Column 70

First please let me clarify some confusion from last week's column.  The article made it sound like the new tax forms are required for year-end 2014.  This is not accurate.  It is my understanding this reporting is for the 2015 tax year, so employers should be prepared to start collecting this information in 2015.  Please accept my apologies for the confusion!  That being said, I will be curious to find out how the reconciliations work out for subsidies this year.  I am really not sure how the "affordable group coverage" issue is going to wash out for the 2014 tax year.

The Affordable Care Act (ACA) implementation had its first anniversary this month.  One of the most significant programs in our country's history is still evolving.  In the short term, the effect has been primarily in the area of universal coverage.  This means the part of the law that tries to expand coverage to the uninsured.  There are definitely more people insured than there were last year.

Another big part of the equation is the actual cost of medical care.  That has yet to be effected much by the changes.  One important provision of the law was directed at keeping the insurance companies honest. It is the MLR or Medical Loss Ratio provision.  This requires insurers pay out 80 to 85 cents of every premium dollar in direct health care expenses.

Since insurance companies have to set rates prospectively, i.e for the future, they must estimate what those costs would be based on an actuarial formula or in layman's terms "best guess".  Then the numbers are reconciled and if the insurer over billed, they must refund the difference to the policyholders, per the formula.

Readers might think this is a simple task.  It is not.  One perfect example of the challenges faced by insurers is seen in the new drug, Sovaldi.  This is used to treat Hepatitis C.  Apparently it is very successful. According to Web MD, it is the "drug of choice for this disease" and replaces other protocols.  According to the Associated Press, the 2011 filings for the drug estimated its cost at $36,000 for the 12 week course of treatment. 

Let's assume an underwriter is expecting that drug to be approved and factors in the $428.57 cost per pill in the equation.  That would be $36,000.  But the actual cost has been $84,000 or $1000 per pill.  It doesn't take too many Hep C patients to throw the loss ratios out of kilter when the insurer must pay $48,000 more for the drug.

Insurer's take some comfort in the fact that at least there is a process for filing and approval of rates that makes mathematical sense.

There is a measure on the November Ballot, (Propostion 45) that threatens to take away the mathematical foundation of underwriting in California.  It will give too much power to one elected official, the insurance commissioner.  While it sounds good to think that this individual could stop rate increases, it really is much more complicated.

We already have a process to address rate filings in the state.  Add to this, the fact that a cornerstone of the ACA legislation is the setting of Minimum Loss Ratios. You now have safeguards in effect to keep the companies honest.

Another provision of Prop 45 apparently requires an insurer to pay the legal expenses of an "intervener" of up to $650 per hour.  If the suit is not successful, these funds are not reimbursed to the insurer. So, as I understand it, a law firm merely has to decide to sue the insurer, and regardless of the outcome can be paid for their time at a very dear rate.    If this proposition is made into law, I would expect every law firm to ramp up to have a department to pursue this gravy train!  Of course, if this law passes, it's unlikely many carriers will stay in California.  It would simply be too unpredictable to do business. 



Note: All information in this column is provided" to the best of my knowledge" subject to final regulation by the respective agencies.