HMO regulations aim to protect, but can burden buyers

Employers and other purchasers of health insurance continue to face rising costs for employee health benefits. The overall cost of providing such benefits has reached such a high level that employers are now often requiring their employees to share part of this burden.

The product they are buying is arguably the most regulated product in the world, and it is provided by one of the most regulated industries. HMOs and health insurers are typically regulated with respect to their corporate structure, capitalization requirements, and reserving methodology, and they must follow a special type of accounting rules. They also are regulated with respect to the configuration of their provider networks, their provider reimbursement methods, and their claims payment practices. The products that they offer and the benefits to be covered are regulated and in some cases, mandated, as well as the pricing, underwriting and marketing practices utilized for distributing those products. Insurers also are heavily taxed at the state and federal levels.

PROTECT AGAINST PERCEIVED EVILS

These hidden costs of health insurance fall under several categories: taxes and assessments, mandated benefits, compliance costs, capitalization costs, and costs associated with acquisitions. Taxes and assessments are the most easily quantifiable. Premium and maintenance taxes are approximately 2% of the insured's premium (but vary from state to state). Additional assessments come in the form of charges involved in the cost of running programs established for uninsured individuals, charges for mandatory reinsurance programs for small group business, and guaranty fund obligations that cover the cost of insolvencies.

Most states' insurance laws do not allow for HMO and PPO products to be offered by the same regulated entity, thus requiring health insurers to separately license and capitalize an insurance company and an HMO. Because of the lack of uniformity among the states with respect to the regulation of HMOs, most insurers feel compelled to license a separate HMO for each state in which it does business. The overall capitalization costs for maintaining these various regulated entities is significant.

When insurers merge with or acquire other insurers, approval must be obtained from state regulators prior to consummating the transaction. In a large transaction in 2004, the California insurance commissioner required the acquirer, as a condition of approval, to pay about $250 million to charities and other organizations supporting medically underserved communities. In another large transaction in 2005, the California commissioner again required payment of a similar amount, and a few other states followed suit. There appears to be no basis in the insurance "change-of-control" rules for the requirement of these payments.

These costs, as a percent of premium, will probably continue to grow, partly because of the shrinking population that ultimately bears them. As the cost of health insurance rises, the threshold for choosing a self-funded option is lowered. In other words, as the cost of a fully insured option gets higher, a self-funded option for health benefits becomes attractive to smaller and smaller groups. Ultimately, the pool of purchasers buying fully insured products becomes smaller.

Barry Senterfitt is a partner in the insurance industry practice of Akin Gump Strauss Hauer & Feld LLP, and is located in the firm's Austin,Texas,office.