Group proposes health insurers' spending rules

WASHINGTON (Reuters) - Health insurers should be able to exclude most federal taxes, but not all, in calculating spending rates to meet new healthcare law requirements, an insurance advisory group has proposed.

Under a draft plan released on Thursday, insurers would be allowed to deduct nearly all federal and state taxes except for federal income taxes on investment income and capital gains in making their calculations.

“It’s written the way insurers wanted it to be written, and so that is good for the insurers,” said Amy Thornton, an analyst at Concept Capital’s Washington Research Group.

The Healthcare law, passed in March, sets strict limits on how insurers allocate customers’ premium dollars toward medical care versus administrative costs and profits, spending levels known as the medical loss ratio (MLR).

MLR is seen by Wall Street as an important indicator of a company’s profitability. The new limits are due to go into effect in January.

Insurance companies have urged broad definitions that they say offer flexibility to provide better care while strict rules could force some to exit the market. Consumer advocates and Democrats want tighter limits to ensure that insurers spend enough on patient claims.

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The plan was put forth by a committee at the National Association of Insurance Commissioners (NAIC). NAIC is comprised of state insurance commissioners from across the country.

NAIC spokesman Jeremy Wilkinson said the plan was a draft of what the organization intends to give the U.S. Department of Health and Human Services (HHS). It must be finalized by the NAIC and formally adopted by HHS.

Under the Healthcare law, large insurance plans must spend 85 cents of every premium dollar on health care while smaller plans can spend 80 cents on the dollar.

Ipsita Smolinski, a healthcare analyst for Capitol Street, said NAIC’s proposal contained no major surprises and gave insurers “a fairly generous definition” of what counts as medical expenses that can raise the quality of care.

In its proposal, NAIC said medical expenses aimed at health quality “must be directed toward individual enrollees” and “should not be designed primarily to control or contain cost.”

NAIC released its proposal on its website.

Reporting by Susan Heavey; Additional reporting by Lewis Krauskopf; Editing by Richard Chang