The Federal Medical Loss Ratio: A Permissible Federal Regulation or an Encroachment on State Power?

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TABLE OF CONTENTS INTRODUCTION I.   THE PATIENT PROTECTION AND AFFORDABLE CARE ACT      A. Processes and Goals of the PPACA and Its         Medical Loss Ratio      B. Litigation Surrounding the PPACA      C. Review of the PPACA by the Supreme Court II.  CONGRESS'S HISTORICAL ROLE IN INSURANCE REGULATION      A. Pre-1945 Common Law Insurance Regulation      B. The McCarran-Ferguson Act and Its Common        Law Progeny      C. The Common Law Struggle with the         "Business of Insurance"      D. Roadmap for Testing the Legality of the         Federal Medical Loss Ratio III. CONSTITUTIONALITY OF THE FEDERAL MEDICAL LOSS      RATIO UNDER THE COMMERCE CLAUSE      A. Constitutionality Under the Test for Persons,         Goods, or Things that Move in Interstate Commerce         1. Persons, Goods, or Things that Move in            Interstate Commerce         2. Rational Relationship of the Rational Basis Test         3. Legitimate Government Purpose of the            Rational Basis Test      B. Constitutionality Under the Substantial Effects Test         1. Substantial Effects Test         2. Rational Basis Test IV. PERMISSIBILITY OF THE FEDERAL MEDICAL LOSS     RATIO UNDER THE MCCARRAN-FERGUSON ACT     A. Elements of the McCarran-Ferguson Act Test in        Practice        1. First Prong        2. Second Prong        3. Third Prong     B. State Medical Loss Ratios Cannot Be        Statutorily Preempted V.  POLICY IMPLICATIONS OF THE FEDERAL MEDICAL LOSS     RATIO CONCLUSION 

INTRODUCTION

The Patient Protection and Affordable Care Act (PPACA) may be the most controversial piece of legislation of the past several decades. (1) The purpose of the PPACA is to provide access to affordable health care for all Americans, to improve efficiency in the health care industry, and to contain rising costs of health insurance. (2) Although increasing access to health care and other similar goals of the Act are not controversial, (3) the PPACA's methods of achieving these goals have created deep rifts within America's political parties. (4)

The controversial nature of the PPACA garnered a constitutional challenge before the Supreme Court in National Federation of Independent Business v. Sebelius. (5) In the majority opinion written by Chief Justice Roberts, (6) the Court upheld the individual mandate under Congress's power to tax, (7) but struck down the provision to expand Medicaid because Congress could not order states to regulate in a precise manner. (8) Not all of the PPACA's legal controversies were brought before the Court in this landmark case. (9) In particular, the Court did not address the PPACA's requirement that health insurance companies provide rebates to customers if they fail to meet a specified federal medical loss ratio. (10)

A medical loss ratio is "[t]he percentage of your premium dollars that an insurance company spends on providing you with health care and improving the quality of your care (as opposed to what it spends on administrative, overhead, [profits,] and marketing costs)." (11) Under the PPACA, insurers must issue rebates if payments for medical claims and quality improvement activities account for less than 85% of premium revenue for insurers in a large group market or less than 80% for insurers in a small group or individual market. (12) These requirements of 80% and 85% are the federal government's minimum medical loss ratios. The federal government now limits how much insurance companies may spend of each premium dollar on expenses that are not medical expenses or efforts to improve quality. (13) The rebate amount is equal to the amount by which the insurance company's expenditures on nonmedical and nonquality improvement costs exceed the minimum medical loss ratio of total premium dollars. (14)

Medical loss ratios are not a new concept in governance. States have implemented minimum medical loss ratios for years to rein in rising health care costs. (15) However, states almost always set more lenient minimum medical loss ratios than the new federal ratio. …