White House unveils awaited Affordable Care Act profit margin rule

A proposed federal rule to cap profit margins for certain health insurance plans and prescription drug benefit programs is now available for review.

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The latest in a raft of rules required by President Obama’s landmark healthcare law, the proposed rule was drafted by the Centers for Medicare and Medicaid Services (CMS) and sent to Pennsylvania Avenue on Thursday.

The White House’s Office of Information and Regulatory Affairs (OIRA) is moving quickly to issue the proposal, which will hit the Federal Register on Tuesday. That begins a 60-day comment period. CMS will consider all comments before finalizing the rule.

The 116-page proposed rule can be read here. The rule is considered economically significant, meaning it carries an economic impact of more than $100 million.

The measure would implement 85-percent “medical loss ratio” requirements on Medicare Advantage plans and the Medicare Prescription Drug Benefit Program. In other words, plans that deliver services under those plans must spend at least 85 percent of their premiums on “clinical services, prescription drugs, quality improving activities, and direct benefits to beneficiaries,” according to the proposal.

Overhead expenses and profits would be capped at 15 percent.

While those broad contours of the plan were set out in the Affordable Care Act, the healthcare industry has anxiously awaited the proposed language, which details nuances of the forthcoming regulations.

The rule would also institute penalties for those providers that fail to meet the caps requirements. 

“If a plan sponsor fails to meet MLR requirements for more than 3 consecutive years, they will also be subject to enrollment sanctions and, after 5 consecutive years, to contract termination,” according to language in the proposal.

Since 2011, most general health insurers have been required to spend either 80 percent or 85 percent of their revenue on medical expenses, depending on their size. The rule expanding caps to Medicare Advantage - a program aimed at the elderly and disabled - and the Prescription Drug Benefit Program is set to take effect next January.