Last week, we heard a disturbing report about insurance companies attempting to sabotage the medical loss ratio, a percentage put into the Affordable Care Act that requires insurers to spend 80-85% of premium revenue on actual medical treatment rather than administrative costs, marketing, overhead, executive salaries and profit. Insurers want to reclassify all kinds of spending as a medical expense, so they can take more and more as profit.

Insurers in violation of MLR rules would have to pay refunds to policyholders. If the health care act had been in effect in 2009, the six largest for-profit health insurance companies would have been required to pay $1.9 billion just for the year, according to the HCAN report. Industrywide, the report stated, MLRs range from 94% to 33% [...]

Franken offered WellPoint (NYSE: WLP) as an example, saying the insurer has reclassified $500 million in administrative costs as medical expenses. A WellPoint spokesman previously said the company now includes in its MLR health and wellness programs, nurse hotlines and weight loss and smoking cessation programs (BestWire, May 10, 2010).

“What they’re trying to do is expand the definition of medical care to include things that simply aren’t medical and in so doing protect their ability to rake in profits at the expense of patients,” HCAN Executive Director Ethan Rome said.

I was able to ask Franken about this in a one-on-one interview at Netroots Nation. He said this was an example of the need to stay vigilant in the implementation process on bills of this nature. “I mean, I like to call what we passed ‘The Health and Human Services Secretary Shall … Act of 2010,’” Franken said, pointing to all the parts of the bill that need to be clarified by that federal agency. However, Franken seemed confident that pressure on the insurers would aid in reducing the amount of reclassification in the system. “It’s not like the medical loss ratio hasn’t been computed before,” Franken said. “I have full confidence that Kathleen Sebelius can get this right.”

John Garamendi, a two-time California Insurance Commissioner and now a Congressman from the Bay Area, agreed that the MLR rules would be implemented properly, mainly because he sent his own reinforcements over to help write them. Gary Cohen, Garamendi’s chief legal counsel throughout his Insurance Commissioner career (and a blogger to boot), has moved to HHS Office of Consumer Information and Insurance Oversight, responsible for the enforcement of rules like the MLR that impact the insurance companies. He knows the tricks and traps that insurers will use to try and get out of the MLR, and should be able to button them up.

However, Garamendi said in an interview that there are two pieces to the medical loss ratio. You have what actually gets included in medical treatment, and you have the premium prices themselves. “It’s an algebra equation,” Garamendi said. “If the insurance companies want to make more profit, they can increase their premiums – in fact, you’re giving them an incentive to do so. Say you want a billion dollars of profit. Just set your prices accordingly and back into it. So we have to control premiums, and there’s nothing in the law yet to do that.” Garamendi said this is a major reason why the public option would have been so helpful in the Affordable Care Act. He hopes to get the new introduction of the public option, which Lynn Woolsey put in last week and which would save $68 billion dollars according to CBO, up for a vote in the near future.

In the meantime, while some manner of rate review gets put together, Franken stressed the importance of working with the federal agencies implementing the laws. “I’ll give you an example, my service dogs bill for wounded veterans,” Franken said. “That made its way through Congress until the conference committee on Appropriations. Someone at Veterans (Affairs Dept.) sounded a thing against it. Now, we meet with them once a month, my staff does, and I personally meet with them every few months to see where the program is going. And that has worked very well. So showing an interest makes a big difference.”