Healthcare rule caps prescription drug profit

An Affordable Care Act-initiated rule striking at the heart of some health insurers’ profit margins has landed at the White House for review.

The provision involves medical ratio loss requirements — insurer-speak for the amount of money healthcare plans must devote to medical expenses versus what they can take for overhead costs and profit.

Drafted by the Department of Health and Human Services (HHS), the proposed rule covering Medicare Advantage plans and prescription drug benefit programs was submitted Thursday to the White House’s Office of Information and Regulatory Affairs (OIRA).

The proposed regulation is considered economically significant in that it would carry an economic impact of more than $100 million. The measure’s actual cost will depend on its details. 

“It’s being anxiously awaited,” said Bobby Guy, a Nashville-based lawyer specializing in healthcare. 

Since 2011, general health insurers have been required by the landmark healthcare law to spend either 80 percent or 85 percent of their revenue on medical expenses, depending on their size. The proposed rule will extend that to the prescription drug programs and Medicare Advantage, which will have to cap its overhead and profits at 15 percent beginning next January.

The stakes are high, notes Guy. Insurers that miss that cap for three consecutive years would be penalized with enrollment restrictions. Five straight misses would require removal from Medicare Advantage.

While the cap is reasonably set in stone, insurers are waiting to see which expenses can be considered medical.

“What will fall into quality care and what will fall into expenses and overhead is very important,” Guy said. “There is substantial room for difference of opinion.”

Medicare Advantage plans primarily deliver care to the elderly and disabled, populations that carry higher health risks. As such, they are adept at working under narrow profit margins, Guy said. He predicted that plans would serve as a “mini-lab,” as they look for ways to remain profitable under the new caps and could serve as a model for the rest of the health insurance industry, even though their rules will take effect relatively late in the game. 

Though they represent a small part of the health insurance marketplace, Guy said they can play an important role in the insurance reform.

HHS also submitted to OIRA a proposed rule involving doctor referrals to healthcare entities with which they have financial relationships.

White House issue of the two proposed rules would trigger public comment periods. The comments must be considered before the rules are finalized.


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