New Rules Tell Insurers: Spend More on Care

The Obama administration issued new federal rules on Monday that will require many health insurance companies to spend more on medical care and allocate less to profits, executive compensation, marketing and overhead expenses.

While some states have had such requirements, Monday’s announcement is the first such mandate by the federal government and grows out of the new national health care law.

Starting next year, she said, insurers in the individual and small-group markets must spend at least 80 percent of their premium revenues on medical care and activities to improve the quality of care. Insurers in the large-group market must spend at least 85 percent of premium dollars for those purposes.

Insurers that do not meet the standards next year will have to pay rebates to consumers, starting in 2012. Ms. Sebelius estimated that up to nine million people could get rebates worth up to $1.4 billion. About 45 percent of people with individually purchased insurance are in health plans that do not meet the new standards, known as medical loss ratios, federal officials said.

The rules allow special treatment for health plans that provide limited benefits at a more affordable price. At least 1.4 million people are enrolled in such “mini-med” plans, which may cap coverage for one or more benefits at $5,000 or $10,000 a year — or perhaps $25,000.

Employers offering such coverage had said they might end it because they could not meet the 80 percent standard next year.

Premiums are usually lower for mini-med plans than for regular insurance, and administrative costs may be high because these plans often cover employees with high turnover rates. As a result, administrative costs account for a higher share of premium revenues.

In addition, some consumer groups said mini-med plans had higher profit margins than traditional insurance.