Insurers ReClassify Admin Expenses as Medical Expenses to Circumvent New Regs

April 19, 2010

The deadline for doing so isn’t until the first of next year, but already some of America’s largest health insurance companies are changing their accounting to reclassify administration costs as medical expenses, in order to work around industry reforms mandated by the recently-passed health care overhaul, says news agency Reuters, reporting on a U.S. Senate panel’s report that was recently released.

Under the new health care law, insurance companies must change their spending habits to meet new restrictions, which specify that large group plans must spend at least 85 cents of premium dollar on actual medical care, while small group and individual plans are required to spend 80 cents of every dollar on medical care, as opposed to administrative expenses.

At issue, is the fact that some health insurers are merely reclassifying expenses, and it’s not just an issue for patients, but for investors as well. According to Reuters, Wall Street keeps a close watch on such spending levels, which are known as “medical-loss ratios” or “MLRs,” to gauge the potential for profit. After the Senate report was released, major health insurance stock indices fell.

The Democrat-led Senate Committee on Commerce, Science and Transportation said in a statement, “The insurance industry is beginning to consider the financial impact of the new federally required (medical) loss ratio requirements, including questionable changes in their accounting practices. Wellpoint, Inc., it said, “…has already ‘reclassified’ more than half a billion dollars of administrative expenses as medical expenses.”

When asked for comment, Kristin Binns, WellPoint spokeswoman, said that the company would work with industry regulators to implement the MLR requirement, but she didn’t speak to the issues of cost shifting or accounting practices.

According to another Reuters article, a review of insurance company expenses for the 2009 fiscal year shows that in some markets, the average amount spent on actual medical care is only 74 cents of every premium dollar.

Chris Curran, Cigna spokesman, said it was too early to know how that company would be affected by the new rules, and that new calculation methods were still in development. Other insurers chose not to comment at all.