[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

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

__________

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13

Small Business Committee Document Number 112-049
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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 VELAZQUEZ, 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

2Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director

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

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 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.

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 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.
[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
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.
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 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.
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 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 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
commission 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 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.
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 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.
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. 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 Dodd-Frank. 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.
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 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 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?
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 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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