are leaving these markets because 

of HHS inflexibility in interpreting the law. One of the tools that 

small businesses have found to be most valuable in helping them 

to afford coverage has been high deductible health plans. These 

plans are likely to be an early casualty of the MLR rules. They discriminate against high deductible plans because the MLR regulations only count payments made directly by insurers as medical expenses. That means that if an individual pays for a health care 

service to meet the deductible, the expenditure does not count toward the MLR even though the full amount is actually a payment 

for medical services. This interpretation by HHS is going to particularly disadvantage high deductible health savings accounts and 

other account-based plans that health insurers and small businesses have found to be most affordable. 

Companies that sell policies in the individual and small group 

market also have higher marketing costs and higher customer service expenses because they provide services and must sell policies 

one-on-one. They are really helping their clients to find the most 

affordable policies that they can for the resources they have. One 

of the perverse effects of the MLR rules likely will be higher health 


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care costs. First, the rules are drying up competition and giving 

carriers little flexibility—giving the remaining carriers the opportunity to increase their premiums. Second, the HHS interpretation 

of the law for example says that costs in ferreting out fraud have 

to be considered as part of the administrative costs rather than as 

part of the overall costs or excluded from the total. 

The medical loss ratio regulations also are job killers, as is this 

whole law. The president of the Federal Reserve Board of Atlanta 

recently said, ‘‘we frequently heard strong comments to the effect 

that my company will not hire a single additional worker until we 

know what health insurance costs are going to be.’’ And as we have 

heard, the first line of impact is in the broker community where 

a survey found that at least 21 percent of independent brokers already have been forced to downsize their businesses or even close 

their doors. 

As you mentioned, Mr. Chairman, the National Association of Insurance Commissioners has adopted a resolution urging Congress 

to amend the Federal Health Law to protect broker commissions 

from the medical loss ratio rules so that they can continue to provide the valuable services that they provide. 

In conclusion, one of the most fervent promises that President 

Obama made to the American people when this law was ramping 

up toward passage was, ‘‘if you like your health plan you can keep 

your health plan. Period. No one will take it away no matter what.’’ 

Clearly before the law even takes effect we find that is not true. 

I detail in my testimony many states in which carriers are already 

leaving the market. This will impact small businesses first because 

the small group and individual markets are particularly difficult 

for carriers to meet this new test. As people are having their coverage disrupted, violating the promise that President Obama made, 

I am sure that the American people are going to look for other options, and I look forward to working with you and other members 

of the Committee to achieve the real goals of health reform. Thank 

you. 

[The statement of Ms. Turner follows:] 

Chairman COFFMAN. Thank you, Ms. Turner. Thank you Ranking Member Mr. Schrader, for an introduction of Mr. Jost. 

Mr. SCHRADER. Thank you, Mr. Chairman. It is my pleasure to 

introduce Professor Timothy Jost. Thank you for being here. 

Professor Jost teaches law at Washington and Lee University 

School of Law. He is co-author of a case book, Health Law. He is 

widely throughout the United States to teach health law. Professor 

Jost is the author of numerous articles on health care regulation 

and comparative health law and policy, and he is also a consumer 

representative to the National Insurance Association of Insurance 

Commissioners. Professor Jost earned his J.D. from the University 

of Chicago cum laude, very good, in 1975. I come from Illinois myself. So welcome, Professor Jost. 

STATEMENT OF TIMOTHY STOLTZFUS JOST 

Mr. JOST. Thank you very much. And thank you Chairman Coffman for the opportunity to speak today and Ranking Member 

Schrader and Committee members. 


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Of all the Affordable Care Act health insurance reforms already 

in effect, the most beneficial for American small businesses is the 

minimum medical loss ratio requirement. The cost of health insurance is one of the largest and fastest growing items in the budgets 

of small businesses. 

Fortunately, the MLR is bringing relief. First, relief will be coming through rebates. A study conducted by the NAIC last spring 

found that 450 million, a half billion dollars, in rebates would have 

been paid to nearly 16 percent of American small businesses and 

23 percent of all employees had the rule been in effect in 2010. 

This year, when the rebates are actually paid, the amounts may be 

larger. 

But the purpose of the MLR is not to generate rebates but rather 

to reduce premiums. The MLR produces a strong incentive for insurers to reduce their administrative costs and thus their premiums. But the real driver of insurance premiums is medical costs, 

and the most important benefit of the MLR is that as medical costs 

come down, premiums will be reduced accordingly. Medical cost inflation, in fact, has fallen precipitously in the last couple of years 

and as medical inflation declines the MLR will force insurers to 

pass the savings directly to consumers. Already last summer the 

GAO report that Chair Coffman mentioned said that the MLR was 

driving down premiums. Aetna in Connecticut recently dropped its 

premiums to small groups by 3.2 percent while Mountain State 

Blue Cross in West Virginia announced yesterday that small businesses like Mr. Livengood’s will be getting an average reduction in 

premiums for December of $2,500 for each of 4,200 small businesses, a 75 percent reduction in their premiums. Jim Houser, a 

small businessman from Portland, Oregon, reports that his premiums went down 3 percent this year and he was told it was because of the MLR. Brian England’s small business in Columbia, 

Maryland, saw his premiums go down 6 percent because of the 

MLR. 

Some argue, however, that the MLR is destabilizing insurance 

markets, but as another recent GAO report found, most insurers 

were already at 80 percent before the rule went into effect. The 

HHS rule provides special treatment for new market entrants, for 

small plans, for high deductible plans, for limited benefit plans, 

and for expatriate plans. I would really encourage you to read the 

rule. It is very widely misunderstood. It allows insurers to exclude 

fraud recoveries and to claim credit for health quality improvement 

costs, including the full cost of ICD–10 conversions up to 0.3 percent of premiums, which for most will be their full cost. States also 

can request MLR adjustments if they believe that it is going to destabilize their insurance markets, but two-thirds of the states did 

not do so because they did not believe they would have problems. 

Ms. Turner’s testimony includes a long list of insurers leaving 

particular markets. I read through all of the citations of her 

sources and virtually none of those withdrawals are due to the 

MLR requirement. As an example of this, Indiana in its request for 

an adjustment claimed that seven insurers were leaving the market. Four of those would not have had to pay rebates under the 

MLR rule because they were too small or because they already met 

the MLR. Two said they were leaving for business reasons. One 


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had not even started selling policies in the state yet. None of them 

claimed that they were leaving the market because of the MLR. 

The most vociferous protests against the MLR requirements have 

come from agents and brokers, and I certainly understand the valuable services that they provide and their need for compensation. 

There is some evidence that insurers are cutting agent compensation, although the picture is complicated and, as the NAIC found, 

many insurers are not. 

But it is not at all clear that those cuts are to be blamed on the 

MLR. For example, in Colorado, every single health insurance provider met the 80 percent requirement before the MLR rule went 

into effect. So although I do not doubt that Mr. West’s commissions 

have been cut, I do not think it is the fault of the MLR. Cuts in 

agent and broker commissions are occurring because of business 

decisions of insurance companies and they are blaming it on the 

MLR. If Congress took commissions out of the MLR tomorrow, insurers would probably not raise commissions; they would simply 

take the money for profit. 

Finally, Congress must consider what a legislative change would 

mean for the deficit. Employer-sponsored health benefits are heavily tax subsidized. As the MLR drives premiums down, tax subsidies will go down as well. If you add commissions to the administrative expenses insurers already charge small business, and that 

is what the Rogers Bill would do, you are increasing the cost of 

small businesses for doing business. You are increasing their premiums. But you are also increasing the federal budget deficit by 

billions of dollars. Any attempt to eliminate the MLR rule or to 

change it to allow insurers to keep spending unchecked can only 

raise costs for small businesses and indeed for all insured Americans. I encourage you to support small businesses by keeping a 

strong MLR. 

And let me just say, although I am a second over, that I was involved extensively in the NAIC’s drafting of the MLR rule. I have 

followed it very closely and I would be very happy to talk to you 

about what the MLR rule actually says and does. 

So thank you very much for your time. 

[The statement of Mr. Jost follows:] 

Chairman COFFMAN. Thank you, Mr. Jost. 

Let me start out with a few questions. To Mr. West, first of all 

to you, the eight major health insurers in Colorado have reduced 

agent commissions as a direct result of the new MLRs. Would you 

elaborate on your situation and that in Colorado? 

Mr. WEST. Yes, I can. 

The average composite commission—and I am speaking from my 

book of business—approximately 1,200 active client folders serving 

a couple thousand people—the average commission reduction was 

about 47 percent on the individual insurance markets pre-January 

1, 2011 to post-January 1, 2011. I am also licensed and have clients 

in 27 other states. Every insurance company in every state across 

the United States with which I am appointed and do business had 

similar reductions. 

And I can tell you that it was attributable to the MLR guidelines 

because insurance companies could not have met the guidelines 

and maintained previous commission levels. I mean, the math is 


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just clear and very direct and obvious. So it was an instantaneous 

impact that took effect at the stroke of midnight New Year’s Eve 

last year, and it affected every carrier that I work with. 

Chairman COFFMAN. Okay. With the new MLRs, you said you 

are forced to spend time selling other products to maintain your income. How does that affect your company and your small business 

clients? 

Mr. WEST. Well, it is forcing me out of supporting clients in the 

health insurance domain. Other areas for other types of health insurance products, financial services, of course, were not affected by 

the MLR. So I, like many of my associates, have been forced into 

those spaces in order to be able to keep my business alive. I still 

do active work with my current clients, but I also have to curtail 

my support for them. I cannot do all of the aftermarket support. 

I cannot help them with claims issues, problems with their policies. 

I also cannot be proactive as much as I would like to be in terms 

of professional development and staying abreast of changes so that 

I can, in the same manner as I did before, call them in advance 

of new impacts and changes and advise them how to adapt their 

coverage for best benefit. So I am just being forced, if you will, into 

a different business model. And it is my health insurance clients 

that are going to suffer as a result. 

Chairman COFFMAN. Okay. Let us see. Mr. Schrader. 

Mr. SCHRADER. Thank you, Mr. Chairman. Good testimony. I appreciate everyone taking the time out of your business schedules 

and trying to get our economy going by doing business to come here 

to Washington, D.C. and enlighten us a little bit on the MLR. 

I guess I would be interested in everyone’s opinion, but Mr. Jost 

in particular, some of the other issues that have been discussed is 

that while the MLR takes into account fraud and going after fraud 

as a positive benefit and all, there is not a lot about prevention. 

It seems to me that a lot of insurance companies and agents are 

dissuaded from pursuing early intervention and prevention because 

they do not get the same benefit under law. Was that discussed at 

all during the NAIC hearings and such? 

Mr. JOST. Yes. And in fact, that is expressly accommodated in 

the rule. The statute allows the rule (the regulation that HHS was 

supposed to produce with the advice of the NAIC) to put into the 

numerator in calculating the MLR both health care costs and 

health care quality improvement costs. The NAIC spent a long time 

debating what quality improvement meant and decided that it did 

not include brokers’ commissions but that it did include money that 

insurers spend on improving patient outcomes, protecting patient 

safety, preventing medical errors, and, specifically, prevention and 

wellness activities. And a lot of thought was put into that. The rule 

also supports IT conversions and ICD–10 conversions and accreditation costs attributable to quality. 

So in fact, wellness and prevention activities are explicitly countable in the numerator. They go into the 80 percent; not into the 

20 percent. 

Mr. SCHRADER. I would get those citations if possible. Obviously 

there is some misunderstanding about that. 

Just, I guess I would go to Mr. West on this. In terms of talking 

about how small businesses are harmed by, including the commisVerDate Mar 15 2010 02:28 Dec 01, 2012 Jkt 075610 PO 00000 Frm 00015 Fmt 6633 Sfmt 6602 E:\HR\OC\A610.XXX A610

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sion fees in the MLR and stuff, can you elaborate in ways that we 

might be able to get around that a little bit? What are some of the 

other options? I have signed onto some bills but I am curious your 

view as to ways we can alleviate some of the negative effects by 

including commissions in the MLR at this point. 

Mr. WEST. Well, the first and foremost impact is on the small 

businesses that are in that space, the health insurance agents, the 

people they hire, the businesses they run. As I said, it is immediately evident that if a business overnight suffers a 50 percent reduction in bottom-line, it cannot expand. I have chosen, for my employee, not to cut her salary 50 percent. She would not be able to 

survive. So I have had to eat that out of my small business. So you 

can imagine if there are a million licensed agents across the United 

States, any significant percentage of an impact there translates 

into jobs and it ripples through the employees and support structures. I have about a 30 percent overheard rate in my business and 

that is paid out in terms of services and contract labor and there 

are all kinds of other trickle downs from the effects on my small 

business. 

The other effects to other small businesses, perhaps small businesses that I serve, have to do with the fact that it takes more time 

and effort to work with those clients as we try to solve their business needs and that time is just no longer available to spend with 

them. And there is no other place that they can turn in terms of 

gaining that professional support. And that can be critical in terms 

of optimizing coverage. Saving premium dollars in the long run can 

be very substantially impactful to those small businesses. 

So from my perspective, undoing that impact that was done 

(MLR) moves us back at least to the status quo before, in which 

people were willing to put in that time, develop their businesses, 

and work on behalf of those consumers and small clients that are 

the core of my business today. 

Mr. SCHRADER. Very good. Ms. Turner, Mr. Jost, I am curious as 

to what the potential remedy would be in your minds if we were 

to exclude commission from the basic MLRs. The goal really of the 

MLR was to improve efficiency. And I do not know—I would be curious about comments. I do not see how agents themselves are inefficient. They actually provide a pretty good service as Mr. West just 

testified to and just giving small business people that have no 

background—you guys have background—I have no background in 

health insurance. Well, I am a veterinarian but other than that I 

do not have a whole lot of experience. I can fix your horse but it 

would be nice to, you know, I just do not see agents’ overhead— 

they are more of an informative. They keep my costs down because 

I do not have to spend or my office manager does not have to spend 

a lot of time on that. 

But I am also concerned about, with all due respect, not that this 

would ever happen, but insurance agents gaming, including commissions, and they slip some other costs in there that indeed would 

be part of the administrative overhead that we would like to see 

them try and get down on their own. So what is the sweet spot in 

any sort of solution going forward here? 

Ms. TURNER. Well, I think—thank you for that question. I think 

that excluding broker commissions from the MLR calculation 


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makes the most sense because they are not going to the insurance 

company. Yet the commissions count in the administrative cost calculation for the company. Of course, the insurance company would 

rather take the whole 20 percent for itself rather than pay brokers, 

even though they are providing, as you say, valuable services to 

their clients, not only in finding more affordable policies but often 

serving as external HR departments for small businesses and helping with complex claims, et cetera. So the costs are there. They will 

be borne by small businesses. They will be borne by companies that 

are going out of business. And they will be borne by businesses 

that have fewer options for affordable coverage, because they do 

not have the brokers to help them. So those are real costs. They 

are not going away. 

And whether or not they fit in with some artificial calculation 

that HHS has determined is really not the point. They are valuable 

and I think, therefore, should be excluded from the calculation entirely. 

Mr. SCHRADER. Yes. Mr. Jost. 

Mr. JOST. Yeah. The effect of the Rogers Bill, 1206, of excluding 

brokers’ commissions from the calculation is not to give money directly to brokers; it is to increase the amount that insurance companies can keep. In other words, if the insurance company is now 

paying 10 percent and keeping 10 percent for its administrative 

costs because it has a total of 20 percent, it can now keep 30 percent. And it will undoubtedly raise premiums or cease reducing 

premiums to account for that. Now, it may share some of that 

money with the brokers. If insurers are paying 5 percent now, they 

can keep paying that—and that is the average for insurance for 

small business commissions—they can keep that 5 percent but they 

now get 20 percent on top of that and they are going to raise the 

premiums by that 5 percent. So the effect of the Rogers Bill is simply to raise premiums for small businesses. And hopefully insurers 

will share some of the extra profits they make with agents. And do 

not just trust me. Carl McDonald, Citibank’s investment analyst, 

put out a report right after the NAIC had its vote and said this 

is a big deal for insurers. They are going to make a lot more profit 

and they may share some of it with brokers. 

The NAIC worked out a number of recommendations for legislation that would allow commissions to be passed through but then 

reduce the administrative costs for insurers correspondingly so that 

consumers would not be hurt. And if you feel that brokers need legislative relief, I would strongly encourage you to look at those alternatives rather than the Rogers Bill which simply increases premiums for small businesses and insureds and passes the money 

onto insurers in the hope they might share some. 

And let me just say one other thing. Although it is entitled the 

independent brokers’ and agents’ bill, the way that agent is defined 

would include employees of insurance companies who sell policies 

as well. And so insurers could pass all of their marketing costs on 

to consumers and to small businesses. 

Mr. SCHRADER. Very good. I would be interested in that at some 

point in time also. 

Mr. JOST. Sure. 

Mr. SCHRADER. Thank you, Mr. Chairman. I yield back. 


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Chairman COFFMAN. Let me make one point and ask for any 

comment from any of the members of the panel. First of all, I want 

to say it is amazing to me intellectually how we have come to this 

conclusion, you know, whereby the federal government is enacting 

policies, assuming based on the commerce clause that it has jurisdiction in this particular area where we do not allow small businesses to purchase across state lines today and how that we can 

impose rules that, in fact, regulate commissions is extraordinary. 

I think how to bring down cost is to allow the market to work. And 

I think one of the problems with health insurance in the United 

States today is we have a regulatory regime that really I do not 

think fosters competition between insurance companies. 

And so one of the concerns that I have about this particular policy is I think that there is perhaps a perverse incentive built in 

that—and I remember having been a state legislator debating one 

day a particular mandate on a health insurance company that 

clearly would have raised costs on small businesses on their premiums and going down to the floor to debate the sponsor of the bill. 

And I said why is the public sector exempt from your particular 

mandate? And she said, well, because it costs too much. 

Well, you know, I mean, it is extraordinary but we keep putting 

these things on small business. Well, every time you do that obviously you create an increase in cost. But the beneficiary of the increase in cost under this regulatory framework is going to be the 

insurance carrier because it is one way I think that this is built 

in that the higher your premium costs the greater your profits not 

by competition. And so I think that this is inherently problematic 

but would any of you like to comment on that? Ms. Turner. 

Ms. TURNER. I think that that is really a risk. Many factors go 

into the cost of health insurance, including care utilization. In a 

competitive market, if you have more competition, then administrative costs will get wrung out. But when you only have a few carriers left in the market because the competitors that have lower 

overhead actually have been shoved out, you are going to drive up 

health care costs. If a carrier is looking to maximize its 20 percent 

share of the MLR and it has less competition, then it is going to 

be able to raise the overall premium so that that 20 percent represents a larger number of dollars. And so I think the MLR rule 

will drive out competition—and hopefully I will have a chance to 

talk about some of the challenges to my testimony—allowing the 

few carriers that are left in a market to increase premiums and 

therefore maximize their share of that 20 percent. And with less 

competition, who is going to stop them from doing that? 

Mr. JOST. If I could respond briefly, the Affordable Care Act actually contains a number of provisions that will increase competition, 

and I readily admit that some insurance markets, many insurance 

markets are highly concentrated. One of the things it does, and 

this program is actively underway right now, is to introduce consumer cooperatives. We have those in a handful of states but there 

is seed money in the law for loans to establish consumer cooperatives and there is a lot of interest in that. 

Another thing the legislation does is to provide that the Office of 

Personnel Management is supposed to provide multistate plans in 

every state, just like it does in FEHBP, so that there will be at 


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least two plans in every state that will be new—well, they will be 

multistate plans that will be available to establish competition 

with existing plans. 

Another thing the legislation does is that it actually does allow 

sale across state lines with some controls and not immediately but 

it does provide for that possibility. That is something state insurance commissioners are very concerned about because they then 

lose the ability to police what is happening in their states but with 

appropriate controls I think it is a good idea and it is in the Affordable Care Act. 

With respect to regulating the markets, I have one other response. And that is if you look at the actual medical loss ratio of 

companies, what you find is that the really big plans, the big Blue 

Cross plans, are there already. They have 85–90 percent MLRs and 

have for a long time in most states. It is the small insurers that 

have high administrative costs but the legislation and the regulation takes account of that because smaller insurers actually have 

reduced MLRs and so do high deductible plans. The insurers have 

reduced MLRs, so they have an easier target to hit. 

So a lot of these problems have already been taken into account 

in the regulation. 

Chairman COFFMAN. More freedom might be a solution but are 

there any other comments? Yes, Mr. West. 

Mr. WEST. I checked with my assistant this morning before the 

hearing and there are 50 client folders on my desk right now. And 

these are clients that have all been affected by two major insurers 

in the state of Colorado exiting the entire market space. And there 

are a bunch of factors that go into that. 

But I am looking at a backlog here, a tremendous amount of 

work, to work with these clients to understand what to do next and 

how to save them from becoming uninsured, which is what they are 

staring at. Okay? 

I can tell you that my clients are mystified by what is going on 

just in general. We have seen in the state of Colorado in the past 

18 months an average individual medical premium increase, if I average out all the plans over all the companies, of about 27 percent. 

And the customers do not understand why. And they are frosted, 

I guess, is the best way to say it. 

The one thing that they would be willing to pay for is my services. But I cannot collect fees for those services. It is for a bunch 

of regulatory reasons, which are different in every state and in 

every market that I work. We are prohibited from charging direct 

fees in some markets. If we were not prohibited, just the inefficiencies of the process of me having to negotiate fees and services with 

every client and collect and bill would be prohibitive. And so the 

direct impact of the MLR, which is easily accounted for and which 

resulted in this 50 percent reduction in commissions, makes the entire situation untenable. Upon request I am happy to do a random 

sampling of my 1,200 clients. We can call them and ask them, but 

the last thing they want to do is see me provide less services to 

them. That may be the biggest value-added component they see in 

the entire process right now. 

Chairman COFFMAN. Thank you Mr. West. The other Mr. West 

from Florida. 


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Mr. WEST of Florida. I think Mr. Bartlett plans to go before me. 

Chairman COFFMAN. Oh, Mr. Bartlett from Maryland, please. 

Mr. BARTLETT. Thank you. You know, if you think about it, essentially all of our regulations are based on one of two premises. 

The first premise is that every employer, provider or manufacturer 

is inherently incompetent, evil, or greedy, and they are going to 

screw the employees and the consumers if we do not protect them 

with regulations. And the other premise is that every consumer is 

really incredibly naive and ignorant, and if we do not have a bunch 

of regulations to protect them, they are going to get taken advantage of and they are going to hurt themselves. And this regulation 

is no different. I know it was well intentioned and it was intended 

to reduce the cost of health care but I think it will do quite the opposite because there has to be a cost of compliance here and that 

can do nothing but drive up the cost of health care. 

If, in fact, insurers are making excessive profits because they are 

paying out too little of the premiums in health care, if we have an 

open competition, will not new insurers come into the market to 

share in these profits and therefore drive down the cost of health 

care? You know, our problem is that our regulations are preventing 

competition, and competition, I think, will do what this regulation 

is intended to do but cannot do because it will simply increase the 

cost of compliance and therefore, drive up the cost of health care. 

Why should we not reduce regulations and let the market drive 

down the cost of health care? 

Ms. TURNER. Mr. Bartlett, you could not be more correct. In Virginia, across the river from your state, a company called nHealth 

announced right after the health law passed that it was closing its 

doors. This new, innovative, company offered primarily high deductible plans but because it saw this regulatory steamroller coming at it, it basically lost investor support. So people lost that opportunity for this new innovative company to provide those options. 

nHealth has basically left the individual market in Virginia, leaving about 3,000 policyholders without other options. 

And you are so right about regulatory compliance when you look 

at this MLR regulation with pages and pages of rules about how 

insurers have to document their medical loss ratios. This costs 

them money to go through this administrative hassle to prove to 

HHS that they are going through the right administrative hoops. 

This is completely working against lowering costs and actually 

helping consumers—and you are so right. People have said health 

care is just too important to be left to consumers. Well, it is not. 

The market will respond if those options are available but they are 

being crushed by regulation. 

Mr. JOST. If I could respond briefly, I went to the University of 

Chicago so I believe in market competition to a point. World Insurance Company, one of the companies that is leaving Colorado, was 

fined $153,000 by the Colorado State Department of Insurance for 

a number of marketing problems, including the fact that it excluded coverage from skiing as a high risk activity. Well, in Colorado, a lot of people ski. And so I think that when a company is 

fined or is even barred from a market for regulatory purposes, 

sometimes it is a good thing and sometimes it helps consumers. 


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Not everybody who wants to sell insurance should be allowed to do 

so. 

With respect to competition though in insurance markets, it is 

really complicated and health economists have studied this for 

years. Just an example of this, I heard the other day and I cannot 

substantiate this but I believe it is probably true, that in one of the 

states where a new cooperative was trying to form under this new 

law, one of the big insurers had gone around and told providers if 

you sign a contract with them we are going to terminate your contract with us. 

Mr. BARTLETT. But if we had open competition and if we did not 

have regulations that kept new people from coming in, would not 

the marketplace take care of this? 

Mr. JOST. I do not believe so. 

Mr. BARTLETT. You do not believe so? 

Mr. JOST. I think if we did that we would have basically about 

two or three national insurers in every state. 

Mr. BARTLETT. Sir, that cannot be true if other people can come 

in. We are now going to have fewer and fewer insurers because 

your regulations are driving them out of the market and you are 

achieving exactly what you set out to avoid with your regulations. 

Thank you and I yield back, Mr. Chairman. 

Chairman COFFMAN. Mr. West of Florida. 

Mr. WEST of Florida. Thank you, Mr. Chairman and Mr. Ranking 

Member. And thanks to the panel members for being here today. 

You know, I am a simple soldier and I appreciate your son serving in the Air Force and I appreciate your service in Vietnam 

where my older brother served. And to me this seems like another 

example of we have to pass the bill to know what is in it because 

now we are all of a sudden seeing again the unintended circumstances. And I think that this once again represents a rule, a 

regulation, whatever you call it that is counterproductive to what 

established this country and made it great, and that is the free 

market and enterprise system. I mean, just the same with DoddFrank. We are finding out with Dodd-Frank we have more problems with our small community banks and their relationship with 

our small business owners. And the same thing with this here now 

with the Patient Protection Affordable Care Act, we find another 

provision that is causing more problems for our small business 

owners. 

So my initial question to Mr. West, Mr. Livengood, and Ms. Turner is what do you see as the most detrimental effect of this new 

MLR rule, regulation, whatever you call it within your respective 

lane? 

Mr. LIVENGOOD. I will go first. I am aware that it has become— 

caused an impact upon my agent’s revenue stream and his ability 

to possibly attend to my needs as deeply as he did in the past because I rely upon my agent heavily. I have implicit confidence in 

his ability to perform. When I have issues that arise, and that is 

not often, but when I have issues that arise, I pick up the phone 

and say, Paul, you have a problem. And I tell him what the problem is. And then I hang up the phone and I know that that problem is going to get resolved expediently and to the best benefit that 

possibly could occur to me. 


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So as I see him being concerned about do I want to still stay in 

this market or do I want to do something, that causes me great 

concern because if he were not performing, same as my CPA, my 

attorney, et cetera, et cetera, if they were not performing I have 

immense leverage. I can terminate the services. If we are dealing 

with some other entity, such as an insurance exchange, I think I 

have lost that leverage. But that is my observation and most immediate impact. 

Ms. TURNER. Mr. West, I think that the biggest problem is just 

this ‘‘Washington knows best’’ attitude. I mean, states are the regulators for health insurance and they can solve problems. When a 

company may go against some regulation about whether or not a 

ski accident is a covered benefit, that is not a federal problem. And 

yet states have had to go through amazing paperwork burdens to 

petition Washington to exclude them from the medical loss ratio 

rule and to give them some relief. 

And HHS in its wisdom has told states like Indiana, ‘‘I am sorry, 

we know best, not you.’’ Mitch Daniels, governor of Indiana, said 

that denying Indiana the waiver from the MLR rule is going to 

lead to higher costs. This is working against personal freedom. He 

says, for example, that in Indiana they have a disproportionately 

high number of people with health savings accounts and therefore, 

because, again, of this obscure provision—the MLR rule, it is particularly difficult for Indiana to meet that test even though it is offering businesses in the state more affordable coverage. 

And to Mr.—Dr. Jost’s comment earlier, a number of companies 

have said we are leaving not just because of the MLR but because 

of this burden of regulation of which the MLR is a part. The American Enterprise Group announced just this October that it is leaving the market in 20 states. The MLR is a big reason why. Aetna 

is leaving the market in many states, including Colorado, because 

it is saying that it cannot meet the test in the individual and small 

group markets. So you are losing the exact competition that you 

are talking about because states are asking Washington for relief 

from the MRL rule and Washington is telling them, ‘‘no, we know 

better than you do what is right for your health insurance markets.’’ I think it is that arrogance that is really the root of the problem. 

Mr. WEST. Congressman, I would use the case of World Insurance in Colorado as a perfect case study. World Insurance was a 

relatively small insurer that entered the state. They were very creative with their policy definitions and offered an extremely high 

value product. And that product was based on two premises. One, 

giving the consumer the ability to tailor their coverage to their 

needs. The fact that they define skiing as a high risk activity was 

not evil. It was not illegal. It was simply part of their product offering. Very interestingly enough, they also entered into a partnership 

with agents and they offered a higher than average commission 

rate to agents with the understanding that we, as agents, would 

represent the company to properly deliver that product to consumers. While there are a lot of skiers in Colorado, 95 percent of 

the residents in Colorado do not ski and they enjoyed the opportunity to knowingly select a plan that would not cover skiing injuries at a substantial premium discount. The direct result of the 


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MLR calculation and many of the other factors inherent in the legislation was to deem those sorts of practices to be somehow wrong. 

And World Insurance has left the market space. 

I can tell you for a two-year period the World Insurance product 

was the one that I owned and that I recommended for the vast majority of my clients based on lowest premiums and best value delivery to those consumers under the appropriate circumstances. The 

moment that I learned from a client or we discussed the issue and 

he told me ‘‘I am a skier,’’ I would immediately say, ‘‘Well, then we 

need to move to another product.’’ Those choices have been all but 

eliminated from the marketplace now, and the result of the legislation is decreased competition. This company has left the space. 

Their highly effective, cost effective premiums are no longer available to my clients and I would tell you as a former customer of 

theirs, there was nothing wrong with the product they delivered. 

Mr. WEST of Florida. Thank you. Can I continue on, Mr. Chairman and Mr. Ranking Member? 

Chairman COFFMAN. Yes, please do. 

Mr. WEST of Florida. Professor Jost, I have a letter here you recently signed on to members of Congress about the medical loss 

ratio and later states in part that the NAIC unambiguously concluded that a year ago producers’ commissions are an administrative cost. And you participated in the NAIC’s fall of 2010 meeting. 

As a matter of fact, I will read the statement out of the letter. ‘‘As 

the NAIC itself concluded a year ago, after extensive deliberations 

producers’ commissions are an unambiguous administrative cost. 

But at that 2010 meeting, the NAIC took no action on these brokers’ commissions and in fact, since January 2010, they have been 

urging Congress and the HHS to accommodate brokers’ commissions in the medical loss ratio. 

And I want to read from that NAIC report where it says, ‘‘In a 

recent letter to HHS Secretary Kathleen Sebelius, the NAIC reiterated the important role of insurance agents and brokers. Director 

Hudson stated that the NAIC encouraged Secretary Sebelius to recognize the essential role of insurance agents and brokers and to accommodate compensation arrangements in any MLR regulation 

that is promulgated. Director Hudson made a motion, seconded by 

Commissioner Sevigny, for the NAIC to appoint an executive committee level subgroup to work with HHS to accommodate agent and 

broker compensation in the MLR particularly during the transition 

to 2014. And the motion passed.’’ 

So my question is why would you sign on to a letter that actually 

contradicts what happened at this NAIC meeting? 

Mr. JOST. Thank you for an opportunity to comment on the 

NAIC’s involvement in this issue because it is a complicated story 

but I will try to keep it brief. 

The NAIC’s task under the statute was to come up with definitions, establish definitions and methodologies for implementing the 

statute. The statute does not permit either HHS or the NAIC to remove agents’ and brokers’ commissions from the denominator because it is not there. It allows taxes, regulatory fees, various other 

kinds of adjustments, not agents’ and brokers’ commissions. So the 

NAIC recognized that when it unanimously adopted the recommendation—I believe it was unanimous—on the NAIC rule last 


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year. However, the NAIC is concerned about brokers and agents for 

the same reason we all are. They do provide valuable services to 

insured consumers. So they said if there is anything HHS can 

think of to do here that we did not, please do it. HHS could not 

think of anything to do that they could not because it read the rule, 

the statute, exactly the same way that they did. There is no other 

way to read the statute really. 

So the NAIC appointed this task force, executive level task force, 

to look further into the question because it was a question of great 

importance to them. The task force in turn asked the Health and 

Managed Care Committee to look into it and they asked the Health 

Actuarial Task Force to look into it and they wrote a very comprehensive report which I would really urge all of you to read. 

What that report found was—— 

Mr. WEST of Florida. Let me—just for one minute. But when I 

read this letter, this letter makes me believe that the NAIC is supporting keeping this unambitious rule, this MLR as it is. That is 

what this letter says to me. 

Mr. JOST. That letter is from—I believe that letter is from consumer representatives to the NAIC. We do not speak for the NAIC. 

We speak for consumers to the NAIC. Let me just finish. 

Mr. WEST of Florida. So you are agreeing with something that 

obviously it seems that the NAIC did not say? 

Mr. JOST. The NAIC said in its initial finding that there is no— 

that the current law does not accommodate them. Anyway, there 

was a task force—I will make this quick. The task force report 

found, number one, that although some places agents’ commissions 

were being cut, other places they were not. And number two, that 

in states that already had MLR rules like the federal rule, consumers were not having a hard time finding agents and brokers, 

but it did come up with, I believe, nine or 12 alternatives for Congress to consider for changing the law if they wanted to reinstate 

agents’ and brokers’ commissions. That, then, has been a subject of 

debate within the NAIC since that time and just about two weeks 

ago, on November 22nd, the NAIC Plenary, all of the state insurance commissioners, voted 26 to 20 with 5 abstentions, a very close 

vote for the NAIC which usually operates by consensus, and frankly, a political vote, voted to recommend to Congress that something 

be done for agents and brokers. And that is basically what it says. 

So it is in your lap but I would strongly urge you for the sake 

of small businesses, do not drive insurance premiums up when they 

are just coming down right now. 

Mr. WEST of Florida. Everything shows that insurance premiums 

are going up. I mean, even in my simple little southern, you know, 

understanding of math, it seems that they are going up, especially 

since January 2009. 

Thank you, Mr. Chairman. I yield back. 

Chairman COFFMAN. Thank you, Mr. West. 

Let me just raise one question, Mr. Jost. So the thesis behind the 

MLR rule is that by in effect regulating commissions and, if you 

will, by virtue of having them in the cap will benefit consumers. 

Is not that the principle? It will drive more benefit to consumers 

in terms of health care provider services. Is that not correct? 


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Mr. JOST. The idea is that when consumers buy health insurance 

they are looking for insurance for medical care, not for paying a lot 

for profits and bureaucracy. 

Chairman COFFMAN. Sure. Because I remember being a state legislator, again going back in Colorado, where we were—I remember 

being at a debate one time where the issue was about consumers 

but from a trial lawyer point of view in personal injury cases. And 

then the question was should we, in fact, regulate the fees that 

lawyers can charge as a percentage of the case in order that more 

benefit go to the victim. But I think that at the end of the day the 

argument that won out was that the victims could, in fact, shop 

around for lawyers and get one potentially with perhaps a lower 

contingency fee. How do you separate those two? 

Mr. JOST. I think brokers and agents ought to be paid exactly the 

way lawyers and accountants and real estate brokers and everybody else is paid. They ought to negotiate a fee with their client 

and that should be their fee. The MLR then should be raised. Administrative costs should be reduced to recognize the fact that insurers are not now paying for that. But if somebody wants to pay 

a broker 20 percent of their premium, I think they should have 

that freedom. So I do not think Congress should tell them. 

Chairman COFFMAN. So what should be the cap then for trial 

lawyers in terms of their contingency fee? What cap should we impose on them so that we protect consumers, so that we protect the 

victims that they are representing? What cap should be imposed? 

Mr. JOST. That is not something I was prepared to testify to 

today. 

Chairman COFFMAN. Oh, but surely you have thought of that. 

You are a law school professor. Please. 

Mr. JOST. If you want me to talk about that, I can talk about 

that. 

Chairman COFFMAN. I would love to know what is 20 percent? 

Would 20 percent be a fair number? 

Mr. JOST. I cannot say. I would have to look at that more closely. 

I mean, the problem obviously is that lawyers who take—— 

Chairman COFFMAN. Can you get back to me as to what a fair 

percentage would be, so you have had time to deliberate that? Because obviously what we want to do, I mean, if we are going to regulate everything, because we do not believe in freedom, because we 

do not believe that free market competition, which unfortunately 

we do not have today in the insurance industry because of regulation, that we ought to look in terms of—to follow this logic through 

to the plaintiff’s bar and just say there ought to be a cap on contingencies so that the bulk of the money goes to the victim. 

Mr. JOST. You know, I do not have a problem with that and those 

laws exist in many states but I am not an expert on that. 

Chairman COFFMAN. Why not have a federal one? 

Mr. JOST. Well, I think that that is a problem that many states 

have addressed. 

Chairman COFFMAN. But should not we—I mean, if we are regulating something that is truly intrastate commerce because we do 

not allow small businesses and individuals to purchase across state 

lines, so if obviously the commerce clause is so expansive to warrant the rule that we are discussing today, then why does not the 


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Congress of the United States have a rule affecting the plaintiff 

party in every state in the country? 

Mr. JOST. I think under the Commerce Clause, Congress could 

definitely do that and you would have to decide whether that is 

something that demands your attention. I think that Congress decided two years ago that insurance was, and in fact, since 1946, it 

has been clear that Congress has the right to regulate insurance. 

In fact, since 1974, Congress has regulated 85 percent of health 

care benefits through ERISA, and now they are extending that a 

little bit. 

But I am sorry, I just do not—I am not an expert on attorney 

fees. 

Chairman COFFMAN. Mr. Schrader, any further comments? 

Mr. SCHRADER. No, thank you, Mr. Chairman. I think we have 

covered it pretty well and the goal would be to find some way to 

take care of the insurance agents and yet keep the intent of reducing health care costs for Americans going forward. 

Chairman COFFMAN. Well, I want to thank you all so much for 

your testimony today. This Subcommittee will continue to closely 

follow the implementation of the health care law. I ask unanimous 

consent that members have five legislative days to submit statements and supporting materials for the record. Any objection? 

Without objection, so ordered. This Subcommittee is now adjourned. 

[Whereupon, at 11:20 a.m., the Subcommittee hearing was adjourned.] 


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Mitchell West 

Health Insurance Broker 

HealthChoiceOne 

5500 Greenwood Plaza 8lvd, Suite 100 

Greenwood Village, CO 80111 

(303, 350-5408 

Testimony before the House Small Business Subcommittee on Investigations, OVersight and 

Regulations Hearing "New Medical Loss Ratios: Increasing Health Care Value or Just 

Eliminating Jobs?" 

December 15, 2011 

Chairman Coffman and members of the Subcommittee: Thank you for the opportunity to testify 

today. My name is Mitchell West and I am an independent health insurance agent and broker 

in Centennial, Colorado. I am here to testify on behalf of myself and my professional 

association, the National Association of Health Underwriters. I also believe that I share the 

sentiments of the 22,019 licensed health insurance agents in Colorado, and the over 1 million 

insurance agents licensed across the entire United States. 

As a sole proprietor with one full-time employee, I am a typical health insurance agent and I 

appreciate this opportunity to provide perspective on how the Medical loss Ratio (MlR) 

requirements of the Patient Protection and Affordable Care Act (PPACAj have affected my 

industry. 

Helping people obtain and use their health insurance is my second-chance career. My degree is 

in engineering, and I spent 20 years in the aerospace industry as an engineer and program 

manager working some of the most advanced telecommunications satellite programs of the 

time. But in 2002, I found myself in unfamiliar territory. I had been covered my entire life by 

group health insurance that had been provided by employers. When I was laid off as a result of 

the telecommunications downturn in 2001, f was in need of health insurance for my family. 

I was inundated with information and unable to make sense of it. Dozens of companies, 

hundreds of plans, an unfamiliar vocabulary and marketing materials that'lill claimed to offer 

me the best possible solution were only a few of the challenges. To differentiate themselves 

from their competition, some insurance companies attempted to make their offerings sound 

unique when they were not. At the same time, other companies claimed their offerings were 

similar to those of their competitors' when in fact they were not comparable. 
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Mitchell West 

Health Insurance Broker 

HealthChoiceOne 

5500 Greenwood Plaza Blvd, Suite 100 

Greenwood Village, CO 80111 

(303) 356-5408 

Despite my professional background, I had no confidence in my ability to make a good decision. 

It was only with the help of a skilled agent that I came to understand how the industry worked, 

which plans were risky and to be avoided, and which offered the best value. Only then was I 

able to make a wise choice. I was greatly relieved at the end of the process, especially after 

realizing that some of the options that I had been considering on my own could have put my 

family at risk. 

A few months later, I began my career as a licensed health insurance agent with my recent 

experiences fresh in my mind. As I met with clients, I began to understand that consumers 

often have more misconceptions about health insurance than they do correct information, and 

that they are often not prepQ,ed fa ask the right questions as they approach the very 

important task of choosing a plan that will protect themselves and their families. 

Having since worked with over 5,300 consumers, I have come to recognize that my primary job 

is client education. Not until this is accomplished can I begin the process of helping a client 

select the right plan. Once the plan has been selected and procured, I become an educator 

again, explaining how to use the plan and what to do when circumstances arise. A partial list of 

topics that I discuss with each and every client includes: 

• What defines the value of a health 

plan 

• Types of plans available, and the 

features of each 

• Cost and value of optional features 

• Which risks are acceptable and 

which may not be 

• Pros and cons of each plan type 

• Insurance companies' strengths and 

weaknesses 

• Claim scenariOS, and which plans 

work best for each scenario 

• Effect of pre-existing conditions on 

price and availability 

• How best to deal with specific health 

conditions 

• Network coverage and doctor 

availability 

• Rate locks and future price 

expectations 

• Payment modes 

• What happens when there is a claim 

• What to do when there is a problem 

with a claim 
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Mitchell West 

Health Insurance Broker 

HealthCholceOne 

5500 Greenwood Pla~a Blvd, Suite 100 

Greenwood Village, CO 80111 

(303) 350-5408 

I pride myself on delivering a high level of service, staying in touch with my clients and updating 

them when changes occur in the health insurance market. Hundreds of my clients have been 

with me for over eight years. I am constantly reviewing their coverage and making plan 

changes on their behalf to deal with evolving family situations and the tremendous rate of 

change of products in the health insurance marketplace. Historically, I have also worked, on a 

"pro bono" basis, to assist anyone that has called me when they cannot obtain coverage, and 

have helped many consumers obtain health care through public programs like Cover Colorado. 

None of the activities mentioned above generate a single dollar of revenue for my business. 

My Q!!rt source of revenue is commissions paid after the sale of health insurance policies to my 

clients, and all of these commissions are paid through the insurance companies whose products 

I sell. 

We have eight major health insurance carriers in Colorado aggressively competing for business 

in the state. All of these carriers reduced agent commissions over the past year as a direct 

result of PPACA's MlR requirements as designed by the Department of Health and Human 

Services. Effective January 1, 2011, for my practice, which is comprised of over 1,200 active 

clients, my commission reductions averaged 47 percent on new business and 20 percent on 

existing bUSiness/renewals. One of the carriers in Colorado has stopped paying renewal 

commissions entirely. That means I only get paid for the first year of any contracts f place with 

that carrier, even though it is my responsibility to service to my clients who are enrolled in their 

plans for all of the years that my clients stay with this carrier. 

My practice has an overhead rate of 30 percent, comprised of rent, licensing fees, employee 

compensation, marketing, communications, office equipment, transportation, consumables and 

mandatory continuing education. My overhead expenses are unchanged for 2011, but will 

increase out of necessity in the future. 

Using a figure of 35 percent as the composite reduction in my revenues that are attributable 

directly to MlR on January 1, 2011, the net gmseguence is Q decreese 0(56 Percent to my 

bgttom line. 

As a sole proprietor, the bottom line of my practice is both my salary and the source of all funds 

needed to grow or maintain my business going forward. 
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Mitchell West 

Health Insurance Broker 

HealthChoiceOne 

5500 Greenwood Plaza Blvd, Suite 100 

Greenwood Village, CO 80111 

(303) 350-5408 

Is there any business able to suffer a 50-percent instantaneous reduction in revenue, while 

costs remain the same, and survive intact? 

My experience isn't atypical, either. Many agents I know, in particular those who were in the 

early stages of building their businesses, have not been able to meet their expenses and have 

simply gone out of business. Others have chosen to move into other insurance and services 

sectors in which they can be successful. 

I am very fortunate that I previously built a successful practice providing a revenue foundation 

upon which I can fall back, because I have to sell twice as many policies this year in order to 

earn the same amount as I did last year. This situation is not sustainable for much longer. I 

have, thus far, been able to hold on, but many thousands of other agents all across the country 

who are also working under these circumstances have become unemployed or underemployed, 

or have permanently left the industry. 

The reduction in revenues does not fully describe the total impact of the new health reform law 

on my bUSiness. PPACA has had many widely misunderstood impacts on the health insurance 

poliCies of every American citizen. The addition of another layer of change in the form of 

interpretations and regulatory requirements implemented separately and differently by the 

regulatory agencies of everyone of the 50 states has created further flux and consumer 

uncertainty. 

This means that every policy I have ever sold to everyone of my clients in the past has been 

subject to unforeseen policy amendments, coverage changes and price increases over the past 

20 months. A significant amount of my time must now be spent explaining which changes 

could, will or might in the future affect everyone of my clients. This need for extensive 

additional education applies to all "in-force" poliCies, which were supposed to be stable 

contracts that were well understood at the time they were initiated. Making sure my clients 

completely understand the changes to their benefits is a significant and uncompensated 

additional burden that I conSider a new "overhead expense" attributable to PPACA. 

As a result, I am forced to plan for a very different future. I simply cannot stay in bUSiness 

operating the way I used to. My time must now, of necessity, be used differently. 

Here are examples of changes that PPACA is forcing me to make: 
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Mitchell West 

Health Insurance Broker 

HealthChoiceOne 

5500 Greenwood Plaza Blvd, Suite 100 

Greenwood Village, CO 80111 

(303) 350-5408 

• A new prospect with significant medical concerns and personal issues will not get the 

help that I have been accustomed to providing ... I simply cannot spend the time with 

them and must move on to other opportunities. 

• Pro bono support is not an option .... I can only deal with clients who will generate 

revenue, and I must turn away those with special needs instead of assisting them as I 

would like to do. 

• Current clients will not get the same level of attention ..• I must spend more time 

searching for new business just to be able to keep my practice operating. 

• I am forced to change the focus of my practice and sell other types of personal 

insurance products that have an acceptable compensation structure ... The percentage of 

time I spend helping people with health insurance inquiries is in decline. 

• I have chosen to not cut the salary of my full-time employee by half... She would not be 

able to survive financially, so hiring of additional staff to deal with the added burdens 

from ACA or to grow my practice is not possible. 

• Time that I used to spend on professional development in the health insurance area no 

longer exists ... Rather than keeping abreast of trends and finding creative ways to help 

my clients, I must move on to other markets. 

• I fully expect that my health insurance revenues will continue to decline as a share of my 

total revenues in the coming months as I am forced to change my practice, serving 

smaller numbers of consumers with their health insurance needs. 

• Rather than anticipating the needs of my clients, proactively reviewing their coverage 

and looking for better solutions for them, I am forced to be reactive and only respond to 

requests as they come ... This inevitably means my clients will pay more for their 

coverage in the long term and enjoy lesser benefits at any given time because I am 

unable to spend the time to make sure their plans are optimized in real time. 

• I can no longer provide the same level of administrative support to my clients ... Helping 

with banking/payment issues, questions at the time of claims and detailed questions 
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Mitchell West 

Health Insurance Broker 

HealthChoiceOne 

5500 Greenwood Plaza Blvd, Suite 100 

Greenwood Village, CO 80111 

(303) 350-5408 

about their policies is no longer possible. All of these were value-added services that I 

now must avoid. 

Millions of Americans are in need of health insurance because they have lost their employerprovided coverage, have come to the end of their COBRA coverage, have chosen to start small 

businesses, have come off of their parents' plans or are entering the workforce for the first 

time. Put yourself in their shoes; the health insurance environment has never been more 

confusing and there has never been more of a need for help. The rate of change in the industry 

is remarkable, making it impractical for consumers to keep themselves informed. How can the 

average mom or dad be confident that they are choosing wisely when making decisions that 

have such very important consequences for their families? 

I have noticed a rise in the number of discount plans, limited-benefit plans and other types of 

bundled packages being promoted, as well as the number of call centers and non-licensed 

marketers selling these products. Their efforts are an attempt to capitalize on the current 

environment to the detriment of unwary consumers who are confused by the changes and 

desperate to find a deal that is more affordable but which is too good to be true. Many times, 

these products are presented in such a way that they can be misunderstood to be traditional 

health insurance plans providing extensive and comprehensive protection. I am very concerned 

for the large number of consumers believing they are purchasing reliable and complete health 

insurance coverage when this is not the case. 

While agents are under these pressures, insurance carriers are challenged to reduce their nonclaims expenses and they are cutting staff and unable to provide added support to the 

consumer to pick up the slack. As agents are going out of business or dramatically reducing 

their level of service, this double whammy will leave more and more consumers without the 

benefit of an advocate and unable to obtain proper support before, during or after the planselection and purchasing process. 

This trend is accelerating and I believe a tipping point will be reached soon. With potential 

new agents perceiving that they cannot make an acceptable income and seeking other 

opportunities, the population of agents will decline to such an extent that consumers will have 
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Mitchell West 

Health Insurance Broker 

HealthChoiteOne 

5500 Greenwood Plaza Blvd, Suite 100 

Greenwood Village, CO 80111 

(303) 350-5408 

lost this important asset, even as their need for assistance is increase by the addition of further 

PPACA changes over the next two years. 

The stated intent of PPACA was to help the consumer in a number of categories. The effect of 

the MlR provisions as currently interpreted and implemented has been a very negative and 

unintended consequence of this legislation. 

HHS was given authority under PPACA to implement the MLR requirements. It is within the 

power of HHS to recognize the facts presented above and to provide immediate relief by 

modifying the MlR regulation. Despite the recommendations of industry groups, business 

organizations, the National Conference of Insurance legislators, the National Assotiation of 

Insurance Commissioners and many members of Congress, HHS has been unwallering in its 

position and c:hosen to not act. 

It would seem, therefore, that the only solution is a legislative one, and it is needed 

immediately. Much damage has already been done to tens of thousands of agents and 

countless consumers nationwide. Health insurance agents are highly skilled professionals who 

deliver valuable services to consumers attempting to navigate an extremely complicated 

marketplace in which mistakes can result in severe financial impact. 

I have never in my career had a dient complain about having to pay a commission, which in 

Colorado is required to be disclosed and transparent to all clients. On the contrary, my clients 

routinely thank me for my assistance both verbally and by referring their friends and family 

members to me for assistance. 

Agent commissions are not, and never have been, a profit element for the insurance 

companies. They are rather a Hpass-through" fee that is required to be collected this way by a 

variety of state laws. The embedded commission structure also benefits consumers because 

fee standardization is achieved across the industry, consumers are relieved of the 

inconvenience of having to negotiate with agents, and agents are relieved of the burden of 

having to negotiate and collect their fees separately from their numerous clients. Consumers, 

agents and insurance companies all benefit from this arrangement and the highest level of 

service is delivered to the consumer. 
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Mitchell West 

Health Insurance Broker 

HealthChoiceOne 

5500 Greenwood Plaza Blvd, Suite 100 

Greenwood Village, CO 80111 

(303) 350-5408 

By eliminating agent commissions from the MLR calculation, as would be achieved by the 

passage of H.R. 1206, the bipartisan Access to Professional Health Insurance Advisors Act of 

2011, consumers would be assured of continued access to the support and services that only a 

community of trained, licensed and experienced agents can provide. Numerous jobs will be 

preserved at the national level as agents are able to stay in business. New jobs will be created 

as agents enter the workforce to assist consumers with the increasing complexity of the health 

insurance marketplace as we enter the era of exchanges and the many new regulatory and 

insurance product changes that are ahead. 

I appreciate the opportunity to share these thoughts with the Committee. This is a case of wellintentioned legislation resulting in unintended negative consequences to small businesses and 

consumers. Members of Congress need to recognize the problems that have been created and, 

on behalf of the American people, work with a sense of urgency for a legislative remedy. 
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Testimony of Gary Livengood 

Principal, What A Stitch, LLC 

Before the U.S. House of Representatives' Small Business Subcommittee on Investigations, Oversight 

and Regulations concerning "New Medical Loss Ratios: Increasing Health Care Value or Just 

Eliminating Jobs" 

December 15, 2011 

Good Morning. My name is Gary livengood, and I am a principal of What A Stitch, lLC, a small 

commercial embroidery company located in Mt. Airy, Maryland. I would like to thank the members of 

the Small Business Committee for the honor of testifying before you today about the new health reform 

law. I plan to address my specific concerns about how its rnedicalloss ratio provisions are threatening 

my access to the services my health insurance agent provides, as well as how the new law may impact 

my ability to grow my business and provide health coverage to my employees in the future. 

To tell you a little bit about me, after serving our country in Vietnam, I worked in a variety of operational 

positions in the railroad, investigative services and insurance industries for more than 35 years. Then, a 

few years ago, my wonderful wife, touann, somehow got me to agree to spend my retirement not on 

the golf course, like I planned, but on growing her hobby into a bUSiness that now employs 21 people. 

We started What A 5titch in 2002 with one sewing machine. The company grew and grew, but then, like 

small·business owners everywhere, we hit very tough times in 2008 and 2009. We are very committed 

to our employees, so we dug into our savings and kept the doors open during the rough years. I am very 

proud that, through great personal sacrifice, we were able retain aU of our employees throughout the 

Great Recession. 

While times still aren't great for us, this year has been much better than the last. I wish I could say that 

even better times are coming for What A Stitch but, unfortunately, the future still looks very uncertain. I 

know the intent ofthe new health law was to help business owners like me but, so far, I just don't see it. 

The new law weighs heavily on my mind every time I think about hiring new employees or how our 

business may grow and change over the next few years. It has already put regulatory burdens on our 
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company, due to the required changes to our benefit plan and the grandfathered plan rules. And there 

are more compliance burdens in our future: the new impending taxes on our premiums, the many 

notice and reporting requirements, the changes to the way our premium will be calculated, the new 

essential benefits we'll have to cover, and so on. 

Before we started What A Stitch, my wife was a director of human resources for Amtrak and I worked 

for 13 years, eventually as a vice president of operations, for a small regional HMO that was eventually 

bought by UnitedHealthcare. Due to our professional backgrounds, my wife and I may know a little bit 

more about the administration of group health insurance than your average small-business owners. 

Consequently, our level of day-to-day reliance on our company's health insurance agent, Paul Younkins, 

and the company he co-owns, Allied Resource Management, is much less extensive than what other 

small-business owners I know need. 

In insurance, we often talk about the 80/20 rule, meaning that about 20 percent of the clients use 80 

percent of the services. We are one of Paul's clients who falls soundly in the 80 percent. Unlike many 

small-business owners, we don't call our agent every day to help us out of jams. We do trust him 

implicitly, though, and over the years he has come to know us, our employees and the needs of our 

company well. Paul is our regular source of information about our compliance responsibilities, which is 

a service that's become increasingly important as health reform is implemented. We rely on him each 

year when our policy renews to help us provide the best benefits for our employees at the best possible 

price. We also call on him occasionally to help us with benefit issues that we can't easily resolve. When 

we do that, it is very comforting to just tell him what the problem is and then hang up the phone and get 

back to work knowing that it's Paul's problem now. We have complete confidence he will be able to 

leverage his relationships within the benefit community and reach an expedient solution on our behalf. 

Even with our extensive personal experience in the employee benefit world, Louann and r would never 

consider dropping the services of our agent. He's our insurance policy within an insurance policy. So 

far, our company and employees have been lucky. We haven't had a claims disaster or a medical crisis 

to overcome that would require the full use of Paul's capabilities. I know some of his other clients have 

those kinds of service needs, and other health insurance agents like Paul provide far-reaching services to 

small-business owners across the country. That's why I am more than happy to pay our agent's 

commission each month. I understand at any time our company could have similar needs. Eventually, 
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all health care consumers have a serious benefit problem to address. If and when our when our day 

comes, I want my empioyees and family to have someone we know and trust in our corner. My 

company will need a professional benefit specialist who will work tirelessly at no additional cost to us so 

my wife and I will be able to focus on keeping our company profitable. 

Our agent is a businessman like I am, and he deserves to make a fair living for the services he provides. 

When I pay our company's insurance premiums each month, it's clear that a portion of my check is 

really our agent's fee that is included in our bill for tax and convenience purposes. Also, it's obvious 

that our company's total insurance premium rate has nothing to do with the amount our agent gets 

paid. Our premium costs are driven by the cost of medical care in Maryland and the age and size of our 

group of employees. Paul's fee is just a small percentage of whatever our insurance premium will be, 

and it is worth every penny. 

Unfortunately, it's my understanding that the new health reform law's medical loss ratio requirements 

are having a profound impact on both PauVs business and on all similar businesses nationally. In 

Maryland, commissions on group policies like mine have been cut by 15 percent or more, which means 

that Paul's overall business revenue is down significantly. In other states, I hear agents have it far 

worse. My company just went through several years of declining revenue, and it was extremely difficult 

to keep our doors open. So I feel for Paul on a personalleve!. 

I also have strong feeling about how this will impact our company. If our agent is forced out of bUSiness 

by the new law, I wi!! have to think very, very seriously about whether or not it will be feasible to 

continue to provide benefits to our employees. I don't think I will be able to handle the new compliance 

burdens coming without professional help. 

If Paul needs to change the nature of his business and can't afford to handle our account anymore, there 

is a good chance we will just drop our group coverage, save the money we put into our employee's 

premiums, and let our employees purchase individual coverage through the new health insurance 

exchanges. Although if the government takes over our benefits, such as through these new health 

insurance exchanges, I am hard-pressed to believe that my employees and I will have access to the same 

kind of customer service that Paul and his company provide. 
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Obviously, the cost of our health insurance premiums is very important to me, and I dare to say to every 

American small-business owner. I believe Americans need to take serious steps to get health care costs 

under control. But to try to do so by over-regulating and cutting the payments to insurance agents and 

brokers who assist consumers like me is completely missing the forest for the trees. 

When I think back on our decision to open What A Stitch nine years ago, knowing what I know now, I am 

not sure we would make the same choice again. We had no idea the regulatory burden would be this 

significant. 

I would strongly encourage all members of this committee to take a serious look at the strain the new 

health reform law is putting on companies like ours, as well as on other small businesses like our 

insurance agency, Allied Resource Management. The first place I suggest you look to for improvements 

is the section of the law addressing medical loss ratios, so that business owners like me will not have to 

worry about losing continued access to our health insurance agents and brokers. 

Thank you for the honor of testifying before the subcommittee today. If you have any questions, I 

would be glad to answer them at the appropriate time. 
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INSTITUTE 

A nat-for-pr'lfi/ heallh and lax paJley research organization 

Testimony before the U.S. Honse of Representatives 

Committee on Small Business 

Subeommittee on Investigations, Oversight and Regulations 

Rep. Mike Coffman, Chairman 

Hearing on 

"New Medical Loss Ratios: 

Increasing Health Care Value or Jnst Eliminating Jobs?" 

December 15, lOU 

Testimony presented by 

Grace-Marie Turner 

President, Galen Illstitnte 

P.O. Box 320010 • AI."mdri •• VA 2232(1· Phone 703-299-8900' www.galcn.org 
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"New Medieal Loss Ratios: 

Increasing Health Care Value or Just Eliminating Jobs?" 

Committee on Small Business 

Subcommittee on Investigations, Oversight and Regnlations 

Testimony by Grace-Marie Turner, Galen Institute 

Executive summary 

The Patient Protection and Affordable Care Act (PPACA) already is leading to a loss of 

affordable options for health insurance for small employers, to a loss of jobs inside and outside 

the health sector, and to higher health costs that make hiring new workers a risky proposition, 

especially for struggling small businesses. 

The percentage of small businesses offering health insurance has declined from 68 percent in 

2000 to 59 percent in 20 II. The health law that so many small business owners had hoped would 

benefit them by lowering costs is instead harming their ability to continue to offer health 

insurance at all. At least partly because of early provisions of PPACA, premiums for job-based 

health insurance rose in 2011 by an average of$I,303 per family - at the rate of9 percent A 

family policy now costs an average of$15,073. 

The "medical loss ratio" (MLR), which mandates that health insurance carriers spend most of the 

money they collect from premiums on direct medical care, is contributing to the dislocations in 

the small group and individual markets, which small businesses rely on for coverage. A growing 

number of carriers are leaving these markets because they can't meet the Department of Health 

and Human Services' (HHS) inflexible tests. 

Many states have applied to Washington to delay implementation, arguing that some carriers 

would be forced to stop selling policies in their states if they were not given relief from the MLR 

rules. This will lead to less competition and higher prices. The HHS has refused many requests, 

and the deterioration in available private-sector coverage already has begun. In my testimony, I 

provide a list of examples of companies pulling out of markets from New York to Colorado, 

Indiana to New Mexico, and Virginia to Utah. 

One of the tools that small businesses have found to be most valuable in helping them offer 

affordable coverage - high-deductible health plans - could be strangled by the obscure and 

complex MLR regulation. 

PPACA already is having a direct impact on jobs in the health broker industry. Brokers are 

closing their doors, laying off workers, and depriving clients of their services. A recent survey 

found that 21 percent of independent health insurance agency owners have been forced to 

downsize their businesses. 

Clearly, millions ofpeop\e are having their coverage disrupted, violating the promise that 

President Obama - and virtually all of those in Congress who voted for the law - made to the 

American people. As the cascade continues, support will grow for an alternative approach to 

PPACA. I look forward, Mr. Chairman, to talking with you and with members of the committee 

about a better, more sustainable path forward to affordable health insurance. 
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"New Medical Loss Ratios: 

Increasing Health Care Value or Just Eliminating Jobs?" 

Hearing before the 

Committee on Small Business 

Subcommittee on Investigations, Oversight and Regulations 

December 15, 20U 

By Grace-Marie Turner, Galen Institnte 

Chairman Coffinan and Members of the Subcommittee, my name is Grace-Marie Turoer and I 

am president and founder of the Galen Institute, a non-profit research organization specializing 

in market-based solutions to health reform. I appreciate the opportunity to testifY today about the 

Medical Loss Ratio rules and their impact on health insurance and the jobs market. I will focus 

on the economic effects of the new MLR rules on small businesses, including the impact on the 

businesses' growth,jobs creation, and health costs. 

Losing coverage 

The Patient Protection and Affordable Care Act (PPACA) already is leading to a loss of 

affordable options for health insurance for small employers, to a loss of jobs inside and outside 

the health sector, and to higher health costs that make hiring new workers a risky proposition, 

especially for struggling small businesses. 

A major survey of employer plans provides evidence of how PPACA is destabilizing employerbased health insurance. Earlier this year, McKinsey & Company surveyed 1,300 employers 

across industries, geographies, and employer sizes, and concluded that PPACA will lead to a 

"radical restructuring" of job-based health coverage.l McKinsey found that 45 to 50 percent of 

employers say they will definitely or probably pursue alternatives to employer-sponsored health 

insurance in the years after it fully takes effect in 2014. One-third of employers say they will 

"definitely or probably drop coverage after 2014." Amoug employers who knew most about the 

new health law, half said they were likely to drop coverage. 

An estimated 156 million non-elderly Americans get health insurance at work,2 according to the 

Employee Benefit Research Institute, 3 and that means as many as 78 million people could be 

forced to find other sources of coverage. 

Large companies can self-insure and better insulate themselves from the early changes inflicted 

by PPACA. Not so small businesses, which are more exposed to changes in the marketplace. As 

I document below, many carriers already are leaving the market for individual and small group 

insurance. When fewer carriers offer insurance and when fewer options of affordable coverage 

are available, small businesses are hit the hardest 

The percentage of small businesses offering health insurance has declined from 68 percent in 

2000 to 59 percent in 2011.4 The health law that so many small business owners had hoped 

would henefit them will instead harm their ability to continue to offer health insurance to their 

workers. 

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One of the most fervent promises President Obama made to the American people before passage 

ofthe health overhaul law was "If you like your health care plan, you will be able to keep your 

health care plan. Period. No one will take it away. No matter what."s 

But, even before the law fully takes effect, millions of people are losing the coverage they have 

now, and tens of millions more surely will follow. 

Health costs rising 

A Kaiser Family Foundation and Health Research and Educational Trust survey of employersponsored coverage released in September 20 II quantified what businesses across the country 

already know.6 jt found that premiums for job-based health insurance rose in 2011 by an average 

of $\,303 per family - at the rate of 9 percent. A family policy now costs an average of 

$15,073. President Obama repeatedly said families would see savings to their health premiums 

of $2,500 a year by the end of his first term - not an increase of$I,303 in one year. 

There are a number of factors that contribute to rising health costs, including the mandates, rules, 

regulations, and spending in the health law. We are already seeing the impact of the law's early 

provisions, such as not charging patients deductibles or co-payments for preventive care, raising 

the ceiling on what insurance pays adds to premium costs, and requiring employers that offer 

dependent coverage to add "children" up to age 26 to their parents' policies. All ofthese 

mandates cost money and add to premium costs. And we have only seen the beginning of the 

cascade of mandates in the law that will fuel further health cost increases. I will describe more 

about this in my testimony below. 

Medical Loss Ratio rules 

I would like to turn to the specific provision in PP ACA that is the focus of this hearing - the 

"medical loss ratio" (MLR), which mandates that health insurance carriers spend most of the 

money they collect from premiums on direct medical care. 

This rule and the Department of Health and Human Services' (HHS) strict interpretation of it are 

contributing to the dislocations in the small group and individual health insurance markets, 

hitting small businesses hardest. 

The MLR rules require health insurance carriers to spend 85 percent of the money they collect 

from premiums on direct medical care for large groups and 80 percent for individual and small 

groups. The remainder can be spent on administrative overhead and profit. 

HHS has been very inflexible in listening to the real world impact of its regulations 

implementing this provision. 

As an example ofHHS' inflexibility, the final MLR rules released on December 2,2011, 

rejected insurers' requests that the health expenditure side of the MLR equation include both 

anti-fraud efforts and all costs associated with implementing ICD-IO codes - a huge and costly 

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requirement that they change their billing categories to include more than 140,000 new billing 

codes.? 

That means the new MLR rules constrain the ability of health plans to fight fraud because that 

spending now must count toward their administrative expenses. Ifhealth plans spend too much 

protecting policyholders from fraud, the plans will be penalized and forced to send rebates to the 

policyholders. It's a Catch-22. Health insurance companies will have a disincentive to fight fraud 

and protect policyholders' premium dollars. 

The National Association of Insurance Commissioners also had petitioned HHS to exclude 

broker fees from the administrative portion of the calculation. That request also was r«iected by 

HHS regulators. This means agents and brokers, many of whom function as valued outside 

human resources departments for many small and medium-sized employers, will have trouble 

getting compensated for their work. The brokers help employers find the policies that meet their 

needs, negotiate terms, benefits, and premium costs with insurers, and then help navigate the 

claims process for the client company's employees. Without commissions, businesses will not 

have access to these services and will either have to do the work themselves or leave their 

employees to fend for themselves. 

The National Association ofInsurance and Financial Advisers (NAIFA) said it was disappointed 

that the final regulations did not permit insurers to exclude agent and broker fees from 

administrative expenses.8 

Forced rebates 

Health insurers that are unable to comply with this increasingly complex maze of MLR rules will 

be required to provide premium rebates if they exceed the allowed medical loss ratio for 

administrative expenses. "Tfyour insurance company doesn't spend enough of your premium 

dollars on medical care or quality improvement this year, they'll have to give you rebates next 

year," according to eMS acting administrator Marilyn Tavenner.9 

Companies that sell policies to individuals and small groups have higher marketing costs and 

higher customer service expenses, and it is especially difficult for them to meet the MLR tests 

because their administrative costs are necessarily higher. In addition, high-deductible policies 

provide customers protection against large medical expenses, but carriers may not payout the 

required percentage every year in medical claims, making it very difficult for them to meet the 

MLR tests. Many health insurance companies have slashed the number of employees, cut agent 

commissions, and taken other harsh steps to reduce overhead, but this is also slashing customer 

services. 

Many carriers said they could meet the test given time, but Sec. Sebelius refused to listen to the 

carriers when they asked her to use her authorized discretion to delay for at least a year the MLR 

requirement. 

The stakes are high. Aetna warns it may hemorrhage up to $100 million thanks to MLR rules this 

year. 10 According to Fortune magazine, health insurance is among the least profitable industry 

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sectors in America. Kaiser Health News concludes, "With the nation's health care spending 

estimated at $2.5 trillion this year, even the elimination of insurers' profits and executive 

compensation would lower health care spending by just 0.5 percent."l1 

Discriminating against HSAs 

The MLR rules also discriminate against high-deductible health plans, which are especially 

popular among small businesses with slim profit margins. These businesses want to offer health 

insurance to their workers but cannot afford the generous plans that larger companies offer. 

Health Savings Accounts (HSAs) and other consumer-directed plans allow companies to provide 

an affordable alternative to their workers. 

But the MLR regulations only counts payments made directly by insurers as medical expenses. 

Health care costs paid by individuals below the deductible don't qualify, making it hard for these 

plans to meet the 80 percent MLR test. In other words, HHS rules mean that if an individual pays 

for a health care service to meet the deductible, the expenditure does not count toward the MLR 

ratio, even though the full amount is actually a payment for medical services. 

As of January, about 11.4 million people were covered by HSA plans. The average deductible 

for small group HSA plans ranged from $2,820 to $2,957 in 2011, according to industry group 

America's Health Insurance Plans. Only about 5 percent of HSA policies have claims above the 

deductible. 12 

"Ifit is too difficult [for HSAs to meet the MLR test], insurance companies won't offer them," 

said Roy Ramthun, who played a major role in writing HSA regulations during the Bush 

administration. "That would mean the most affordable policies would go off the market.·' 

Therefore, one ofthe tools that small businesses have found to be most valuable in helping them 

offer affordable coverage could be strangled by this obscure and complex regulation. 

OhamaCare regulations cause havoc in the states 

Many states have applied to Washington to give them flexibility because they say many carriers 

can't comply with the MLR rules. Thirteen states that have applied to the federal government for 

temporary "adjustments" in MLR rules have been granted waivers. But the Obama 

administration has turned down requests from Indiana, Louisiana, North Dakota, and Delaware 

that they be granted waivers from the health law's strict directives. 

Indiana argued that some carriers would be forced to stop selling policies in the state if they were 

not given relief from the rules. This would lead to less competition and higher prices for 

consumers. Indiana asked HHS to lower the threshold MLR percentage companies would have to 

meet, provide a permanent waiver for high-deductible plans, and provide a waiver for new 

entrants into the individual market until 2014. Louisiana asked HHS to lower the MLR 

percentllges to 70 percent for 2011 and.75 percent for 2012. 
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Health and Human Services officials said in letters on November 27, 2011, to the insurance 

commissioners in Indiana and Louisiana that the government is denying their requests. 13 

"Once again, the Obama administration took a position in favor of higher health care costs and 

against personal freedom," said Indiana Governor Mitch Daniels after receiving the letter 

notitying him of Washington's decision. "Today's letter is further proof that the PPACA is a 

catastrophe for America and must be repeaied.,,14 The MLR rules are particularly difficult to 

meet for plans such as Health Savings Accounts which offer high-deductible coverage, and 

Indiana has a particularly high concentration of the popular cost-saving plans. Indiana had 

proposed an alternative approach to phase in the MLR triggers, but it was denied by HHS. 

In addition, North Dakota warned that if the government denied its request for a waiver that 

"consumers would be left without coverage" and many would have trouble finding new 

coverage, especially if they have a health condition. Washington denied its request as well. 

This Washington-knows-best attitude that is guiding the creation of more than 10,000 pages of 

rules and regulations to implement the health law will continue to cause a cascade of lost 

coverage because it is ignoring market forces in favor of Washington rule-making. 

The health law already is harming the ability of small businesses to find health insurance as a 

growing number of carriers are leaving markets, shrinking the pool of options available to small 

business owners. 

One of the perverse effects of the MLR rules likely will be higher health premiums. If health 

insurance companies are limited in their ability to cut costs by reducing fraud, for example, they 

can also meet the MLR test by increasing premiums. A higher premium produces a larger 

denominator, and therefore the 20 percent available for administrative expenses would be a 

larger amount of money. With fewer competitors in the market and a smaller number of products 

available, carriers would be able to charge higher premiums. Small employers would be 

squeezed. The federal government may have the hubris to believe it will be able to force carriers 

to hold down premium prices, but this is simply another form of price controls. No matter how 

complex and opaque, price controls have not worked for 4,000 years, and they won't work here 

either. 

Medical Loss Ratio regulations as job killers 

PPACA already is having a direct impact on jobs in the health broker industry. Dennis Lockhart, 

President of the Federal Reserve Bank of Atlanta, reports that: 15 

In addition to slow and uncertain revenue growth, contacts in this recovery are frequently 

citing a number of other factors that are impeding hiring. Prominent among these is the 

lack of clarity about the cost implications of the recent health care legislation. We've 

frequently heard strong comments to the effect of "my company won't hire a single 

additional worker until we know what health insurance costs are going to be." 

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Many economists believe that uncertainty about the cost ofthe employer mandate is a key 

contributor to the stubbornly high unemployment rate. 16 

But the immediate impact of job losses has been felt most acutely in the broker community. A 

recent survey found that 21 percent of independent health insurance alfency owners have been 

forced to downsize their businesses, including laying off employees. 1 An additional 26 percent 

have also had to reduce the services they provide to their clients. Many agents have lost their 

jobs and their main source oflivelihood, and those who remain in the business have seen their 

compensation plummet. 

The HHS rules require health plans to treat independent agent and broker compensation as part 

of health plan administrative costs - even though they aren't employed by health insurance 

carriers. Brokers and agents run their own businesses, hire their own employees, and pay all of 

their own office expenses, working for their clients to find the best and most affordable health 

insurance, usually from a range of health carriers. 

None of the compensation goes to the health insurer, yet HHS rules require that it be counted 

against the insurer's allowable administrative cost. 

Agents bring a great deal of value to their clients, yet these clumsy rules are shoving them aside. 

Not only do they help individuals and small businesses find the most appropriate and affordable 

policy from many competing carriers, but they also help companies find and establish wellness 

and disease-management programs and navigate the often-complex claims process. They are a 

crucial element in the equation of helping businesses find the most appropriate and affordable 

health policies for their employees. 

Many smaller companies do not even have an HR department so, as the Congressional Budget 

Office has noted, agents and brokers often "handle the responsibilities that larger firms generally 

delegate to their human resources departments - such as finding plans and negotiating 

premiums, providing information about the selected plans, and processing enrollees." 

There will continue to be a need for licensed, trained professionals to help individuals, employers 

and employees with their health insurance needs. Yet in every state, as a direct result of the new 

law's MLR provisions, agency owners are reporting that they are reducing services to their 

clients, cutting benefits, and eliminating jobs just to stay in business. In some instances, they are 

simply closing their doors. 

Other studies show additional job losses as a result of provisions in PPACA. The National 

Federation oflndependent Business's Research Foundation studied the private-sector job loss 

that will result from just one provision in PPACA -the Health Insurance Tax (HIT). The rise in 

the cost of employer-sponsored insurance stemming from the HIT will result in a reduction in 

private sector employment by 125,000 to 249,000 jobs in 2021, with 59 percent of those losses 

falling on small business. 18 

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Health plans are already leaving markets 

The deterioration in available private-sector coverage already has begun. Citizens in states 

around the country have learned that carriers are leaving markets. Some of the carriers are 

exiting because of onerous state regulations, others are victims ofa faltering economy, but the 

cascade has been accelerated by the rules that already have taken effect and the many more that 

are to come as a result of PPACA, including the MLR. 

Employers work very hard to find the balance in keeping the cost of health insurance as low as 

possible while offering the benefits that employees want and need. Part of the way tbey are able 

to do this is by seeking bids from competing insurers and amending and adjusting benefit 

structures. But if there are fewer companies offering coverage, employers will be limited in their 

choices. This also means they are limited in their options to help keep costs down. 

Here are some examples of the many carriers leaving the private health insurance market: 

In New York, Empire BlueCross BlueShield said it will drop in the spring of2012 health 

insurance plans covering about 20,000 businesses in tbe state. Mark Wagar, president and C.EO 

of Empire, said that the company will eliminate seven of the 13 group plans it currently offers to 

businesses that have two to 50 employees. The move is expected to have a great and potentially 

"catastrophic" impact on small businesses in New York, according to James L. Newhouse, 

president of Newhouse Financial and Insurance Brokers in Rye Brook, Ny.19 This loss of 

competition inevitably will lead to higher prices and fewer choices for businesses and their 

employees. 

In Colorado, World Insurance Company/American Republic Insurance Company announced in 

October 2011 that it is leaving the individual markel, citing the company's inability to comply 

with insurance regulations,20 Also in Colorado, Aetna will stop selling new health insurance to 

small groups in the state and is moving existing clients off its plans this year, affecting 1,200 

companies and 5,200 employees and theirdependents.21 Aetna also has pulled out of Colorado's 

individual market because of concerns about its ability to compete there, dropping 22,000 

members.22 It also has dropped out of the small-group market in Michigan and several other 

states. 

In Indiana, nearly 10 percent ofthe state's health insurance carriers have withdrawn from the 

market because they are unable to comply with the federal medical loss ratio requirement. 

Indiana was hoping to bring the companies baek by asking the Department of Health and Human 

Services for a waiver from the rule, but Washington refused in late November 20 II to grant the 

waiver. 

In Iowa, 13 plans have left the health insurance market since June of201O, citing regulatory 

concerns?3 

In New Mexico, four insurers - National Health Insurance, Aetna, john Alden, and Principle 

- are no longer offering insurance to individuals or to small businesses - drying up the market 

and driving out competition.24 

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In Utah, Humana is ending its partici~ation in the Utah Health Exchange, leaving only three 

carriers participating in the exchange. 5 

In Virginia, UniCare has eliminated its individual market coverage for about 3,000 

policyholders.26 And shortly after the health law was enacted in 2010, a new Virginia-based 

company, nHealth, announced it was closing its doors, saying that the regulatory burdens posed 

by the health law made it impossible to gain investor support to continue operating?7 

The American Enterprise Group announced in October 2011 that it would stop offering nongroup health insurance in more than 20 states.28 As a result, 35,000 people will lose the health 

coverage they have now. The company cited regulatory burdens, including the medical loss ratio 

requirements, in explaining its decision to leave the markets. This means there will be less 

competition in these 20 states, resulting in higher prices for consumers in many cases. 

Principal Financial Group, based in Iowa, announced in 2010 that it would stop selling health 

insurance, impacting 840,000 people who receive their insurance through employers served by 

the company. The company assessed its ability to compete in the new environment created by 

PPACA and concluded its best course was to stop selling health insurance policies.29 

Another 42,000 employees of small and midsize employers learned in January 2011 they were 

losing their health coverage with Guardian Life Insurauce Co. of America. The company 

announced it was leaving the group medical insurance market (it had reached an agreement with 

UnitedHealthcare to renew coverage for Guardian clients).30 Guardian began withdrawing from 

the medical insurance market in specific states more than a decade ago, and says it would be 

leaving the market with or without PPACA. 

Cigna announced that it is no longer offering health insurance coverage to small businesses in 16 

states and the District of Columbia: California, Connecticut, Florida, Georgia, Hawaii, Illinois, 

Kansas, Missouri, New Hampshire, New York, North Carolina, Ohio, Pennsylvania, South 

Carolina. Texas. Virginia, and Washington, D.C.31 

These announcements that carriers are leaving markets accelerates a trend that the American 

Medical Association says leaves four out of five metropolitan areas in the United States without 

a competitive health insurance market. 32 The report found that in about half of the metropolitan 

markets, at least one health insurer had a commercial market share of 50 percent or more. In 24 

states, the two largest health insurers had a combined commercial market share of 70 percent or 

more. 

This is a negative and destructive trend, leaving fewer carriers to serve these markets and giving 

small businesses and the insurance agents who serve them less leverage to negotiate better 

benefits and lower rates among competing companies. 

Other dislocating regulations 

The committee may want to look into other regulations and directives from HHS that are 

dislocating the market and impacting small businesses: 

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Children-only policies 

One of the provisions of the health law that the Obama administration touts most 

enthusiastically is the requirement that employers who offer dependent coverage allow 

employees to add their 26 year old "children" to their policies. It is highly ironic. then, that 

another provision is causing huge losses of coverage among children whose parents or 

guardians were buying health insurance policies for them on their own. 

One of the earliest indications orlost coverage came in June 2010 when Health and Human 

Services Secretary Kathleen Seootius told health insurers that they must write policies for 

children under 19, including those with pre-existing conditions, no matter when their parents 

and guardians apply. This creates an incentive for parents to wait to buy the coverage until 

the children have a significant medical condition. This in tum creates a substantial risk of 

"adverse selection," which makes it financially unsustainable for health plans to continue to 

offer these policies. Rather than wait for this to happen, many carriers have decided to leave 

this market altogether. 

Sen. Michael Euzi, ranking Republican on the Health, Education, Labor, and Pensions 

Committee, asked his staff to survey the states to find out how many were offering child-only 

pOlicies.33 AU 50 states responded to the HELP Committee survey, and 11 said there are no 

carriers currently selling these plans to new enrollees in their states. One of the largest 

insurance markets in the country, Texas, has seen all of its carriers drop child-only health 

insurance. Other states that no longer have carriers selling child-only plans include Alaska, 

Arizona, Connecticut, Delaware, Florida, Georgia, Idaho, Minnesota, Nebraska, Nevada, 

North Dakota, Oklahoma, South Carolina, Tennessee,West Virginia, and Wyoming. The 

HELP Committee updated its survey of the child-only market and released a paper in August 

2011 with a detailed summary of the states impacted.34 

The MLR rules represent just one set of market-distorting regulations imposed by the health 

law. Guaranteed issue and community rating rules to cume will further dislocate the health 

insurance market, making it difficult for most carriers to continue to offer policies. We 

should expect this cascade oflost coverage to continue. 

Sicker employees could be shoved out 

Two University of Minnesota law professors write that ObamaCare actually provides 

incentives for "tar~eted employer dumping" of sicker workers into taxpayer-subsidized 

health exchanges.3 

The article, "Will employers undermine health care reform by dumping sick employees?" by 

Amy Monahan and Daniel Schwarcz, explains how companies could redesign their health 

benefit programs to make it more costly for sicker employees to stay with the company 

health plan and encourage them to opt instead for the exchanges. 

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Monahan and Schwarcz write that this "would expose these exchanges to adverse selection 

caused by the entrance of a disproportionately high-risk segment ofthe population into the 

insured pool." They said that, "Not only would this undermine the spirit of health care 

reform, but it would jeopardize the sustainability of the insurance exchanges." 

In spite of this, senior HHS officials have said it would be a good thing for employers to 

"dump [their] people into the exchange,,,}6 and that Speaker Pelosi talked favorably about 

ObamaCare as a way "for businesses to be emancipated from health care costs because they 

have a way out or whatever works for them.,,37 

The only problem is that it would NOT be good for sicker employees, who would surely 

have greater difficulty finding physicians to see them under what surely will be lower 

payment rates in the exchanges, and it would be bad for taxpayers, who will have a much 

bigger bill to pay for exchange subsidies. 

The Ohio Department ofInsurance commissioned a study on What to expect from 

ObamaCare trom the actuarial firm Milliman, Inc. of Seattle. Milliman's report estimates that 

790,000 Ohioans will lose their private health insurance. Further, health insurance premiums 

in the individual market could increase by as much as 55 percent to 85 percent when 

ObamaCare takes full effect in 2014. Small businesses could see premium increases, and, in 

many cases, "these changes could be greater than 25 percent," not counting regular medical 

inflation. 

A total of 688,000 Ohio residents will move OUT of employer coverage, and most of those 

getting coverage in the new state exchanges will be people who lost their employer coverage 

because firms have new incentives to "dump" their workers. 

The employer mandate 

We have written extensively about the risks of the employer mandate.38 Even though small 

businesses are exempt ifthey have fewer than 50 employees, it presents a huge obstacle to 

their growth. And even if the company is small enough to escape the mandate, each of the 

employees still will be subject to the individual mandate in PPACA. The costs and 

disruptions are enormous. 

Looking toward the future 

Long before the law fully takes effect, PPACA is harming workers and employers as they face 

fewer choices for health insurance. 

Clearly, millions of people are having their coverage disrupted, violating the promise that 

President Obama - and virtually all of those in Congress who voted for the law - made to the 

American people. As the cascade continues, support will grow for an alternative approach to 

PPACA. I look forward, Mr. Chairman, to talking with you and with members of the committee 

about a better, more sustainable path forward to affordable health insurance, especially for small 

businesses. 

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ENDNOTES 

1 Shubham Singhal, Jeris Stueland, and Drew Ungerman, "How US health care reform will affect employee 

benefits," McKinsey Quarterly, June 2011, 

www.mckinseyquarterly.com/Health_Care!Strategy_Analysis/How_US_health_careJeform_will_affect_employee 

_benefits_2813. 

2 The employment-based health system in the United States has evolved from decisions made during World War II 

that gave favored status to health insurance offered through the workplace. Our system of employer-based health 

insurance is underpinned by generous tax incentives that allow employers to deduct the cost of health insurance 

as a part of their employee compensation costs and through a separate tax provision that shields the value of the 

policy from befng taxed as income to the worker. These dual tax incentives have provided strong incentives for 

people to get their health insurance at work and have led to the system in which 156 million Americans get health 

insurance through the workplace. 

, Paul Fronstin, "Sources of Health Insurance and Characteristics of the Uninsured: Analysis of the March 2010 

Current Population Survey," Employee Benefit Research Institute, September 2010, 

www.ebri.org/pdf/briefspdf/EBRUB_09-2010_N0347 _ Uninsuredl.pdf. 

4 "Employer Health Benefits: 2011 Summary of Findings," The Kaiser Family Foundation and Health Research & 

Educational Trust, September 2011, http://ehbs.kff.org/pdffS226.pdf. 

5 Remarks of President Barack Obama - As Prepared for Delivery to the American Medical Association, June 15, 

2009, http://blogs.wsj.com/washwire/2009/06!lS!obama-if-you-like-your-doctor-you-can-keep-your-doctor/. 

6 "Employer Health Benefits 2011 Annual Survey," The Kaiser Family Foundation and Health Research & 

Educational Trust, September 2011, http://ehbs.kff.org/pdf!2011/8225.pdf. 

7 "ICD-lO Code Set to Replace ICD-9," American Medical ASSOCiation, www.ama-assn.org/ama/pub/physicianresources/solutions-managing-your-practice!coding-blliing-insurance/hipaahealth-insurance-portabilityaccountability-act/transaction-code-set-standards!icd10-code-set. page. 

• "NAIFA President Robert Miller Comments on HHS Final MI.R Rule," National Association of Insurance and 

Financial Advisors, December 2,2011, www.naifablog.com!2011!12/hhs-final-mlr-rule.html. 

9 "Affordable Care Act Helping Consumers Get Better Value for Their Health Care DoUars," Centers for Medicare 

and Medicaid Services, December 2, 2011, 

www.cms.gov/apps!media!press/release.asp?Counter=4201&intNumperPage=l000&checkDate=&checkKey;&src 

hType=l&numDays=O&srchOpt=O&srchData=&keywordType=AfI&chkNewsType=1%2C+2%2C+3%2C+4%2C+S&int 

Page=&showAU=1&pYea",1&year=2011&desc=false&cboOrder=date. 

10 Sally C. Pipes, "ObamaCare Is Starting To Bleed Insurers Dry," Forbes, February 24, 2011, 

www.forbes.com!2011!02!23!obamacare-insurance-regulation-opinions-contributors-sally-pipes.html. 

11 Jordan Rau, "Ad Audit: 'What If?'," Kaiser Health News, June 19, 2009, 

www.kaiserhealthnews.org/AdAudlt/061909HCAN.aspx. 

12 David Hogberg, "ObamaCare Rute May Bar HSAs, Low-Cost Health Plans," Investor's Business Daily, December 7, 

2011, http://news.investors.com/Article/594079/201112071853!obamacare-rule-hits-hsa-high-deductibleplans.htm. 

12 
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13 Steven B. Larsen, Letter to Louisiana Insurance Commissioner James J. Donelon regarding State of Louisian a's 

Request for Adjustment to Medical Loss Ratio Standard, November 27, 2011, 

http://cciio.cms.gov/programs/marketreforms/mlr/states/louisiana!la_mlr_deUetter.pdf.pdf. 

14 Sara Hansard, "NAIC Approves Resolution Urging MLR Changes to Keep Brokers in Business," Health Care Daily 

Report (BNA), November 29, 2011, www.bna.com/naic-approves-resolution-n12884904568/. 

15 Dennis lockhart, "Business Feedback on Today's Labor Market," federal Reserve Bank of Atlanta, November 11, 

2010, at www.frbatlanta.orgfnews/speeches/lockhart_lllll0.cfm. 

16 Diana furchtgott-Roth, "Obamacare will hurt low-skill workers," The Examiner,.December 16, 2010, 

http://washingtonexaminer.com/opinion/columnists/2010/12/diana-furchtgott-roth-obamacare-will-hurt-Iowskill-workers. 

17 Janet Trautwein, Testimony for the United States House of Representatives Committee on Energy and 

Commerce Subcommittee on Health Hearing "Cutting the Red Tape: Saving lobs from PPACA's Harmful 

Regulations," September 15, 2011, http://republicans.energycommerce.house.gov/Media/file!Hearings/ 

Health/091511!Trautwein.pdf. 

18 Michael J. Chow, "Effects of the PPACA Health Insurance Premium Tax on Small Businesses and Their 

Employees," National Federation of Independent Business, November 9,2011, www.nfib.com/researchfoundation/studies/hit-cost. 

19 John Golden, "Insurer to drop small-business health plans," West/air Online, November 11, 2011, 

http://westfaironline.com/2011/17248-insurer-to-drop-small-business-health-plans/. 

20 letter from American Enterprise Group Inc. to Indiana Insurance Commissioner Steve Robertson, October 20, 

2011, http://cciio.cms.gov/programs/marketreforms/mlr/states/indiana/in_american_enterprise_letter.pdf. 

21 Michael Booth, "Aetna to drop small groups in Colorado," The Denver Post, September 29, 2010, 

www.denverpost.com/business/ci_16199735. 

" "Aetna Drops Individuals in Colorado," United Press International, February 1, 2011, 

www.upi.com/Business_News/2011!02!01/Aetna-drops-individuals-in-Colorado/UPI-S8251296591876/. 

" Adam Belz, "Iowa insurer exits some individual health policies," The Des Maines Register, October 20, 2011. 

2. Trip Jennings, "Health insurance companies drop NM policies for individuals, small groups," The New Mexico 

Independent, October 26, 2010, http://newmexicoindependent.com!65802!health-insurance-companies-drop-nmpolicies-for-individuals-small-groups. 

25 Kirsten Stewart, "Insurer drops out of Utah Health Exchange," The Salt Lake Tribune, October 11, 2011, 

www.sltrib.com!sltrib/news!52705095-78!exchange-humana-health-utah.html.csp. 

"Small Employers - Utah Health Exchange Participating Providers," Utah Health Exchange, 

www.exchange.utah.gov/find-insurance!small-employers?start=4. 

26 Bob Graham, "UniCare bows to Anthem, CareFirst With Planned Exit from Virginia," IFAwebnews.com, June 30, 

2010, http://ifawebnews.com/2010/06/30/unicare-bows-to-anthem-carefirst-with-planned-exit-from-virginia/. 

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" James A. Slabaugh, nHealth letter to nHealth agents, June 2, 2010, 

www.richmondbizsense.com/images/nhealthletter.pdf. 

28 Adam Belz, "Iowa insurer exits some individual health policies," The Des Moines Register, October 20, 2011. 

29 Reed Abelson, "Insurer Cuts Health Plan as New Law Takes Hold," The New York Times, September 30, 2010, 

www.nytimes.com/2010/10/01!health/policy/Olinsure.html. 

30 Jerry Geisel, "Guardian to Exit Group Medical Insurance Market," Business Insurance, January 27, 2011, 

www.businessinsurance.com!articie/20110127/BENEFlTS02/110129919. 

31 Cigna Corporation, "Annual Report Pursuant to Section 13 or 1S(d) of the Securities Exchange Act of 1934 for the 

Fiscal Year Ended December 31,2010," 

www.cigna.com/about_us!investor_relations/sec_filings/4Q2010!cignalOk20101231.html. 

" David W. Emmons, Ph.D., Jose R. Guardado, Ph.D., and Carol K. Kane, Ph.D., Competition in Health Insurance: A 

Comprehensive Study of us. Markets, 2011 Update, American Medical ASSOciation, https:!/catalog.amaassn.orgfCatalog/product/product_detail.jsp ?productld=prod1940016. 

33 "Health Care Reform Law's Impact on Child-Only Health Insurance Policies," Senate Committee on Health, 

Education, Labor and Pensions, August 2, 2011, http://help.senate.gov/imo/media/doc/ChildOnly%20Health%201nsurance%20Report%20Aug%202,%202011.pdf. 

34 Ibid. 

" Amy Monahan and Daniel Schwarcz, "Will Employers Undermine Health Care Reform by Dumping Sick 

Employees?," Virginia Law Review, Vol. 97, p. 125,2011; Minnesota legal Studies Research Paper No. 10-37, 

http://papers.ssrn.com/soI3/papers.cfm?abstracUd=1651308&. 

3. Jason Millman, "HHS official: Employers may gradually move to exchanges," The Hill: Healthwatch, March 29, 

2011, http://thehilLcom!blogs/healthwatch/health-reform-implementation!152429-hhs-official-employers-maygradually-move-to-exchanges. 

37 "One-an-One With Nancy Pelosi," CNBC, October 28, 2011, http://video.cnbc.com!gallery!?video=3000054002. 

38 Grace-Marie Turner, James C. Capretta, Thomas P. Miller, Robert E. Moffit, "Impact on ... You and Your 

Employer," Why ObamaCare Is Wrong far America, New York: Broadside Books, an imprint of HarperCollins, 2011. 

14 
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House Small Business Subcommittee 

Tbe New Medical Loss Ratios 

Testimony of Timotby Stoltzfus Jost 

Thank you Chairman Coffman and Subcommittee Members for the opportunity to 

address you today on the important topic of how medical loss ratios help small 

businesses. My name is Timothy Stoltzfus Jost and I am a law professor at Washington 

and Lee University. I am also a consumer representative to the National Association of 

Insurance Commissioners and a member of the Institute of Medicine. 

The Medical Loss Ratio Rule: Saviog Mooey aDd Jobs for Americao Small 

Busioesses 

Of all ofthe Affordable Care Act health insurance reforms that are currently in effect, the 

most important and beneficial for American small businesses is the minimum MLR 

requirement. Had this provision, which is first in effect this year, been in place last year, 

American small businesses would have received rebates of$447.4 million according to a 

thorough study conducted by the actuaries of the National Association ofInsurance 

Commissioners.l Insurers are already moderating the premium increases they are 

imposing onsmaU businesses to avoid paying rebates--even reducing premiums in some 

cases. The MLR requirement is reducing the cost of health insurance for American small 

businesses as we speak. It thus demands the full support of this committee. 

Section 2718 of the Public Health Services Act, added by section 10 101 (t) ofthe 

Affordable Care Act and implemented by regulations issued by the Department of Health 

and Human Services, requires health insurers in the small group market to spend at least 

80 percent oftbeir premium revenues (after the cost oftaxes and regulatory fees are 

deducted) on payments for clinical services and expenses that improve the quality of care. 

An insurer that fails to meet this target must refund each year to its enrollees-including 

small businesses--an amount equal to the product ofthe diffilrence between the 80 

percent MLR target and its actual MLR and the total amount of premium revenue (after 

taxes and regulatory fees) that it collected that year. 

Nearly sixty percent of small businesses offer their employees health benefits.2 The 

average annual premium for single coverage for small businesses is nearly $5000 a year 

and for family coverage over $14,000.3 Between 200 1 and 2011, premiums for small 

group family coverage grew by 103 percent.4 The cost of health insurance is one ofthe 

largest, and fastest growing, items in the budgets of many American small businesses. 

Fortunately, relief is on the way through the MLR requirement. First, many small 

businesses will receive rebates from insurers that fail to meet the MLR requirement on 

August! of next year, and each August thereafter. The NAte study concluded that nearly 
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16% of small businesses, 23% of all small business employees, would have received 

rebates totaling almost $450 million had the rule been in effect last year.s Carl 

McDonald, a respected Wall Street analyst with Citi, concluded from his own review of 

the data that the top five U.S. insurers alone would have rebated almost $282 million to 

small businesses.6 Actual rebates for 2011 may be greater or less, but they are certain to 

be substantial, and will most likely be used under rules released earlier this month by 

HHS and the Department of Labor to reduce premiums for health insurance going 

forward. 7 

But the purpose of the MLR requirement is not to generate rebates, but rather to reduce 

premiums. It does this in two ways. First, it provides a strong incentive for insurers to 

become more efficient, reducing administrative costs. There are widespread reports that 

insurers are doing this, including a GAO report from last summer.s As insurers reduce 

bureaucracy, they are able to reduce premiums for small businesses. 

More importantly, however, the MLR requirement ensures that as medical costs 

themselves are reduced, premiums are reduced accordingly. It has been widely reported 

that the growth in health care spending has dropped significantly in the recent past.9 This 

may be due in part to reduced utilization because of the recession or because of increased 

cost sharing, but also is attributable to reductions in prices, such as those caused by a 

number of widely used drugs going generic. As medical inflation declines, however, the 

MLR requirement forces insurers to pass the savings directly on to consumers in reduced 

premiums. 10 Airead~ last summer, the GAO found that the MLR was driving down 

premium increases. 1 I have heard a number of reports in recent weeks of businesses that 

are seeing dramatic reductions in premium increases, indeed in some cases reductions in 

premiums themselves, directly because of the MLR requirement. I have also heard state 

insurance commissioners relate that insurers in their states are filing requests to decrease 

premiums or offer premium holidays, again specifically because they would rather reduce 

premiums now than pay rebates iater. 12 

The Minimum Medical Loss Ratio is Not Destabilizing Insurance Markets 

Some argue, however, that the MLR rule is destabilizing insurance markets. Although 

some insurers have had to change their business practices to meet the MLR requirements, 

most are already in compliance. A study by the GAO found that 70 percent of the 610 

insurers in the small group market that are subject to the MLR requirement, covering 

76% of covered lives, would have been in full compliance with the MLR requirement in 

2010 had the rule been in effect. 13 Presumably even more will be in compliance in 20 I I, 

since they have had a full year to adjust their business models. Moreover, some states 

had MLR requirements that approximated the federal MLR requirement in place before 

2011, and in those states insurers should already be in compliance. 

Section 2718 delegated to the NAIC the responsibility for establishing the definitions and 

methodologies to be used by HHS for implementing the MLR rule. The statute 

specifically charged the NAIC and HHS to consider the special circumstances of "sma\ler 

plans, different types of plans, and newer plans." The NAIC conducted an open process 

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that fully involved interested parties, including insurers and brokers and agents, as well as 

consumer representatives and re~ulators. The NAIC recommendations were adopted 

nearly in their entirely by HHS.l 

As written, the rule makes special accommodation for smaller insurers, recognizing that 

their claims experience can vary randomly from year to year. Insurers with fewer than 

1000 covered lives are not even required to pay rebates initially, and insurers with fewer 

than 75,000 covered lives---'the vast majority of insurers in the country-receive an 

upwards adjustment to their MLR for "credibility" of their experience. Insurers that 

predominantly sell high deductible policies also get a special upwards adjustment to 

accommodate their business model. Insurers entering a new market receive special 

accommodations under the rule. All insurers get to claim money they spend on health 

care quality improvement-for example expenditures to improve patient outcomes and 

safety, to reduce errors, to improve wellness and prevention, and to prevent hospital 

readmissions-in the numerator of the MLR formula. Under HHS' recently issued final 

rule, insurers can also claim part of their accreditation costs as well as the cost of 

converting to the ICD-IO claims coding system as quality improvement expenses. 

After all of these adjustments accrue in the insurers' favor, some will still fuU short ofthe 

federal minimum standard and have to pay a rebate to their customers. Even then, 

however, there is little evidence that this is having an effect on competition in insurance 

markets. Section 2718 permits states to petition HHS for adjustments to the MLR target 

in the individual market if the state believes that strict application of the MLR rule will 

destabilize their market. Seventeen states have petitioned for an adjustment, indicating 

that two thirds of the states did not believe the MLR was having a destabilizing effect on 

their markets. HHS has granted adjustments to six states, denied four requests, and seven 

are still pending. 

A paper issued by the Galen Institute last week claims that the MLR requirement is 

leading to a "radical restructuring" of health insurance, and cites examples of a number of 

insurers who are ceasing the offering of certain plans or withdrawing from certain 

markets. IS If one looks further at the sources cited in the paper, however, virtually none 

ofthese withdrawals had anything to do with health reform, much less with the MLR 

requirement. Empire Blue-Cross Blue Shield, for example, attributed its elimination of 

thirteen group plans to fuur years of financial losses, which can hardly be the fault of the 

MLR rule which went into effect only this year. The Principle Financial Group ceded its 

health insurance business to United and left the market because "our medical business 

has been declining in relative size for a number ofyears.,,16 It decided to focus on other 

lines of business. Cigna also stated that it decided to cease offering small group coverage 

in several states for strategic business reasons, but remained in the individual market 

where it will still be subject to the MLR. UniCare explicitly stated that its decision to 

leave Virginia was not based on health reform. National Health had only 60 policies in 

New Mexico and the "thirteen plans" that left Iowa were apparently owned by a single 

insurer, which only covered 700 Iowans and thus would not have had to pay rebates in 

2011. 

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The HHS Indiana MLR adjustment request determination, mentioned prominently in the 

Galen paper, illustrates the problem with attributing changes in dynamic markets to 

health reform. The Galen paper claims that "nearly 10 percent of the state's health 

insurance carriers have withdrawn from the market because they are unable to comply 

with the federal medical loss ratio requirement." In fuct Indiana claimed initial'1 that 

five insurers had withdrawn from its individual market, later adding two more.! 

However, one ofthe initial five, it turned out, had never actually sold policies in Indiana. 

Two more had MLRs well in excess ofthe 80 percent requirement and did not claim that 

the MLR requirement had anything to do with them leaving the market. Another insurer 

stated that its withdrawal had nothing to do with health reform, yet another withdrew 

because it was under a rehabilitation order, while a third stated that it withdrew for 

unrelated business reasons. The remaining two insurers both had fewer than 1000 

enrollees in indiana, and would not have had to pay rebates in 2011. None of the insurers 

claimed that they were leaving Indiana because of the MLR requirements. 

Nationally, hundreds of insurers sell thousands of health insurance plans. The market for 

health insurance is very dynamic, with insurers coming and going from markets all the 

time for their own business reasons. To attribute every withdrawal from insurance 

markets to MLR requirements is to misunderstand profoundly insurance markets. Most 

insurers are in tact trying to comply with the ACA MLR requirement and stay in the 

game for 2014, when the exchanges and premium tax credits will provide a huge new 

market for health insurance. 

Congress Should Not Increase Premiums for Small Businesses to Protect the Income 

of Brokers and Agents 

The most vociferous complaints about the MLR requirement have come from agents and 

brokers, who believe that the MLR requirement is reducing their commissions. There is 

some evidence that one way in which insurers are reducing their administrative costs is 

by cutting their marketing costs, including agent and broker commissions. It is not 

accurate, though, to say that the MLR is "forcing" the reduction of this one administrative 

expense. Insurers have choices about how to reduce their administrative costs. Agent 

and broker commissions compete with other administrative costs and with profits. In a 

year in which the largest insurers made record profits, it is clear insurers made a choice. 

Cuts in agent and broker commissions are far from universal. This issue was studied 

closely by the NAIC task force. It concluded "In 2011, a significant number of 

companies have reduced commission levels, particularly in the individual market. 

However, a significant number of companies have not reduced commissions in 20 II." !8 

The NAIC's conclusion was based in large part on state-by-state data submitted by the 

National Association of Health Underwriters (NAHU), which showed a complex pattern 

in which some companies in some states were cutting commissions, others were not, and 

many were changing their method of compensation, moving from percentage 

commissions to per-member per-month compensation. The GAO in its)uly report 

concluded that most ofthe insurers it interviewed were cutting commissions, but it 

interviewed only eight insurers, hardly a representative sample. The Insurance 

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Infonnation Institute recently reported that the number of employed insurance agents and 

brokers actually increased between 2010 and 2011 by 5500. 1 

The effect of the MLR on agent and broker commissions must be understood in context. 

Historically, agents and brokers have been paid based on percentage of premiums. As 

health insurance premiums have grown dramatically in recent years, so have 

commissions. Yet the level of effort required of agents and brokers has remained largely 

the same, or perhaps with increased use of IT and automated eligibility and enrollment 

systems has even decreased. Commissions have also varied dramatically from state to 

state. A report from the Kaiser Family Foundation issued last week found that average 

commissions in the sman group market varied from less than I % of premiums in 

Alabama and North Dakota to about 7% of premiums in Utah and Califomia.2o From the 

data NAHU submitted to the NAIC, it appears that when commissions have been cut, 

they have often been cut from very high levels - as high as 15 to 20 percent -- to levels 

more in accordance with the market generally. 

Congress does not exist, of course, to protect the income of any special interest group. If 

there were solid data that the MLR was causing consumers to lose access to the valuable 

services of agents and brokers, that might be a subject of concern. But the NAIC found 

no evidence that this was happening. Indeed, the NAIC study found that states with high 

state MLR requirements had not experienced loss of access to agent and broker 

services.2

! The NAIC plenary, as has been widely reported, did recently decide to 

recommend in a closely divided and politically contentious vote to recommend that 

Congress amend the MLR law to preserve consumer access to agents and brokers. It 

produced no evidence, however, that consumers are having difficulty finding agents and 

brokers. Indeed, none of the state MLR adjustment requests have yet produced evidence 

of reduction in agent and broker services to consumers, and some states have not even 

asserted that this is an issue. 

Any cuts in agent and broker commissions are occurring because of the business 

decisions of insurance companies. Insurers have been looking for a way to cut their 

marketing costs and have moved away from commissions, switching to per-member permonth. Many insurers are also marketing directly over the internet. The MLR gave the 

insurers an opportunity to all act together at once to cut their marketing expenses without 

risking antitrust scrutiny-and to blame their decisions on the Affordable Care Act, 

which many insurers dislike for other reasons. If Congress were to withdraw agents and 

brokers commissions from the MLR denominator, as H.R. 1205, a bill offered by 

Congressman Rogers, would pennit, it is likely that insurers would increase their 

administrative costs and profits-and small business premiums--but it is unlikely that 

they would restore commission cuts. 

Agents and brokers do provide valuable services for small businesses. They deserve fair 

compensation for these services. The NATC found that the average insurer paid about 4.5 

percent of premiums in commission in the small group market,22 This compares with the 

approximately 13.6 percent of premiums that insurers spend on phannaceutical costs, and 

a probably even lower percentage on primary care.23 I am not sure that Congress should 

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be in the business of deciding how much agents and broker should be paid, but I am 

doubtful an argument can be made for restoring 20 percent commissions at a time when 

many small businesses are struggling to meet premium payments to cover basic medical 

care. 

Repealing or Amending Medical Loss Ratio Requirements Will Increase the Deficit 

Finally, Congress must consider one other issue-the effect of any legislative changes in 

the MLR requirement on the federal budget deficit. Premiums paid for small business 

health insurance coverage are taxable neither to employers nor to employees. Prem iums 

are not only free from the income tax, but also from payroll taxes (as well as from state 

income tax in many states). That means for an employee in the 15 percent tax bracket, 

30.3 percent of the cost of health insurance coverage is written off as lost tax revenue. 

For an employee in the 28 percent bracket, 43.3 percent of the premium is lost in tax 

revenue. If, as is widely reported, the MLR is resulting in lower premium increases, or 

even in premium decreases, small businesses will retain more in profits and employees in 

cash income. This also means, of course, that more taxes are going toward federal deficit 

reduction. 

If you change the MLR rule to allow insurers to add commissions of 5, or 10, or even 20 

percent on top ofthe 20 percent insurers can already claim for administrative expenses to 

the cost of an insurance plan sold to a small business, you are increasing the cost of doing 

business for small businesses and killing job creation. But you are also increasing the 

size ofthe federal deficit, and not insignificantly. The CBO has yet to price legislation to 

amend the MLR, but I will be surprised if the cost is not in the billions, perhaps tens of 

billions, of dollars over the ten year budget window. If you are serious about the budget 

deficit, reject any legislative changes to the MLR. 

Conclusion 

The MLR is a powerful tool to control health premium costs. It is bringing down health 

insurance costs for small businesses, promoting their prosperity and facilitating job 

creation. It is encouraging insurers to be more efficient and to cut unnecessary 

administrative costs. Any attempt to eliminate the MLR or to change it to allow insurer 

spending to continue unchecked can only raise costs for small businesses and for all 

insured Americans. I encourage you to support small business by keeping a strong MLR. 

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References 

I NAIC, Report ofthe Health Actuarial Task Force Working Group (2011), 

http://www.naic.grgldocumentslcommittees b eXp()Sure 110607 phia charge report.pdf at p. 4. 

2 Kaiser Family Foundation and Health Research and Educational Trust, Emplgyer Health Benefits 2011 

(2011), at p. 36 

3 Id. at 20. 

4 1d. at 20. 

5 NA1C, 

6 Carl McIDgn,ald, 1), 

8 GAO, Private Health Insurance: Eady Experiences Implementing New Medical Loss Ratio Requirements 

(2011), http://www.gao.gov/new.itemsldll711.pdf at p. 18. 

9 Anne Martin, el aI., Recession Contributes to Slowest Annual Rate of Increase in Health Spending in Five 

Decades, Health Affairs, 30, no. 1 (2011):1l-22 

10 Conn. Insurer Cuts Preimums as Industry Prepares for New Rules (20 II), 

http://www.kaiserhealthnews.orglFeatures/lnsuring-Y our-Health/Michelle-Andrews-on-premium-cuts-andrebates.aspx 

II GAO, supra note 8 at p. 18. 

12See, e.g. Financial Relieffor Insurers from Health Care Law Denied, Delaware News Journal, Sept. 13, 

2011. 

13 GAO: Indicators Show that insurers Would Have Met or Exceeded Medical Loss Ratio Standards 

(2011), _!J!U~~~,gQYiM.Y~tlJ!Ii;!l122!4!11!: 14 45 

6. 

15 Grace-Marie Turner, A Radical Restructuring of Heath Insurance 

(2011 ).http://www.galen.org/fileuploads/RadiealRestructuring.pdf. The sources for the statements that 

follow are found in the Galen paper. 

\6 http://phx.corporate-ir .netlphoenix.zhtml?c= I 25598&p=irol-newsArticle&lD= 14 77633&highligbt= 

" Indiana's Request for Adjustment to Medical Loss Ratio Standard (2011), 

http://cciio.crns.gov!programslmarkelreformslmlrlstateslindianalin_ mlr _ adL determination_letter .pdf 

18 NAIC, supra nole I at p. 3. 

19 Insurance Information Institute, Insurance Industry Employment Trends, 1990 - 2011 (2011), p. 3. 

20 Kaiser Foundation, Insurance Brokers and the Medical Loss Ratio Rule 

supra note 

22 Id. at 4. 

23 National Health Expenditures, Table 12, 

http://www,cms.govlNationaIHealthExpendDataldownloadsltables.pdf 

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&1heCENfER 

for INSURANCE 

PoLICY 

IIfIdREsEARCH 

MEMORANDUM 

June 9, 2011 

TO: Kevin McCarty, Chair 

Professional Health Insurance Advisors (EX) Task Force 

FROM: Sandy Praeger, Chair 

Health Insurance and Managed Care (8) Committee 

RE: Committee report on options for amending the Medical Loss Ratio formula to address 

concerns about access to agent and broker services 

************************************************************************************ 

On March 27, 2011, the Professional Health Insurance Advisory (EX) Task Force charged the Health 

Insurance and Managed Care (8) Committee with the task of collecting, analyzing and reporting to the 

Task Force available data on agent and broker commissions and identifYing "options to modifY MLR 

definitions, methodology and/or numerical standards that may be necessary to protect insurance 

consumers, and to preserve the important role of producers in the health insurance transaction and in the 

resolution of disputed health insurance claims." The final report adopted by the Committee on June 7. 

2011, is attached. 

To complete its charge, the (8) Committee referred the task to the Health Care Reform Actuarial (8) 

Working Group which collected data from the National Association of Health Underwriters (NAHU), 

Connecture, three large health insurance companies, and several states. However, each of these data sets 

proved to be incomplete and have significant limitations. 

The Working Group, therefore, relied heavily on the data from the NAIC Supplemental Health Care 

Exhibit (SHCE) for 2010. Using the SHCE data, the Working Group was able to analyze the potential 

impact of various MLR amendment proposals on potential rebates. It must be noted that the MLR and 

rebate numbers listed in the report are for analytical use only. These are not the final numbers for 20 10, 

even if the MLR and rebate program were effective in 20 10. The final MLR and rebates would be 

adjusted for credibility based on average deductible and membership instead of membership only, 3-

month runoff, and deferrals. More importantly, future years may differ significantly from 2010. As 

detailed in the report, carriers will likely make changes in their operations as they implement and react 

to the various provisions of the Affordable Care Act. Therefore the numbers in the report should only 

be used to demonstrate the relative impact of the various options, not the actual level of rebates 

expected. 

As noted during Working Group and Committee deliberations, the report does not address the issue of 

whether an adjustment to the MLR formula is necessary or whether consumers will be negatively 

impacted by agent and broker commission cuts. The charge given the Committee specifically states that 

they are to provide the options "without determining whether any change is necessary." In addition, the 
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Working Group determined that there was not enough verifiable data readily available and there was not 

enough time to collect such data. The Working Group and Committee did receive data from California 

on commission trends over the past ten years that may be of assistance to the Task Force as you look at 

the bigger issue of whether a change in the MLR formula is necessary. That data is included as a 

supplement to the report. The Committee is prepared to collect similar data from other states if the Task 

Force believes it would be helpful to your deliberations, but it will require more time. 

We hope you find the options listed in the attached report, and the analysis of their impact on rebates, 

useful as the Task Force considers this very important issue. We would be glad to answer any questions 

regarding the report or provide any additional information the Task Force may need. 

© 20 II National Association oflnsurance Commissioners 2 
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Report of the Health Care Reform Actuarial (8) Working Group to the Health Insurance and Managed Care (8) 

Committee 00 Referral from the Professional Health Insurance Advisors (EX) Task Force Regarding Producer 

Compensation in the PPACA Medical Loss Ratio Calculation 

May26,2011 

Introduction 

The Professional Health Insurance Advisors (EX) Task Force made the following referral on March 27, 201 I to the Health 

Insurance and Managed Care (B) Committee at the NArC's 2011 Spring National Meeting in Austin, TX: 

Referral Language: Health Insurance and Managed Care (B) Committee is /0 complete Ihe/ollowing: 

Col/ect, analyze and report on relevant data regarding the level of commissions and/or other payments to 

producers in the individual, small and large group markets, including, but not limited to evaluating 2010 gross 

commission or fee payments as a portion (lfthe denominator in the medical loss ratio (MLR). 

Without determining whether af!)' change is necessary, idenlifY oplions 10 modifY MLR definitions, methodology 

and/or numerical standards that mtry be necessary to protect health insurance consumers, and to preserve the 

important role of producers in the health insurance transaction and in the resolution of disputed health 

insurance claims. 

Other related matters as necessary. 

This was then referred to the Health Care Reform Actuarial (B) Working Group (HeRA WG) of the Health Actuarial (B) 

Task Force on April 4, 20 II for completion, 

Executive Summary 

The Working Group received various suggestions as to possible ways to modify MLR definitions, methodology andlor 

num.rical standards to support producer compensation. Some ofth .. e variations could be combined as appropriate, 

All of these options are in addition to the default option of making no cbanges to the current MLR formula. Here is a 

summary of the variations identified: 

1. Types of compensation in addition to commissions, if any, eligible for special treatment; 

2. Types of producers for which compensation is eligible for special treatment; 

3. Limits, if any, on the amount of compensation given special treatment; 

4. Increase the numerical MLR standards (85% and 80%) to renect the exclusion of commissions; 

5. Substitute producer compensation dednction for the federal tax deduction: 

6. Limit the number of years that special treatment of producer compensation will be applicahle to the 

period prior to 2014 when guaranteed issue will apply and exchanges will be in place. 

The Working Group collected data from the National Association of Health Underwriters (NAHU), Conneclure, three 

large health insurance companies, and several states, regarding commission levels. Each of tbese data sets are 

incomplete and have significant limitations and none orthe private data was fully exposed for public review and 

comment, reducing our ability to draw meaningful conclusions from them. In reviewing this data, the Working Group 

has the following obseryations: 

I. Tbe numerical data from the three companies, NAHU, and Connecture do not provide a clear trend in 

commission reductions prior to 20t t. 2. However, some of the states with higher MLR requirements do report redut':tions in commissions over several 

years in their states. 

3. In 2011, a significant number of companies have reduced commission levels, particularly in the individual 

market. However, a significant number of companies have not reduced commissions in 2011. 

4, The states with higher MLR requirements have not observed any problems witb consumer access to 

insurance or to producers. 

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The Working Group also evaluated options based upon data derived from the Supplemental Health Care Exhibit 

(SHCE) for 2010. Highlights from the SHCE 2010 data include the summary tables below showing rebates that would 

have been payable had the rebate requirement been in effect for calendar year 2010 (~PMPM" refers to "per member 

per month"). 

Table A -MLR and Rebate Levels 

%of %of Member 

MLR and Rebate Levels Companies Members Median Rebate Rebate Months Paying Receiving MLR $Millions PMPM (Millions) Rebates' Rebates 

Individual Market 14.2% 52.9% 73.6% $978.3 

~ 121 

Small Group Market 15.7% 22.8% 82.3% $447.4 

Large Group Market 15.0% 14.7% 89.4% $526.7 465 I 

'" 3,196 company/state combinations in data, each company counted for each state in which it writes. 

The following table captures the relallv.levels of compensation included in tbe SHCE data. 

Table B-Compensation Levels 

Compensation Producer Commissions Other Sales Expenses Member 

Levels (SHCE 10.2) PMPM (SHCE 10.1) PMPM Months 

% of Earned Premium % of Eamed Premium (Millions) 

Individual 5.86% $12.28 1.04% $2.18 121 

Small Group 4.52% $15.08 0.65% $2.17 210 

Large Group 1.84% $6.12 0.52% $1.73 465 

Using the SHCE 2010 data. we were abl. to estimate the effect of 12 modirocations had tbey been in etTect in 2010. 

These modifications renect changing ditTerent components of the MLR calcnlation, including various caps on those 

modifications. The basic modification is the first one, excluding agents and brokers fees and commissions. The other 

modifications are variations from this basic change. Below is a table showing the impact of this basic modification., 

followed by results of capping the commission adjustment at various levels. The tables showing results for Ibe 

complete set of modifications considered are contained in the body of the report. 

It should be noted that our analysis of rebates tbat would have been paid for 2010 renects federal income taxes (FIT) 

as reported in the SHCE. We had extensive discussions as to whether FIT would have been lower, and rebates 

therefore higher, if rebates were actually required for 2010. The thinking was Ib.t • liability would be held for 

anticipated rebates, which would reduce profits and therefore reduce FIT. However, an alternate view was that the 

rebate rules require FIT to be stated ignoring the impact of rebates. Language in the NAIC Regulation for Uniform 

Definitions and Standardized Methodologies for Calculation of the Medical Loss Ratio for Plan Years 2011, 2012 and 

2013 contains language that can be interpreted to support that positjon~ The federal regulation, which is tbe one that 

applies, seems unclear on this point. We believe this is an important issue that must be resolved before rebates are 

calculated next year and we stand ready to investigate it further througb discussions with federal regulators and 

interested parties if requested. However, it is only a secondary issue for purposes of this report and we concluded that 

we did not need to resolve it in order to finalize our report on producer compensation. 

The results in Table C are intended to illustrate the relative impact of the lirst modification. not the actual level of 

rebates expected. Results for 2011 and later years are likely to differ from 2010 for several reasons. Carriers will 

likely make cbanges in their operations as they implement and react to the various provisions of the AtTordable Care 

Act. Cbanges in commission scales are just one example of this. In addition to operational changes, they are likely to 

fine-tune accounting procedures with respeet to the SHCE reporting. For example, many carriers may not have had 

time to consider all of tbe administrative expenses that might qualify as quality improvement expenses for 2010, hut 

may pay more attention to this for 201 t, when this item will affect actual rebate calculations. 

Modification 1 subtracts agents and brokers fees and commissions (SHCE Part I, Line 10.2) from the adjusted earned 

premium used in the rebate formula. 

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Table C -Modification 1 

%of %of 

Companies Members Median Rebate Rebate 

Paying Receiving MLR $Millions PMPM 

Rebates Rebates 

Individual Market 11.1% 31.3% 78.8% $4013 $3.32 

Differences from Table A -3.1% -21.6% 5.2% -$577.0 -$4.77 

Small Group Market 8.4% 7.6% 87.0% $146.2 $0.70 

Differences from Table A -7.3% -15.2% 4.7% -$301.2 -$1.43 

Large Group Market 8.9% 5.4% 91.6% $215.9 $0.46 

Differences from Table A -6.1% -9.3% 2.2% -$310.8 -$0.67 

It has been suggested that rather than excluding all producer compensation from the formula, the exclusion be 

capped. We evaluated various caps, botb on a percentage of premium basis and a PMPM basis. Generally a cap of 

about 3-4% would restore half the rebate reduction for individual, while a cap of under 2% would have a similar 

impact for the small and large group markets. Similarly, a cap orabout $6 PMPM would restore balfthe rebate 

reduction for individual and a cap under $6 PMPM would do so for both group markets. 

As evidenced in Table C, adjusting tbe MLR calculations for producer compensation, results in an increase in the 

MLR by several percentage points. The Working Group calculated the "break-even" MLR level that would preserve 

the level of rebates prior to the commission adjustments. For the three markets (and no commission cap), this breakeven level is about 860/0, with some variation by market. 

The Working Group did not consider modifications to the MLR calculations based on producer type. 

Finally, it has been suggested that the producer compensation deduction should replace the federal tax deduction. As 

discussed above, it is unclear whether FIT would have been lower, and rebates therefore higber, if rebates were 

actually required for 2010. If the answer is no, then the impact of tbe suggestion to replace the federal tax deduction 

with a deduction for producer compensati .. o, had it been in effect in ZOIO, can be seen by comparing Tables 0 and II 

in the report. This comparison shows a reduction in rebates of29% in the individual market, 7% in the sman group 

market, and 5% in the large group market. If, on the other hand, FIT would have been lower if rebates were 

required, we believe rebates in Table 0 would be in the range of 30% higher. This would increase then the reduction 

in rebates that would result from replacing the federal tax deduction with. deduction for producer compensation to 

roughly half for the individual markct and roughly a quarter in the group markets, thus having a significant impact 

on the rebate levels if the numerical standards remain the same. 

Data Collection 

Data to perform analyses to complete the charge were of two general types: NAIC Supplemental Health Care Exhibit (SHCE) 

Data and producer reimbursement data from outside sources. 

NAIC Supplemental Health Care Exhibit Data 

Our primary source of data was the Supplemental Health Care Exhibit ISHCE), a new exhibit added to the annual statement 

reporting requirements to provide data needed for the MI.R calculation under the Affordable Care Act (ACA). Data for the 

year 2010 from the SHCE (a list of elements can be found in Appendix A) as of 4114111 was extracted from the NAtC 

database. The data is unaudited and was used without modification. The collected SHCE data was used to calculate the 

approximate MLR and rebates in the manner detailed in the NAIC's Regulationfor Uniform Definitions and Standardized 

Methodologies for Calculation of the Medical Loss Ratiofor Plan Years 20 J I. 2012 and 2013 per Section 2718 (b) of the 

Public Health Service Act (#190). The data was also used to calculate MLRs and rebates using modifications to the 

standardized calculation to reflect some of the options identified regarding commissions. 

Producer Compensation Data from Outside Sources 

Because the SHCE is not available for years other than 2010. we needed to rely on outside sourceS for data regarding 

commission trends in prior years and changes occurring in 20 II. 

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National Association of Health Underwriters (NAHU) 

NAHU provided compensation schedules by company by state, generally from 2009 through 2011, with a few schedules 

provided back to 2008. The data was blinded as the information is considered proprietary and is used for competitive 

differentiation. This blinding presented analytical challenges and, consequently, conclusions reached from the analysis of the 

data are debatable. It appears that while some commission schedules went down from 2009 to 2010, many more have 

dropped from 20 IOta 201 I. Many carriers maintained stable commission schedules between 2009 and 2011, however, and in 

a few cases schedules went up between 2009 and 2010 or between 20 I 0 and 20 II. Complicating the analysis, some 

schedules were restructured year over year with no apparent indication ofthe relative level of the subsequent schedule. In 

particular, some carriers have moved from percentage commissions to PMPM or PEPM (per employee per month) 

compensation or introduced tiered commission structures. [t is not apparent if these restrocturings were for new product 

packaging, strategic positioning, reflection of relative inconsistencies in prior schedules. or for some other reason. There was 

no indication that reductions in scheduled compensation were intende-d to offset the growth in premium to maintain a 

consistent income level for producers, although that may have been a motivating factor for some companies, since premium 

rates have increased dramatically over the past decade. 

On the basis of our analysis we conclude that companies did not systematically decrease the percentage of premium provided 

as provider compensation between 2009 and 2010. We further conclude there has been a widespread decrease in first year 

percentage of premium compensation in the individual market in 2011, although trends are less evident with respect to 

renewal commissions or the group markets. We were unable to analyze changes in abSOlute dollar amounts of producer 

compensation, which are the results of applying changing producer compensation schedules to changing premium amounts. 

Connecture is a software company that provides technology to Health Insurance Carriers, Brokers, and Exchanges, both 

public & private. Connecture's source for the submirted data was a third-party market research company; not Connecture's 

clientele. Given the sensitive nature of the data it supplied, Connecture insisted that the data not be made public. The 

Connecture data is based on broker commission schedules for large carriers from 2005 through 20 II. The data appears to 

show for some larger carriers in the individual market that first year commission percentages have dropped in some states by 

as much as 30% - 50% in 2011. In other states commissions stayed level or did not drop as dramatically. No pattern can be 

seen in the individual market renewal commission percentages nor the group market commission percentages. No pattern can 

be seen in any market for years prior to 2011. The data generally provides validation to conclusions reached with the NAHU 

data. 

Major carriers 

The Working Group asked the three largest groups of health insurers, Aetna, United Healthcare, and WellPoint, to submit 

data showing company experience by individual, small group, and large group lines of business by state for the years 2006-

20 to. At the suggestion of the companies, a template was prepared to clarifY the data request and promote unifurmity in the 

data being submitted to the Working Group. The companies were not able to provide data for all states within the sbort time 

available, but provided data for three or fuur representative states. They also were not able to provide information on current 

commission scales. The Working Group has identified this as a lower priority. The data was submitted to the Working Group 

through AHIP (America's Health Insurance Plans), a national association of health insurers, with the names ofthe companies 

and states replaced by "I, 2, 3" and "A, B, C". The companies requested confidentiality with respect to the data submitted, 

even though it was blinded, due to a concern that it would be possible to identifY the company and state based on the dat •. 

Therefore, it was not available for review by interested parties. 

The companies provided data for total direct premiums earned, agents and brokers fees and commissions, and member 

months. They were unable to break out first-year versus renewal experience in the time allowed. Using this data, the Working 

Group calculated commission rates both on a percentage basis and a member month basis over the years reported. In 

reviewing these summary results, there were no detectable commission trends in any of the lines of business leading up to 

and including 2010. Please note that this is an aggregate result, which is affected by factors such as the states reported, 

product mix over time, and the relative proportions of new business versus renewal business in each reported year. 

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The Working Group contacted 11 states that have relatively high required minimum loss ratios and asked them to provide 

comments about the impact ofthose loss ratios in their states. Ten states responded and Appendix B contains a summary of 

the responses. The following are general comments about the responses: 

I. State calculations of MLR differ from the fedeml MLR calculation in important ways - especially with respect to 

the deductions from premium allowed in the federal MLR. 

2. Consumers continue to have access to insurance and producers without noticeable problems. 

3. There have been some reductions in both individual and small group producer compensation, with more individual 

health insurance being sold directly to consumers. 

4. For several states, the MLR changes have been too recent to allow for changes to be observed. 

There were 4 states in addition to the II surveyed states that provided data related to producer compensation. Maryland 

provided some data on compensation arrangements for specific companies. The data went back as fur as 2005, but in most 

cases only the most recent schedules are provided. There are three companies where previous and current compensation 

schedules can be compared. 

For the first company, only the small group schedules can be compared. This shows a switch from a percentage of premium 

method for commissions to a per employee per month (PEPM) schedule. A second company has reduced per capita per 

month commission (PCPM) levels by about 15% for both small group and individual business, although it has apparently 

introduced new incentives, so the overall effect is not known. Finally, a third company introduced a new small group 

schedule which appears to increase agent compensation, since the percentages are unchanged, but new incentives are added. 

While this information is limited, it is basically consistent with other information discussed above in that it suggests 

movement from commission arrangements based on percentages of commissions to a flat dollar amount per employee, 

particularly for group business. 

Maryland provided data from 2002 through 20 I 0 for the ratio of total preducer compensation to earned premium for the 

individual, small group, and large group. The data for all three markets shows sizeable increases in that percentage over the 

time period. Without more specific data it is only possible to hypothesize about the cause ofthe increases. This data is only 

for one state so it is not possible to make nationwide inferences. 

California provided data from 2000 through 2010 for the ratio of total producer compensation to earned premium for the 

individual, small group, and large group. Forthe individual market, the data were comparable for 2005 through 20 I 0, and for 

the group markets (large and small) the data were comparable for the period 2003 through 2010. The data for the individual 

and small group markets shows very modest decreases in commission percentages (substantially less than the increases ill 

premium rates over the observation period) and very modest increases in commission percentages in the large group market. 

Data received from the other states is useful for background purposes but does not add to the above analysis. 

The following options to modity MLR definitions, methodology andlor numerical standards are ones communicated to us by 

various parties during our discussions. All of these are variations on the initial proposal to exclude broker compensation from 

the MLR calculation. Some of these variations could be combined as appropriate. All of these options are in addition to the 

default option of making no changes to the current MLR formula. 

1. Types of compensation in addition to commissions, if any, eligible for special treatment: 

a. Bonuses 

b. Incentives 

c. Direct sales salaries and benefits 

d. Payments by one carrier to another to market the first carrier's health plans 

e. Fees paid to exchanges (beginning in plan year 2014) 

2. Types of producers for which compensation is eligible for special treatment: 

f. Independent 

g. Captive 

h. Employees oflhe carrier 

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3. Limits, ifany, on the amount of compensation given special treatment: 

i. Cap on percentage of premium excluded 

j. Cap on dollar amount per individual policy or group certificate or per member month 

4. Increase the numerical MLR standards (85% and 80%) to reflect the exclusion of commissions 

5. Currently, the MLR formula allows all federal taxes to be excluded from the calculation. A possible modification to 

the formula would allow producer compensation to be excluded from the calculation, but would allow the deduction 

of only those federal taxes that result from the enactment of the ACA. (These taxes will not be levied until 2014.) 

6. Limit the number of years that special treatment of producer compensation will be applicable to the period prior to 

2014 when guaranteed issue will apply and exchanges will be in place. A variation on this would be grading the 

allowable excluded amounts from a maximum in the first plan year to no allowable excludable amounts in 2014. 

As discussed below, we were able to estimate the effect of many ofthese options had they been in effect in 2010, from the 

SHCE. This analysis assumes options l.a, l.b, and I.d, are all treated the same as commissions and that commissions include 

those paid to captive as well as independent producers. The data in the SHCE did not allow quantification of other options. 

As another option. exclusion of producer compensation up to a maximum percentage of earned premium from the MLR 

calculation could be at the option of each state. The default would be that no producer compensation would be allowed fur 

exclusion. This option was not quantifiable, as there is no way to determine which states would choose this option. However, 

SHCE data is segregated by state, so the effects of a capped exclusion for a given state could be quantified. SHCE data by 

state is summarized in Appendix E. 

MLR Rebate Estimate Modeling 

2010 SHCE data was used to calculate an estimate ofMLRs and rebates that would have been payable had the rebate 

requirement been in effect for calendar year 2010. The exact calculation is given in Appendix D. There are differences 

between some of the data elements that would be used for an actual MLR rebate calculation and the data that is found in the 

SHCE, which lead to differences in the calculation used in this analysis and the actual calculation under Section 2718 of 

PPACA: 

The SHCE defines incurred claims as any claims paid in the reporting year, irrespective of incurral year, plus the 

year-over-year change in year-end reserve estimates. The actual MLR calculation defines incurred claims as claims 

incurred in the reporting year and paid as of 3/31 of the following year, plus the estimate of remaining amounts 

unpaid as 00/31 of the following year. 

The actual MLR calculation incorporates a credibility adjustment based on the number of life years and the average 

deductible for a given block of insurance plans. The SHCE does not give deductible information, so it was assumed 

the deductible adjustment factor in the credibility adjustment was 1.0, implying all deductibles in the SHCE data 

were less than $2,500. The effect of this assumption is to overstate the rebates 

The impact on federal income taxes that result from rebates is not considered in the calculation for this analysis. 

Only taxes as reported in the SHCE enter the calculation. Because no rebates are actually payable fur 2010, reported 

taxes do not reflect any adjustment for rebates. It is unclear whether the reported taxes and the rebates calculated 

would be affected ifrebates were payable. (See Appendix C for discussion of this issue). 

The variances between the calculated and actual MLRs due to these differences cannot be accurately determined. 

The results ofthe rebate estimate modeling are as follows (PMPM ~ per-member-per-month). Please see Appendix D for the 

detailed calculation: 

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Table 0: no change to current fonnula 

%of %of Member Companies Members Median Rebate Rebate Months Paying Receiving MLR $MilIions PMPM (Millions) Rebates Rebates 

Individual Market, Nationwide 14.2% 52,9"10 73.6% $978.3 $8.09 121 

Small Group Market, 15.7% 22.8% 82.3% $447.4 I $2.13 210 Nationwide 

Large Group Market, 15.0% 14,7% 89.4% $526.7 I $1.13 465 Nationwide 

*3,196 company/state combinations in data. each company counted for each state in which it writes. 

The following table shows the relative level of compensation included in the SHCE. 

Compensation Levels 

Compensation Producer Commissions Other Sales Expenses Member 

Levels (SHCE 10.2) PMPM (SHCE 10.1) PMPM Months 

% of Earned Premium % of Earned Premium (Millions) 

Individual 5.86% $12.28 1.04% $2.18 121 

Small Group 4.52% $15.08 0.65% $2.17 210 

Large Group 1.84% $6.12 0.52% $1.73 465 

The results in the following tables are intended to illustrate the relative impact orthe various options, not the actual level of 

rebates expected. Results for 20 II and later years are likely to differ from 20 lO tor several reasons. Carriers will likely 

make changes in their operations as they implement and react to the various provisions of the Affordable Care Act. Changes 

in commission scales are just one example of this. In addition to operational changes, they are likely to fine-tune accounting 

procedures with respect to tbe SHCE. For example, many carriers may not have had time to consider all of the administrative 

expenses that might qualiJY as quality improvement expenses for 2010, but may pay more attention to this for 2011, when 

this item will affect rebate calculations. 

Quantifiable Options 

As previously mentioned, we were able to estimate the effects of many of the options identified above, assuming they had 

been applicable in 2010, using 2010 SHCE data. 

These modifications exclude either all or some of payments made to producers from the adjusted earned premium, which is 

both the denominator of the MLR fonnuia, and the amount to which the rebate percentage is applied. 

The following table shows which of the items listed in the "Options" section above relate to the various modifications 

discussed below: 

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Lc. Exclude 3.a. Cap exclusion 3.b. Cap exclusion 4. Increase the 5. Exclude only 

Direct as percent of per member month numericalMLR federal taxes that 

Sales Salaries and premium standards result from the 

Benefits in addition ACA(none in 

Modification to Commissions 2010) 

I 

2 X 

3 ± X 

! 4 X X 

5 X 

6 X X 

7 X X 

8 X X X 

9 X X 

10 X X X 

11 X 

12 X X 

Modification 1 

This modification subtracts agents and brokers fees and commissions (SHCE Part I, Line 10.2) from the adjusted earned 

premium used in the rebate formula (please see Appendix D for the detailed calculation). Line 10.2 should include bonuses 

and incentives as well as commissions. However, because this is the first year the SHCE has been completed and the data 

has not been audited, we cannot verifY this with certainty. The results of the rebate estimate modeling are as follows: 

--

Table I 

%of %of Member Companies Members Median Rebate Rebate Months Paying Receiving MLR $Millions PMPM (Millions) Rebates Rebates 

!Individual Market, Nationwide IL1% 31.3% 78.8% $401.3 $3.32 121 l§0UP Market, 8.4% 7.6% 87.0% $146.2 $0.70 210 Nationwide 

roup Market, 8.9% 5.4% 91.6% $215.9 $0.46 465 ide 

Modification 2 

This modification subtracts agents and brokers fees and commissions (SHCE Part I, Line 10.2), and direct sales salaries and 

benefits (SHCE Part 1, Line 10.1) from the adjusted earned premium used in the rebate formula (please see Appendix D for 

the exact calculation). The results of the rebate estimate modeling are as follows: 

--

Table 2 

%of %of Member Companies Members Median Rebate Rebate Months Paying Receiving MLR $Millions PMPM (Millions) Rehates Rebates 

Individual Market, Nationwide 10.9% 30.9% 79.5% $358.6 $2.96 121 

Small Group Market, 7.9% 7.5% 87.7% $126.4 $0.60 210 Nationwide 

Large Group Market, 7.8% 4.1% 92.1% $195.9 $0.42 465 Nationwide 

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Modification 3 

This modification subtracts agents and brokers fees and commissions (SHCE Part I, Line 10.2), capped at a maximum 

percentage of earned premium, from the adjusted earned premium used in the rebate formula (please see Appendix D for the 

exact calculation). The results of the rebate estimate modeling are as shown in the three tables below. The results under 

current law and the results with no cap are shown for comparison. GeneraHy, a cap of between 30/0 and 4% would restore 

half the rebate reduction for the individual market, while a cap of under 2% would do so for the group markets (i.e. in Table 

3a, 978 - 401 577, 577! 2 - 288, 288 + 401 - 689, 655 < 689 < 800.) 

Table 3a --- Individual Market, Nationwide 

Pereentage of %of %of Earned Companies Members ! Rebate Rebate Member 

Premium Cap Months 

on Excluded Paying Receiving $Millions PMPM (Millions) 

Commissions Rebates Rebates 

Current Law 14.2% 52.9% $978.3 $8.09 121 

2% 13.4% 46.7% 74.5% $800.1 $6.62 121 

4% 12.7% 41.3% 75.6% $655.7 $5.42 121 

6% 12.1% 33.0% 76.9% $556.5 $4.60 121 

8% 11.8% 32.7% 77.7"10 $485.9 $4.02 121 

10% 11.4% 31.5% 78.5% $425.7 $3.52 121 

No Cap 11.I% 31.3% 78.8% $401.3 $332 121 

Table 3b --- Small Group Market, Nationwide 

Percentage of %of %of Earned Companies Members Median Rebate Rebate Member 

Premium Cap Paying Receiving MLR SMiIlions PMPM Months 

on Excluded Rebates Rebates (Millions) 

Commissions 

Current Law 15.7% 22.8% 82.3% $447.4 $2.13 210 

I 2% 12.4% 17.0% 83.9% $259.9 $1.23 210 

4% 10.5% 9.7"1. 85.2% $181.3 $0.86 210 

6% 9.1% 7.8% 86.0% $157.7 $0.75 210 

8% 8.9% 7.8% 86.5% S152.1 $0.72 210 

10% 8.7% 7.7% 86.7% $148.9 $0.71 210 

No Cap 8.4% 7.6% 87.0% $146 ? $0.70 210 

Lal1!e Group Market, Nationwide 

Percentage of %of %of Earned Companies Members Median Rebate Rebate Member 

Premium Cap Months 

on Excluded Paying Receiving MLR SMiliions PMPM (Millions) 

Commissions Rebates Rebates 

Current Law 15.0% 14.7% 89.4% $526.7 $1.13 465 

2% 12.0% 9.2% 90.8% $281.6 $0.61 465 

4% 10.0% 5.6% 91.3% $221.9 $0.48 465 

6% 9.4% 5.4% 91.4% $217.5 $0.47 465 

8% 9.4% 5.4% 91.4% $217.0 $0.47 465 

10% 9.4% 5.4% 91.5% $216.6 $0.47 465 

No Cap 8.9% 5.4% 91.6% $215.9 $0.46 465 

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Modi fication 4 

This modification subtracts agents and brokers fees and commissions (SHCE Part 1. Line 10.2) and direct sales salaries and 

benefits (SHCE Part I. Line 10.1). the sum of both capped at a maximum percentage of earned premium. from the adjusted 

earned premium used in the rebate fonnula (please see Appendix D for the exact calculation). The results under current law 

and the results with no cap are shown for comparison. 

Table4a 

--- Individual Market, Nationwide 

Percentage of %of %of Earned Premium Companies Members Median Rebate Rebate Member 

Cap on Excluded Paying Receiving MLR $Millions PMPM Months 

Commissions + Rebates Rebates (Millions) 

Direct Sales 

Current Law 14.2% 52.9"10 73.6% $8.09 121 

2% 13.4% 46.7% 74.3% $6.61 121 

4% 12.6% 4U)·10 75.5% $5.37 121 

6% 12.0% 32.7% 76.8% $540.0 $4.47 121 

8% 11.7% 32.3% 77.7% $465.5 $3.85 121 

10% 11.2% 31.1% 78.4% $401.8 $3.32 121 

No Cap 10.9"10 30.9"10 79.5% $358.6 $2.96 121 

Table4b 

--- Smail Group Market, Nationwide 

Percentage of %of %of Earned Premium Companies Members Median Rebate Rebate Member 

Cap on Excluded Months 

Commissions + Paying Receiving MLR $Millions PMPM (Millions) 

Dire<tSales Rebates Rebates 

Current Law 15.7% 22.8% 82.3% $447.4 $2.13 210 

2% 12.4% 17.0% 83.9% S256.6 $1.22 210 

4% 10.4% 9.6% 85.5% $171.9 $0.81 210 

6% 8.9"10 7.7% 86.6% $142.4 $0.67 210 

8% 8.7% 7.7% 87.1% $135.6 $0.64 210 

10% 8.2% 7.5% 87.3% $130.4 $0.62 210 

No Cap 7.9% 7.5% 87.7% $126.4 $0.60 210 

Table 4c --- Lar2e GrOOD Market Nationwide 

Percentage of %of %of Earned Premium Companies Members Median Rebate Rebate Member 

Cap on Excluded Paying Receiving MLR SMillions PMPM Months 

Commissions + Rebates Rebates (Millions) 

Direct Sales 

Current Law 15.0% 14.7% 89.4% $526.7 $1.13 465 

2% 11.6% 8.1% 90.9"10 $272.1 $0.59 465 

4% 9.5% 4.5% 91.6% $206.l $0.44 465 

6% 8.6% 4.2% 91.8% $198.0 $0.43 465 

8% 8.3% 4.1% 91.9"10 $197.1 $0.42 465 

10% 8.3% 4.1% 91.9"10 $196.7 $0.42 465 

No Cap 7.8% 4.1% 92.1% $195.9 $0.42 465 

© 201 1 National Association of lnsurance Commissioners t2 
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Modification 5 

This modification subtracts agents and brokers fees and commissions (SHCE Part I, Line 10.2), capped at a maximum 

PMPM amount multiplied by member months, from the adjusted earned premium used in the rebate formula (please see 

Appendix D for the exact calculation). The results under current law and the results with no cap are shown for comparison. 

Generally, a cap of between $6 and $12 PMPM would restore half the rebate reduction for the individual market and a cap 

under $6 PMPM would do so for both group markets. 

Table 5a --- Individual Market, Nationwide 

PMPM Cap on %of %of Member 

Excluded Companies Members Median Rebate Rebate Months 

Commissions Paying Receiving MLR $MilIions PMPM (Millions) Rebates Rebates 

Current Law 14.2% 52.9% 73.6% $978.3 $8.09 121 

$6 13.0% 43.5% 75.3% $724.9 $6.00 121 

$12 12.0% 34.1% 77.0% $548.5 $4.54 121 

$18 11.5% 31.7"10 78.0% $445.0 $3.68 121 

$24 11.3% 31.5% 78.6% $412.5 $3.41 121 

$30 11.3% 31.5% 78.8% $406.2 $3.36 121 

No Cap 11.1% 31.3% 78.8% $401.3 $3.32 121 

_a_e_ T hI 5b 

Small GrouD Market Nationwide 

PMPM Cap on %of %of Member 

Excluded Companies Members Median Rebate Rebate Months 

Commissions Paying Receiving MLR $MiIlions PMPM (Millions) Rebates Rebates 

Current Law 15.7% 22.8% 82.3% $447.4 $2.13 210 

$6 12.7% 17.2% 83.6% $269.9 I $1.28 210 

$12 10.4% 9.9"10 84.9% $192.0 $0.91 210 

$18 9.3% 8.4% 85.7% $161.0 $0.76 210 

$24 8.8% 7.7% 86.3% $152.9 $0.72 210 

$30 8.7% 7.7% 86.5% $149.6 $0.71 210 

No Cap 8.4% 7.6% 87.0% $146.2 $0.70 210 

Table5c --- La",e GronD Market Nationwide 

PMPM Cap on %of %of Member 

Excluded Companies Members Median Rebate Rebate Months 

Commissions Paying Receiving MLR SMillions PMPM (Millions) Rebates Rebates 

Current Law 15.0% 14.7% 89.4% $526.7 $1.13 465 

$6 11.6% 9.2% 90.7% $288.0 $0.62 465 

$12 9.2% 5.5% 91.4% $223.4 $0.48 465 

$18 8.8% 5.4% 91.5% $217.0 $0.47 465 

$24 8.8% 5.4% 91.5% $215.8 $0.46 465 

$30 8.8% 5.4% 91.6% $215.5 $0.46 465 

No Cap 8.9% 5.4% 91.6% $215.9 $0.46 465 

© 2011 National Association oflnsurance Commissioners 13 
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Modification 6 

This modification subtracts agents and brokers fees and commissions (SHCE Part I, Line 10.2) and direct sales salaries and 

benefits (SHCE Part I, Line 10.1), the sum of both capped at a maximum PMPM amount multiplied by member months, 

from the adjusted earned premium used in the rebate formula (please see Appendix D for the exact calculation). The results 

under current law and the results with no cap are shown for comparison. 

Table 6a --- Individual Market, Nationwide 

PMPMCapon %of %of Member Excluded Companies Members Median Rebate Rebate Months Commissions + Paying Receiving MLR $MilIions PMPM (Millions) Direct Sales Rebates Rebates 

Current Law 14.2% 52.9"10 73.6% $978.3 $8.09 121 

$6 13.0% 43.3% 75.6% $719.2 $5.95 121 

$12 11.8% 33.7% 77.5% $534.1 $4.42 121 

$18 11.3% 31.3% 78.5% $420.8 $3.48 121 

$24 11.1% 31.1% 79.2% $378.2 $3.13 121 

$30 11.1% 31.1% 79.3% $365.9 $3.03 121 

No Cap 10.9"10 30.9"10 79.5% $358.6 $2.96 121 

Table6b 

--- Smail Group Market, Nationwide 

PMPM Cap on %of %of Member Excluded Companies Members Median Rebate Rebate Months Commissions + Paying Receiving MLR $Millions PMPM (Millions) Direct Sales Rebates Rebates 

Current Law 15.7% 22.8% 82.3% $447.4 $2.13 210 

$6 12.7% 17.2% 83.7% $266.3 $1.27 210 

$12 10.3% 9.8% 85.1% $178.2 $0.85 210 

$18 9.2% 8.3% 86.1% $146.0 $0.70 210 

$24 8.7% 7.6% 86.8% $135.2 $0.64 210 

$30 8.3% 7.5% 87.2% $130.8 $0.62 210 

No Cap 7.9% 7.5% 87.7% $126.4 $0.60 210 

Table 6c --- Large Group Market, Nationwide 

PMPM Cap on %of %of Member Excluded Companies Members Median Rebate Rebate Months Commissions + Paying Receiving MLR $MiIlions PMPM (Millions) Direct Sales Rebates Rebates 

Current Law 15.0% 14.7% 89.4% $526.7 $1.13 465 

$6 11.2% 8.1% 90.9"10 $277.3 $0.60 465 

$12 8.7% 4.4% 91.6% $207.5 $0.45 465 

$18 8.0% 4.2% 91.9% $198.5 $0.43 465 

$24 7.8% 4.1% 92.0% $196.0 $0.42 465 

$30 7.8% 4.1% 92.0% $195.6 $0.42 465 

No Cap 7.8% 4.1% 92.1% $195.9 $0.42 465 

© 20 II National Association of Insurance Commissioners 14 
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Modification 7 

This modification is a variation of modification 3. It subtracts agents and brokers fees and commissions (SHCE Part I, Line 

10.2), capped at a maximum percentage of earned premium, from the adjusted earned premium used in the rebate formula. In 

addition, the minimum MLR is adjusted such that the rebate payable under this modification will equal the rebate payable 

using a calculation with no modification and the statutory minimum MLRs (please see Appendix D for the exact calculation). 

The results ofthe rebate estimate modeling are as follows: 

Table7a 

Individual Market, Nationwide 

Rebate SMillions 

RebalePMPM 

Member Montbs (Millions) 

Percentage of Eamed Premium Cap 

on Excluded Commissions 

Equivalent Minimum MLR to 

Match Rebat. Under Unchanged 

Rebate Formula 

Table 7b 

Small Group Market, Nationwide 

Rebate $Millions 

RebatePMPM 

Member Months (Millions 

Percentage orEamed Premium Cap 

on Excluded Commissions 

Equivalent Minimum MLR to 

Match Rehate Under Unchanged 

Rebate Formula 

Table 7c 

Large Group Market, Nationwide 

Rehate $Millions 

RebatePMPM 

Member Months (Millions) 

Percentage of Earned Premium Cap 

on Excluded Commissions 

Equivalent Minimum MLR to 

Match Rebate Under Unchanged 

Rebate Formula 

$978.3 

$&.09 

121 

No Cap 2% 4% 

86.20% 81.64% 83.24% 

$447.4 

$2.13 

210 

No Cap 

$526.7 

$1.13 

465 

No Cap 2% 4% 

87.30% 86.52% 87.24% 

© 2011 National Association oflnsurance Commissioners 15 

6% 8% 10% 

84.46% 85.37% 85.98% 

6% 8% 10% 

83.99"/0 84.08% 84.11% 

6% 8% 10% 

87.28% 87.29% 87.29% 
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Modification 8 

This modification is a variation of modification 4. It subtracts agents and brokers fees and commissions (SHCE Part l, Line 

10.2). and direct sales salaries and benefits (SHCE Part I. Une 10.1). the sum of both capped at a m .. ximum percentage of 

earned preminm from the adjusted earned premium used in the rebate formula. In addition. the minimum MLR is adjusted 

such that the rebate payable under this modification will equal the rebate payable using a calculation with no modification 

and the statutory minimum MLRs (please see Appendix D for the exact calculation). The results of the rebate estimate 

modeling are as follows: 

Table 8. 

Individual Market, Nationwide 

Rebate SMiIlions $978.3 

RebatePMPM $8.09 

Member Months (Millions) 121 

Percentage of Earned Premium Cap No Cap 2% 4% 6% 8% JO% on Excluded Commissions 

Equivalent Minimum MLR to 

Match Rebate Under Unchanged 87.00% 81.65% 83.31% 84.79% 85.81% 86.52% 

Rebate Formula 

Table8b 

Small Group Market, Nationwide 

Rebate SMillions $447.4 

RebatePMPM $2.13 

Member Months (Millions) 210 

Percentage of Earned Premium Cap No Cap 2% 4% 6% 8% 10% on Excluded Commissions 

Equivalent Minimum MLR to 

Match Rebate Under Uncbanged 84.60% 81.69% 83.30% 84.28% 84.49";" 84.55% 

Rebate Formula I 

Table 8e 

Large Group Market, Nationwide 

Rebate SMillions $526.7 

RebatePMPM $1.13 

Member Months (Millions) 465 

Percentage of Earned Premium Cap No Cap 2% 4% 6% 8% 10% on Excluded Commissions 

Equivalent Minimum MLR to 

Match Rebate Under Uncbanged 87.60% 86.59% 87.47% 87.56% 87.59% 87.59"10 

Rebate Formula 

© 2011 National Association ofInsurance Commissioners 16 
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Modification 9 

This modification is a variation of modification 5. It subtracts agents and brokers fees and commissions (SHCE Part l~ Line 

10.2), capped at a maximum PMPM amount multiplied by member months, from the adjusted eamed premium used in the 

rebate formula. In addition, the minimum MLR is adjusted such that the rebate payable under this modification will equal the 

rebate payable using a calculation with no modification and the original statutory MLRs (please see Appendix D for the exact 

calculation). The results of the rebate estimate modeling are as follows: 

Table9a 

Individual Market, Nationwide 

Rebate SMiliions $978.3 

RehatePMPM $8.09 

Member Montbs (Millions) 121 

PMPM Cap on Excluded NoC.p $6 $]2 SI8 $24 $30 Commissions 

Equivalent Minimum MLR to 

Matcb Rebate Under Uncbanged 86.20% 82.44% 84.49% 85.78% 86.11% 86.17% 

Rebate Formula 

Table9b 

Small Group Market, Nationwide 

Rebate SMiJlions $447.4 

RebatePMPM $2.13 

Member Months (Millions) 210 

PMPM Cap on Excluded No Cap $6 $12 $18 $24 $30 Commissions 

Equivalent Minimum MLR to 

Match Rebate Under Unchanged 84.10% 81.54% 82.90% 83.82% 84.05% 84.09"10 

Rebate Formula 

Table9c 

Large Group Market, Nationwide 

Rebate $Millions $526.7 

RebatePMPM $1.I3 

Member Months (Millions) 465 

PMPM Cap on Excluded No Cap $6 $12 $18 $24 $30 Commissions 

Equivalent Minimum MLR to 

Match Rebate Under Uncbanged 87.30% 86.44% 87.22% 87.29% 87.30% 87.30% 

Rebate Formula 

© 2011 National Association oflnsurance Commissioners 17 
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Modification 10 

This modification is a variation of modification 6. It subtracts agents and brokers fees and commissions (SHCE Part 1, Line 

10.2), and direct sales salaries and benefits (SHCE Part 1, Line 10.1), the sum of both capped at a maximum PMPM amount 

multiplied by member months, from the adjusted earned premium used in the rebate. In addition, the minimum MLR is 

adjusted such that the rebate payable under this modification will equal the rebate payable using a calculation with no 

modification and the statutory minimum MLRs (please see Appendix D for the exact calculation). The results of the rebate 

estimate modeling are as foHows: 

Table lOa 

Individual Market, Nationwide 

Rebate SMiliions $978.3 

Rebate PMPM $8.09 

Member Months (Millions) 121 

PMPM Cap on Excluded o Cap $6 $12 $18 $24 $30 Commissions 

Equivalent Minimum MLR to 

Match Rehate Under Unchanged 87.00% 82.49% 84.78% 86.30% 86.77% 86.90% 

Rebate Formula 

Table lOb 

Small Group Market, Nationwide 

Rebate $Millions $447.4 

RebatePMPM $2.13 

Member Months (Millions) 210 

PMPM Cap on Excluded No Cap $6 $12 $18 $24 $30 Commissions 

Equivalent Minimum MLR to 

Match Rebate Under Unchanged 84.60% 81.57% 83.03% 84.08% 84.46% 84.53% 

Rebate Formula 

Table IOc 

Large Group Market, Nationwide 

Rebate $Millions $526.7 

RehatePMPM $1.l3 

Member Months (Millions) 465 

PMPM Cap on Excluded No Cap $6 $12 $18 $24 $30 Commissions 

Equivalent Minimum MLR to 

Match Rehate Under Unchanged 87.60% 86.51% 87.44% 87.56% 87.59% 87.59"10 

Rebate Formula 

© 20 II National Association of Insurance Commissioners 18 
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Modification 11 

This modification is a variation of modification). It subtracts agents and brokers fees and commissions (SHCE Part 1, Line 

10.2) from the adjusted earned premium used in the rebate formula and adds federal taxes back in (please see Appendix D for 

the detailed calculation). The results of the rebate estimate modeling are as follows: 

Table 11 ---

%of %of Member Companies Members Median Rebate Rebate Months Paying Receiving MLR $Millions PMPM (Millions) Rebates Rebates 

I Individual Market, Nationwide 11.4% 35.2% 78,0% $699.1 $5.78 121 

I Small Group Market, Nationwide 12.6% 19.2% 85.6% $415.3 $1.98 210 

I Large Group Market, Nationwide 12.7% 11.7% 91.1% $497.9 $1.07 465 

As discussed above, it is unclear whether FIT would have been lower, and rebates therefore higher, if rebates were actually 

required for 20 I O. If the answer is no, then the impact of Modification II can be seen by comparing Tables 0 and 11 in the 

report. This comparison shows a reduction in rebates 0[29"10 in the individual market, 7% in the small group market, and 5% 

in the large group market. If, on the other hand, FIT would have been lower if rebates were required, we believe rebates in 

Table 0 would be in the range of30% higher. This would increase then the reduction in rebates that would result from 

replacing the federal tax deduction with a deduction fur producer compensation to roughly half for the individual market and 

roughly a quarter in the group markets, thus having a significant impact on the rebate levels if the numerical standards remain 

the same. 

Modification 12 

This modification is a variation of modification 2. It subtracts agents and brokers fees and commissions (SHCE Part I, Line 

10.2), and direct sales salaries and benefits (SHCE Part I, Line 10.1) from the adjusted earned premium used in the rebate 

formula and adds federal taxes back in (please see Appendix D for the exact calculation). The results of the rebate estimate 

modeling are as follows: 

Table 12 ---

%of %of Member Companies Members Median Rebate Rebate Months Paying Receiving MLR $Millions PMPM (Millions) Rebates Rebates 

I Individual Market, Nationwide 11.1% 33.8% 78.8% $648.6 $5.36 121 

I Small Group Market, Nationwide 12.4% 18.2% 86.6% $368.9 $1.76 210 

I Large Group Market, Nationwide 11.3% 9.6% 91.7% $453.2 $0.97 465 

As with Modification I I, in comparing to earlier tables, it should be kept in mind that those tables do not reflect the possible 

effect of rebates on taxes reported in 2010. 

Modification 13 

This modification applies either a percentage of premium or PMPM cap on excludable producer compensation that would 

vary by market segment. For example, the excludable percentage of earned premium for individual business could be higher 

than the percentage for small and large group business. The effects of different percentage and PMPM caps are shown in the 

examples above. 

© 2011 National Association oflnsurance Commissioners 19 
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Supplemental Health Care Exhibit Data Elements 

Earned Premium 

[I] Total direct premiums earned 

[2] Change in reserve for rate credits 

[3] Federal high risk pools 

[4] State high risk pools 

Federal and State Taxes and Licensing or Regulatory Fees 

[5] Federal taxes and federal assessments 

[6] State insurance, premium and other taxes 

(7] Regulatory authority licenses and fees 

Expenses to Improve Health Care Quality 

[8] Total of Defined Expenses Incurred for Improving Health Care Quality 

[9] Deductible Fraud and Abuse DetectionlRecnvery Expenses 

[10] Tntallncurred Claims 

[J 1] Agents and Brokers Fees and Commissions 

[12] Direct Sales SaJaries and Benefits 

[13] Member Months 

© 201 t National Association of Insurance Commissioners 20 

SHCE Part 2, Une 1.8 

SHCE Part 2, Une L7 

SHCE Part 1, Une 1.2 

SHCE Part 1, Line 1.3 

SHCE Part 1, Line 1.5 

SHCE Part 1, Line 1.6 

SHCE Part 1, Line 1.7 

SHCE Part I, Une 6.3 

SHCE Part I, Line 4 

SHCE Part I, Line 5 

SHCE Part 1, Line 10.2 

SHCE Part 1, Une 10.1 

SHCE Part I, Other Indicators, Line 4 
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Appendix B State Experience with Higher Minimum Loss Ratios 

State SummarY. of Resllonse 

Colorado 70% MLR for group since 2005 - not really a limit, but a safe harbor for benefits being 

reasonable in relation to premium. Erosion in small group carriers since 2000, sharply since 

2007 when claims experience and health status were removed as allowable rating factors. 

Target loss ratios have increased to above 70%, A letter from Commissioner Postolowski, 

provided to the Working Group by an NAIC Consumer Representative, indicated that: (I) 

consumer access has not changed significantly; (2) MLR requirements may have moderated 

rate increases; and (3) competition may have provided an incentive to keep benefit ratios 

high. 

Maine On July 1,2004 small group carriers had a choice of75%with prior approval or guaranteed 

78% with no prior approval. One company switched from selling small group to individual 

(65% loss ratio). No other observable impact on commissions or number of producers. 

Maryland Small group 75% MLR since 1993. Observed reducing commissions to small group, starting 

before healthcare reform. No problem with lack of producers for small group. 

Minnesota Provided state data. No issues about commissions. 

New Jersey From 75% to 80% in 2009. Most individual is sold direct. Small group - no problem with 

access. High average small group premiums, so may be a special case. 

New Mexico On May 19,2010,75% for individual (in process of changing to 80%). 85% fur all group. 

Three years before any refunds are paid. 

New York Until 20 I 0, rebate payable when individual loss ratio < 80% and small group loss ratio less 

than 75%. [n 2011, all commnnity-rated plans 82% (adjustments bring closer to federal 

level). No access or producer como issues in small ~rouo or individual. 

South Dakota Just changed MLR 1111/11. Too early to tell what impact the higher MLRs will have. 

Previous minimums: 65% individual, 75% group 

Washington For individual, 74% (minus 2% premium tax) loss ratio. Since 2000, excess is remitted by 

company to high risk pool. Companies appear to be reducing agent commissions and 

terminating contracts to cut costs and move to an on-line system. For small group, there is a 

trend toward not paying commissions on groups of 1-3 lives. 

West Virginia No problems with consumer access. Some agents are no longer writing for carriers that have 

limited or ended commissions. 

© 2011 National Association oflnsurance Commissioners 21 
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Appendix C 

Discussion of Federal Income Tax Impact on MLR Rebates 

Under current law, all federal taxes are deducted from premium before calculation of the medical loss ratio (MLR) and 

rebates. The NATC recommended that this be limited to federal taxes other than income tax on investment income, since the 

MLR calculation does not consider investment income. This recommendation was accepted by HHS in their Interim Final 

Regulation. There have been assertions made by some Members of Congress that they intended the federal tax deduction to 

apply only to those taxes used to fund the law. However, statutory language prevailed in developing the regulation. 

Within this report, the issue offederal income taxes (FIT) is relevant in two regards. First, the Supplemental Health Care 

Exhibit (SHCE) does not rellect the possible impact of rebates on FIT, since rebates were not required in 20 I O. Second, one 

of the options discussed in this report is to substitute broker commissions fur federal taxes in the MLR calculation - that is, to 

deduct commissions from premium but not deduct federal taxes other than the ACA-related taxes that begin in 2014. 

Interaction of FIT and Rebates 

The Working Group had extensive discussions as to whether FIT would have been lower. and rebates therefore higher, if 

rebates were actually required for 20 I O. The thinking was that a liability would be held for anticipated rebates, which would 

reduce profits and therefore reduce FIT. However, an alternate view was that the rebate rules require FIT to be stated 

ignoring the impact of rebates. Language in the NAlC Regulation for Uniform Definitions and Standardized Methodologies 

for Calculation of the Medical Loss Ratio for Plan Years 2011, 2012 and 2013 contains language that can be interpreted to 

support that position. The federal regulation, which is the one that applies, seems unclear on this point. We believe this is an 

important issue that must be resolved before rebates are calculated next year and we stand ready to investigate it further 

through discussions with federal regulators and interested parties if requested. However, it is only a secondary issue for 

purposes of this report and we concluded that we did not need to resolve it in order to finalize our report on producer 

compensation. 

Ifthe view that the payment of rebates will reduce FIT is correct, then if rebates had been required in 2010, companies would 

have had lower taxes due to payment of the rebates. These lowertaxes would have been deducted from earned premium in 

the formula, leading to yet lower taxes, leading to yet greater rebates. Companies would have been able to evaluate this 

recursive fonnula to develop the actual taxes and rebates due. This concept may be easier to visualize with an example: 

Example: 

Assume no quality improvement expenses or state taxes and no federal taxes other than FIT, so we have only claims, 

premium and federal income tax entering the calculation. The MLR is calculated as claims divided by the quantity premium 

minus FIT. Taxes impact the calculation two ways, in determining the initial MLR and in determining the amount to which 

the rebate percentage is applied to calculate the rebate. If we have claims of7,OOO, premium of 10,000 and FIT of 400, then 

the MLR is 72.9"10, and the rebate initially is 680, (7,000 1 (10,000-400) ~ 72.9"10. 80% - 72.9"10 ~ 7.1%. 7.1%' (10.000-

400) 680.). However the tax is reduced by the deductible rebate paid, so if the tax rate is 300/0, then taxes would be reduced 

by 204, (680 • 30%~204)'. Butthe new taxes ofl96 would be deducted from earned premium in calculating the MLR, so 

that the new MLR would be 71.4% and the new rebate would be $843. Again the higher rebate would result in lower taxes 

resulting in higher rebates. Evaluation ofthe recursive formula results in an ultimate tax of 132 and ultimate rebate of 895, 

895'30%~268,400-268 132,7,000/(10,000-1321) 70.9%. 80%-70.9%=9.1%. 9.1%*(1O,000-132)~895.) In 

this case, rebates with a tax rate of 30% are 31% higher after evaluating the recursive formula, (895/680 132%). 

Generally the increase in rebates will be about equal to the tax rate. 

, FIT laws and regulations are very complicated. This illustration uses a simplified calculation of the additional FIT incurred 

by only applying a marginal tax rate to the change in underwriting gain. 

© 20 II National Association oflnsurance Commissioners 22 
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Possible Elimination ofNon-ACA Federal Tax Exclusion 

Eliminating the federal tax deduction from premium would generally increase the MLR rebates, while incorporating a 

producer reimbursement deduction from premium would decrease the MLR rebates. It has been suggested that by 

substituting a producer reimbursement deduction for the federal income tax deduction, perhaps the level of rebates to he paid 

to consumers would remain at a comparable level to the current statutory level. We evaluated this substitution and found 

near equality for small group and large group, but a decrease in rebates to he paid for the non-group pool. However as noted 

above, federal taxes in the SHCE did not incorporate the impact of rebates on the level of taxes, suggesting that the illustrated 

rebates were lower than they would have heen if the recursive relationship had been evaluated. Perhaps a better comparison 

would be the rebates illustrated in the paper after deducting producer reimbursement versus rebates illustrated as derived 

from the SHCE inflated by an after tax factor. of25% to 35%. It appears rebates would he reduced with this substitution. 

© 2011 National Association of[nsurance Commissioners 23 
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Appendix D 

MLR Calculation Details 

Bracketed numbers are elements from Appendix A 

Table 0 

MLR = ( [6]+19]+[10j ) 

[l}+[2}+[3}+[41-[Sj-[6j-[7j 

IfMLR < minimum MLR, 

Rebate = [Minimum MLR - MLRJ * ([1] + [2] + [3J + [4]- [5] - [6J - [7J), 

Else, Rebate = 0 

Table I 

MLR = ( [9J+[9}+[10) ) 

[1}+[2}+[3}+[4}-{51-{6}-[71-{111 

IfMLR < minimum MLR, 

Rebate = [Minimum MLR - MLR] * ([1] + [2] + [3] + [4]- [5]- [6J - [7]- [11]) 

Else, Rebate = 0 

Table 2 

MLR = ( [6]+[91+(10) ) 

{11+[2J+131+[41-[51-[61-[71-[111-[ 121 

IfMLR < minimum MLR, 

Rebate = [Minimum MLR - MLRJ • ([1] + [2] + [3] + [4J - [5]- [6]- [7J - [l1J - [12]) 

Else, Rebate = 0 

Table 3 

MLR = (11}+12}+[3;:::i::;:~~!}-17}-[11})' where[ll] is capped at a maximum percentage of earned premium. 

IfMLR < minimum MLR, 

Rebate = [Minimum MLR - MLR] * ([1] + [2] + [31 + [4J - [5]- [6J - [7]- [11]) 

Else, Rebate 0 

Table 4 

MLR = ([1}+12J+[3}+[~~~~~~~~oJ[7}_[l1j_[12})' where [IIJ + [12J is capped at a maximum percentage of earned premium. 

IfMLR < minimum MLR, 

Rebate = [Minimum MLR - MLRJ * ([1] + [2] + [3] + [4J - [5J - [6]- [7J - [11]- [12]) 

Else, Rebate = 0 

TableS 

MLR = ([1J+[2}+[3;!::;~}[;i~~!j-{7}-[11})' where[IIJ is capped at a maximum PMPM amount mUltiplied by member months. 

© 20 II National Association oflnsurance Commissioners 24 
81 


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If MLR < minimum MLR, 

Rebate ~ [Minimum MLR - MLR] * ([1] + [2] + [3] + [4]- [5] [6] - [7]- [11]) 

Else, Rebate ~ 0 

Table 6 

MLR ~ (( J ( [8(+(9J

+[10)( (I ), where [11] + [12] is capped at a maximum PMPM amount multiplied by member 1 + 2j+i3]+[4j-[5j-[61- 71- 11 -[12] 

months. 

IfMLR < minimum MLR, 

Rebate [Minimum MLR - MLR] * ([1] + [2] + [3] + [4]- [5] - [6]- [7]- [11]- [12]) 

Else, Rebate ~ 0 

Table 7 

The MLR is calculated as in Table 3, but uses a modified minimum MLR 

Table 8 

The MLR is calculated as in Table 4, but uses a modified minimum MLR, 

Table 9 

The MLR is calculated as in Table 5, but uses a modified minimum MLR. 

Table 10 

The MLR is calculated as in Table 6, but uses a modified minimum MLR, 

Table 11 

MLR ~ ( [s]+[91+(IOj ) 

[11+[2]+[3J+[4]-(61-(7J-(11] 

IfMLR < minimum MLR, 

Rebate ~ [Minimum MLR - MLR] * ([1] + [2] + [3] + [4]- [6] - [7]- [11]) 

Else, Rebate ~ 0 

Table 12 

MLR ~ ( [8]+(9J+[10) ) 

(IJ+(2J+(3J+(4]-(6J-(7J-[IIJ-(12] 

(fMLR < minimum MLR, 

Rebate [Minimum MLR - MLR] * ([1] + [2] + [3] + [4]- [6]- [7]- [11]- [12]) 

Else, Rebate 0 

Append;, E 

© 20 II National Association oflnsurance Commissioners 25 
82 


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Effects of Removing Commissions/Commissions + Direct Sales from MLR on Rebates 

Comparison of Various Akernate MLR Calculatilns by Stare 

[ndividual Market 

Plan Year 2010 SHCE Data 

Fees & Fees & Fees & Fees & 

Direct Fees & fees & Cotmnissions '!" Conunissions + Commissions Commissions 

F..amed Member Est.MLR EsLMLR Commissions Commissions DirectSa1es Direct Sales Fxluded, !'l<c!uded, 

Premium Months Rebate Rebate Excluded ~ ~luded~Est Excluded ~ F.st. Excluded ~Est FederaiTa.~ Federal Ta:es 

$M (K) $M PMPM Est.MLR MLRRebate MLRRebate MLRRebate lncluded~ F.st Included ~ Est 

Rebate $M PMPM $M PMPM MLRRebate MLRRebate 

$M PMPM 

State 

AK $57.36 !94 $0.48 $2.48 $O.3a $l.98 $0.38 $1.98 $0.64 $328 

AL $328.38 Z 122 54.48 $2.11 $2.96 $139 $2.50 $US $5.05 $2.38 

AR $242.54 !428 58.50 $5.95 $2.39 $1.68 SZ.26 $1.58 $5.57 $3.90 

AZ S656.m 3,093 $37.63 512.17 $9.31 $3.01 58.40 52.72 $28.16 $<>.10 

CA $2.045.98 11,648 $36.63 $3.15 $11.30 $0.97 $11.18 $0.% $16.75 $1.44 

eN $12.58 61 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 

co $660.29 3.615 $24.35 $6.74 512.39 $3.43 lI0.% $3.03 524.75 $6.85 

CT Sl6I.54 1,295 $13.51 510,43 $6.68 55.16 $6.29 54.86 $13.70 $10.58 

DC 520.45 62 $O.W $3.26 $0.14 $2.31 $0.14 $2.19 $0,62 59.95 i 554.n n3 $1.39 $6.24 $0.58 $2.62 $0.54 $2.4Q $1.62 $7,25 

$2.265.77 10198 $109.94 $10.18 545.64 54.48 S4Q.58 $3.98 $65.26 56.4Q 

$8%.24 4,261 $41.33 $9.70 $2,~.86 $5.83 $2297 $5.39 $3llO1 =1= $0.07 0 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 

HI $82.87 372 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 

fA $457.53 2J56 $5.37 $2,49 $2.07 $0.% $1.79 $0.83 $2.70 $1.25 

ID $218.68 i 1525 $3.93 $2.58 $2.85 51.87 Jim.' = II. $1,236.38 ' 5,535 $67,62 $12.n $21.1)8 $3.81 $19.07 $32.55 55.88 

IN $449.4Q 2,189 $24.45 

• $3.65 

KS 5295.90 1,547 5!059 $3.55 

.. . -

56.91 

KY $369.97 1,785 58.67 $0.78 $0.41 $4.13 

IJ 2,037 59.01 $6.75 53.32 $3.09 510.69 

1.271 $3.14 $i.78 $1.4Q $1.39 

644 514.99 $23.27 $l{).13 515.12 59.ll& 515,:;4 .IlO 

447 $6.4Q $14.32 54.79 $!Q70 $4.79 S10.70 $6.40 514.32 

3,997 $24.41 $6.11 $I2A8 $3.12 $11.48 $2.87 $19.73 54.94 

3JlO2 $7.89 52.63 $3.32 $1.1l $3.07 SUI! $2,14 $0.11 

2,920 544.19 $15.!3 $19.29 $6.61 516.25 $5.57 $35.58 S12.t9 

MS $197,26 %0 $8.42 $8.77 $,5.68 $5.92 $5.51 $5.75 58.92 $9.29 

MT $12452 644 $6,4Q 59.93 $3.26 55.06 $3.08 $4.77 $3.73 $5.18 

NC $1,02268 5,018 $gU5 $3.82 59.92 $1.98 59.50 51.89 $15'(14 $3.00 

ND $120.56 536 $2.46 54.60 $1.49 52.78 SI.44 $2.68 $2.4Q $4.48 

NE $290.44 1,334 $5.46 54.09 $!.l2 $0.84 $0.98 iii: $1.55 

Nil 5111.09 414 $7.65 $18.49 54.18 510.10 $3.77 $23.05 

~ 1475 $0.75 $0.51 $0.00 $000 $0.29 

NM 743 $1.04 $1.4Q $0.74 $1.00 $0.73 $0.98 st43 $1.92 

1.049 511.% $11Al 54.53 $4.32 $4.42 $421 $8.60 58.W 

NY $657.19 1,440 $2.42 51.68 $2.33 $1.62 $2.33 $1.62 $2.36 $1.<>4 

011 5481.13 2,882 $39.19 $13.60 58.67 $3.01 $6.69 52.32 $12.08 54.19 

1456 $16.06 $11.03 $7.08 54.86 56.85 1'1.70 $10.54 $7.24 

2,241 $7.81 $3.41l 54A9 $2.01 $4.36 $L94 $5.28 52.36 • 930 $000 $0.00 $0.00 $0.00 $0.00 $0.00 $000 

$1,237.08 5,679 $31.13 $5.48 $18.18 $3.W $17.62 $3.10 $31.83 55.60 

PR $0.09 0 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 

Rl $67.87 371 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 

III 1,613 $34.12 521.16 $11.95 $7.41 $5.36 $3.32 $21.04 $13.04 

730 $0.16 $0.21 $0.12 

- $0.15 $O.!4 $0.20 

2,833 lli.35 58.95 $9.39 $3.31 $2.94 $t4.56 55.14 

849 $I72.ot $19.44 $65.47 $6.65 $1!7.43 $13,27 

1.695 $4.15 52.45 52.05 $1.21 $1.09 $2.48 $1.46 

IwJ ~5.n 3,558 $50.80 $14.28 $18.03 55.07 $14.49 $4.07 $53.33 $14.99 

0 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 

210 $0.00 $0.00 $0.00 $0.00 $0,00 t!m 3788 $6.56 $1.13 $3.45 $0.91 $3.42 $1.19 

WI 5449.91 2,192 $10.30 54.70 $1.11 $0.51 $0.41 $1.14 

WV $69.62 264 $4.39 $16.6l $1.57 $5.93 51.W $15.22 

WY $76.42 296 $1.43 $4.84 $0.45 $1.53 $0.44 51.48 SO.80 $2.70 

Total $25310.91 IW,S37 5978.28 $8.10 $4Q1.28 $3.32 $358.60 $2.97 5699.16 55.79 

© 20 II National Association of Insurance Commissioners 26 
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Effects of Removing Commissions/Commissions + Direct Sales from MLR on Rebates 

Direct 

Famed 

Compariron ofVarnus Akernate MLR Calculatbns by State 

Est.MLR 

Rebate Rebate 

SM PMPM 

51mB Group Market 

Plan Year 2010 SHCE Data 

Fees & Fccs& Pec$,& Commissions Commissions E.~luded ~ E.'<Cluded ~ Est. Mill Est MLR 

Rebate $M Rebate MLRRcbate 

PMPM 8M 

Fees & 

© 2011 National Association oflnsurance Commissioners 27 

Fees & Fees & 

MLRRebate MLRRebate 

$M PMPM 
84 


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Effects of Removing Commissions/Commissions + Direct Sales from MLR on Rebates 

Direct Earned Member 

PremiumSM Months 

(K) 

1,339 

TN $1717.14 6,084 

TX 57,897.85 25.687 

lIT $},689<83 6175 

VA $4,263.73 12,263 

VI SO,OO 0 

vr $33l.21 901 

WA $5,563.02 I 154 

WI $5,166.02 I m WV $612.34 1,580 

WY $158.85 411 

Total $154958.60 464,682 

CO"l'arison ofVari.Jus Alternate MLR Calculafuns by State 

FstMLR Est.MLR 

Rebate Rebate 

$M PMPM 

SO.26 

56.10 SO.48 

$0.00 SO.OO 

SO.OO SO.OO 

$525.99 $1.l3 

Large Group Market 

Plan Year 2010 SHCE Data 

Fees&. F«s& Fees & Co-1l1Il1issions + Commissions Commissions Direct Sales Excluded ~ E~luded ~ Est. E~luded ~ Est. Est MLR MLRRebate MLRRebate Rebate SM PMPM $M 

SO.OO SO.OO SO.OO 

$5.00 SO.81 $L53 

$1.00 SO.37 $LOO 

$7.8! $1.36 57.75 

$6.97 SO.61 $6,41 

SO.OO SO.OO SO.OO 

$16.27 S1.86 $1623 

SO.OO SO.OO SO.OO 

$20.84 $4.49 $2<).00 

SO.30 $0.23 $0.12 

$0,54 $12,61 

$11.42 

$0.00 SO.OO 

$4,99 

$0,00 

$0.00 

$i165 

$0.00 $0.00 

$0,00 SO.OO 

$0,07 $2JJ6 

SO,OO $0.00 

$0.00 $0,00 

SO.OI SO.03 

SO.OO SO,OO 

SO,23 Sl.39 

SO.15 $3.84 

$i).00 SO.OO 

$1.33 $14.75 

NIA NlA 

SO.OO SO,OO 

$0.00 SO.OO 

SO. 13 $1.52 

$0.00 $000 SO.OO 

SO,OO SO.OO SO.OO 

$2lS.21 SO.46 $195.29 

Fees & 

Commissions + 

Ditect Sales 

Excluded ~ F.s t 

MLRRehate 

PMPM 

$1.86 

SO.OO 

$4.31 

SO,09 

$052 

som 

$0,00 

$O,9! 

$0.00 

$0.00 

5<lO3 

SO.07 

SO.OO 

SO.OO 

$0.01 

$0.00 

$0.23 

$iU5 

$0,00 

$1.20 

NIA 

SO.OO 

$0.00 

$0.12 

SO.OO 

SO,OO 

SO.42 

© 2011 National Association of Insurance Commissioners 28 

Fees & Fees & 

Cotnmlssions Commissions 

mluded, .Excluded. 

Federal Taxes Federal Ta.:oes 

lficluded~ Est. included ~ Est 

MLRRebate MLRRebate 

$M PMPM 

SO.83 

$37.95 $8,}1 

SO,68 S053 

$58.81 S2A4 

$11.34 5l.39 

SO.OO SO.OO 

$5.00 $0.91 

$0,00 $0,00 

$058 $0.21 

56Jl3 $0.24 

$0.31 

$0.04 

$1.65 

$0.00 

$0.14 

$6.92 

$0.89 

$0,22 

$0.04 

SO.47 

5U4 

SO.OO 

$1.81 

SO.22 

SO,OO 

SO.43 

$<136 

SO.OO 

SO.08 

SO.23 

$352 

SO.OO 

SO.OO 

SO.OO 

SO.09 

$0.00 

$0.00 

SO.OI 

$0,00 

$1.41 

51.57 

SO.OO 

$3.39 

NIA 

$0.89 SO.99 

$0.26 SOJJ2 

$23.22 $1.82 

$0,00 SO.OO 

SO.OO $0,00 

$497.15 51.07 
85 


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CALIFORNIA INSURANCE DEPARTMENT DATA 

© 2011 National Association oflnsurance Commissioners 29 

Insert offset folio 125 here 75610A.064jbell on DSK7SPTVN1PROD with 

Total Commissions 2000·2010 

2003 2004 2005 

TOTAL COMMISSIONS 35,828,679 54,301,574 65,462,274 

Total Commissions 2000·2010 

180,000,000 160,000,000 140,000,000 120,000,000 

€ 

l!! 100,000,000 

.2 

III ,!II 

E 80,000,000 E 

0 

() 

60,000,000 

40,000,000 

20,000,000 

a 

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 

Year 
87 


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o 

... 

o 

~ a 

a 

a 

N 

III 

C 

o 

~ E 

E 

o 

(J 

:B 

{:. 

0 

0 

0 8-

0 

0 

;:! 

0 0 0 g 8 0 0 

0 0 g 8 8 0 

0 0 0 

$' OJ '" 

($) SUO!SS!WWOO 

"-g 

'" 

:g 

~ 

8 ~ 

<II 0 

'" ~ 

8 

N 

M 

g 

N 

N 

0 

~ 

~ 

8 

N 

8 0 0 0 0 0 0- 0 0 0 0 0 

0 0 

" N 

Insert offset folio 127 here 75610A.066jbell on DSK7SPTVN1PROD with 

COMMISSIONS BY INDIVIDUAL. SMALL AND LARGE GROUP HEALTH POUCIES 2000 - 2010 
89 


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90 


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Communicating for America 

Communicating for Agriculture 

Communicating for Seniors 

The Honorahle Sam Graves 

Chairman 

t12 E. Lincoln Avenue 

Fergus Falls, Minnesota 56537 

Committee on Small Business 

U.S. House of Representatives 

2361 Rayburn House Office Building 

Washington, DC 20515 

Dear Chairman Graves and members of tbe committee: 

Communicating for America is a national association with tens of thousands of farmers and small 

business members all across rural America. On behalf of our members, the CA Board of Directors would 

like to state our support for legislation that ensures insurance agents are allowed to continue belping 

rural health consumers in the individual and small group market navigate the twists and turns of the 

health insurance market place and the Patient Protection and Affordable Care Act (PPACA). 

The great distances that agents sometimes have to travel to visit customers in rural areas, 

coupled with reduced access to high speed internet, in many cases points to the exclusion of 

agent compensation from the MLR calculation. CA members and small businesses in 

general often don't fit the one-size-fits- all type of policies offered by a few very large health 

insurance companies. Rural and smaller community health consumers and small 

businesses need the expertise of many of the smaller companies to meet their needs, as well 

as the personal attention of an agent who attends church and Friday night football games 

with their customers. 

Health insurance agents also assist with difficult cases involving persons with underlying 

medical problems who need additional information in order to get coverage. Agents have 

recommended high risk pools to thousands of their customers, even though they received 

little or no compensation for steering people in that direction. 

Agents help match those hard to cover individuals with the best health insurance plans, at 

the most affordable price. Sometimes for consumers, particularly in rural America, the best 

solution is not a large national company with a one-size-fits all online enrollment, especially 

if certain individuals can be denied coverage. That is where a local agent can help, and why 

there should be incentives to strengthen their role. 

The goal of health care reform and the PPACA is to insure more Americans at less cost 

Limiting choices for consumers accomplishes neither goal, and reducing agent commissions 

does not necessarily reduce insurance company profits, nor does it make health insurance 

more affordable for consumers. CA strongly believes we need legislation that allows greater 

choices and flexibility for consumers and small businesses and encourages innovative 

solutions from agents and the private sector. Limiting choice does not serve the needs of 
91 


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America's small businesses. CA supports legislation that ensures America's small businesses 

are allowed continued advice of their agents and helps strengthen competition in the 

individual and small group market. 

Thank you for your time, and we would be happy to answer any questions the committee 

may have. 

Sincerely, 

Wayne K. Nelson 

CA President 
92 


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CHAMBER OF COMMERCE 

OF THE 

UNITED STATES OF AMERICA 

RANDEL K. JOHNSON 

SE:-':lOR VICE PRESID":-> r 

L.\fiOR, 1\!~!H3R.,\rIll', & 

F,\fl'l.\)Yrl.~ BH:--'U·rrS 

The Honorable Mike Coffman 

Chairman 

December 22, 2011 

Committee on Small Business Subcommittee 

on Investigations, Oversight and Regu1ations 

United States House of Representatives 

Washington, DC 20510 

Dear Chairman Coffman: 

The U.S. Chamber of Commerce appreciates you and members of the 

House Committee on Small Business Subcommittee on Investigations, 

Oversight and Regulations for recognizing the problems that the new medical 

loss ratio (MLR) requirements will have on businesses and for holding the 

December 15,2011 hearing, 'New Medical Loss Ratios: Increasing Health Care 

Value or Just EliminatingJobs?" The Chamber agrees that the way health reform 

law is mandating health insurance carriers to use a specific percent of premiums 

on direct medical care is driving many carriers out of the small group and 

individual markets, eliminating jobs and reducing the number of affordable 

coverage choices. 

The U.S. Chamber of Commerce is the world's largest business 

federation, representing the interests of more than three million businesses and 

organizations of every size, sector, and region. More than 96 percent of the 

Chamber's members are small businesses with 100 or fewer employees. For 

small businesses struggling to remain open, the new health reform law (the 

Patient Protection and Affordable Care Act as amended by the Health Care and 

Education Reconciliation Act, collectively referred to as "PP ACA") and its 

myriad of requirements impose yet another fmancial challenge. In addition to 

imposing new mandates, the law is forcing small businesses and individuals to 

navigate the new legal requirements with fewer resources and fewer choices. 
93 


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The Honorable Mike Coffman 

December 22, 2011 

Page 2 

MLR will reduce valued resources and eliminate jobs 

Most small businesses operate without a human resource department to 

assist with coverage decisions. When deciding which type(s) of health insurance 

coverage and carriers to offer employees, small businesses have historically relied 

on insurance agents and brokers for help. However just as these decisions 

become more complicated, small businesses will be forced to make these choices 

without the help which they have traditionally relied on and those businesses 

which have provided this service will be forced to stop. 

Employers' coverage decisions will no longer be based solely on what 

benefit options are available and appropriate. Instead, as businesses struggle to 

comply with the employer responsibility provision of the PPACA, coverage and 

carrier decisions will become even more complicated. With a projected 32 

million more individuals entering the insurance market in 2014--when health 

insurance exchanges, new marketplaces of health plans, will also become 

operational-the brokers will become even more essential. Although brokers 

may be more essential, the MLR rule will drive them of business. 

Despite the urging of The National Association of Insurance 

Commissioners, HHS refused to exclude broker fees from the administrative 

portion of the calculation, a decision which will make it difficult for agents and 

brokers to be compensated for their work. Without commissions, brokers who 

have helped employers find the policies that meet their needs, negotiated terms, 

benefits, and premium costs with insurers, and helped navigate the claims 

process for the client company's employees will not be able to offer these 

services to small businesses. Companies will either have to do the work 

themselves or leave their employees to fend for themselves. 

Not only is the implementation of the MLR requirement hurting the small 

businesses that rely on brokers, it is driving those small businesses that provide 

this service out of business. A recent survey found that 21 percent of 

independent health insurance agency owners have been forced to downsize their 

businesses, forcing many brokerage fIrms to close their doors, layoff workers, 

and deprive clients of their services. 
94 


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The Honorable Mike Coffman 

December 22, 2011 

Page 3 

MLR will lead to fewer choices for small businesses 

\X7hile small businesses and individuals have fewer resources to assist them 

in identifying appropriate coverage, the choices available for these purchasers are 

becoming even more limited. 

Prior to the enactment ofPPACA, there was very little competition left in 

the small group insurance market. The four largest health insurance fIrms 

accounted for 65 percent of the small group insurance market. However, in 

many states, especially in rural areas, the largest insurer is the only insurer. In 

some cases, small businesses have been forced to get a new health plan because 

their insurer has left the marketplace. In other cases, employers have no other 

plan operating in their area to call for a rate quote when their current plan 

premiums skyrocket. Small fIrms have historically had few, if any, alternatives to 

their health plan when presented with dramatic rate increases. When plans leave 

the market, businesses have one less option to choose from, leading to less 

competition and higher prices. 

Attached is a document that shows the number of carriers that have 

exited the small group and individual market in the states as of October 201l. 

The chart was compiled using public data. In addition to the immediate decrease 

in choice that occurs when a carrier leaves the market, it is important to 

appreciate that this decrease in choice has long term implications. The Health 

Information and Portability and Accountability Act (HIP AA) generally prohibits 

carriers from re-entering the market for a period of 5 years, which will keep 

these carriers out of the market during a critical period of reform. Clearly, 

PPACA is reducing the number of carrier choices for consumers and employers. 

Fewer choices mean less competition and fewer alternatives when a carrier 

increases premiums. 

The withdrawal of carriers impacts the inter-play between the small group 

and individual markets. As states seek to phase in the MLR for the individual 

market, using the waiver process as outlined by HHS, there is widespread 

recognition that de-stabilization in the individual market will lead to destabilization in the small group market. Indiana is one example of a state where 

the Insurance Commissioner asked for a phase in the individual and small group 

marketMLR. 
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The Honorable Mike Coffman 

December 22, 2011 

Page 4 

The U.S. Chamber of Commerce appreciates this opportunity to submit a 

statement for the record on such an important issue. We look forward to 

working with you to identify and enact meaningful reforms to the small group 

insurance market, making healthcare more affordable and accessible for all 

Americans. 

Sincerely, 

Randel K. Johnson 

cc: Members of the Committee on Small Business Subcommittee on 

Investigations, Oversight and Regulations 

Insert offset folio 135 here 75610A.074jbell on DSK7SPTVN1PROD with 

Louisiana 

2011 

184 

186 

187 

188 

189 

Group 

Group 

Association Group or 

Individual Health Ins. 

Plans 

Individual 

Small Group 

Group 

2-3 enrolled 

4-15 enrolled 

16-25 enrolled 

TierZ 

2-3 enrolled 

4-15 enrolled 

16-25 enrolled 

26-50 enrolled 

51-99 enrolled 

Tier II 

2-3 enrolled 

4-15 enrolled 

16-25 enrolled 

26-50 enrolled 

51-99 enrolled 

Tier II! 

2-3 enrolled 

4-15 enrolled 

16-25 enrolled 

26-50 enrolled 

NfA NfA 

N/A N/A 

Negotiated but generally 4-5% 

N/A 

NfA 

4% 

4% 

5% 

$7.0

$35.0$29.0$19.0$17.0

$8.0

$36.0$30.0$20.5$19.0

$9.0

$37.0

$31.0

$21.0

4% 

Insert offset folio 136 here 75610A.075jbell on DSK7SPTVN1PROD with 

186 Group 15 enrolled NIA NIA 

Association Group or 50-99 Policies 12% 4% 

187 Individual Health Ins. 100+ POlicies N/A 

Plans Medical A e 61 + 

5.0% 6.0% 4% 

7.0% 

$35,000 10% 

2-50 enrolled Next $25,000 7.50% 189 Group Next $15,000 5% 4% 

Remainder 

186 Group 4-15 enrolled NIA NIA 16-25 enrolled 

26-50 enrolled 

Association Group or 23.0% 5% 187 Individual Health Ins, Various Products N/A 10.0% 5% Plans 

First $35,000 

2-50 enrolled Next $25,000 189 Group Next $15,000 F 5% ==j 4% Remainder 2.50% 

Negotiated but generally 4-5%