Health Insurers May Meet Medical Cost Mandate Under Health Law

By Drew Armstrong and Alex Nussbaum

April 27 (Bloomberg) -- Health plans led by WellPoint Inc. and UnitedHealth Group Inc. can subtract taxes and include as costs “activities that improve health care quality” to meet mandates in the U.S. health-care overhaul on how much they spend on medical care, a draft report says.

The health-care law signed by President Barack Obama in March requires some health insurers to spend at least 80 percent of premium revenue on customers’ medical care. A preliminary review by state regulators asked to help implement the mandate found that most companies can meet it, said an April 24 memo from the National Association of Insurance Commissioners.

The determination, if true, means the overhaul may not squeeze insurer profits as much as some investors feared, said Joshua Raskin, a Barclays Capital analyst in New York, in a note to clients today. Insurer shares have fallen 12 percent since the U.S. House approved the law March 21, as measured by the Standard & Poor’s 500 Managed-Health Index.

How the mandate is written “will be one of the most important events of the year for the managed-care stocks,” said Raskin. “Several of the comments in the report point to the potential for a definition that is not as harmful to the managed-care industry as currently expected.”

The health law will mandate insurers spend at least 85 percent of their premium revenue on medical care for large group plans, and at least 80 percent of revenue for small-group and individual plans. It requires the federal government to develop a standard definition of what constitutes medical care, a determination now left to insurers

Early Take

The memo, written by Rick Diamond, an actuary with the Maine Bureau of Insurance, is an early take on the new rule and will likely change before it is offered to federal regulators to be turned into a final regulation, said Jeremy Wilkinson, an association spokesman, in a telephone interview today.

“It’s a draft document,” he said. “I think you’ll find a lot of people going in and editing it.”

The state group has until June 1 to deliver its final recommendations.

WellPoint, the largest U.S. insurer by enrollment, fell 64 cents, or 1.1 percent, to $55.92 in composite New York Stock Exchange trading at 4 p.m. UnitedHealth, the second biggest, dropped 5 cents to $29.80. WellPoint is based in Indianapolis. UnitedHealth is in Minnetonka, Minnesota.

Since the House passed the overhaul, WellPoint shares have fallen 13 percent and UnitedHealth has dropped 11 percent.

Diamond’s memo said insurance companies will be able to meet the standards for large- and small-group policies under either of two different ways that regulators could decide to calculate medical spending and administrative costs.

Government Taxes

Meeting the standard will be easier because the law appears to allow health plans to subtract state and federal taxes they pay from premiums and to include as costs activities that improve health care quality, as defined by the association, Diamond wrote.

State insurance commissioners are writing recommendations for the medical-spending rules before handing them over to the federal Health and Human Services Department to complete.

Overall, UnitedHealth spent 82.3 percent of revenue from premiums to pay customers’ medical expenses last year, while WellPoint spent 82.6 percent, according to company filings.

--Editors: Reg Gale, Angela Zimm.

To contact the reporters on this story: Drew Armstrong in Washington at darmstrong17@bloomberg.net; Alex Nussbaum in New York anussbaum1@bloomberg.net.

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net.