Will health care reform pressure school insurance plans to pay out?

It's one of the dirtiest little secrets about mandatory student health insurance and the rise of college-sponsored health care plans: for all those dollars in hefty premiums the plans take in from students, they spend comparative peanuts paying out students for benefits -- sometimes as little as 30 cents on the dollar or less.

As the new health care reform laws take shape, however, it looks like school plans may find themselves squeezed to pay out more money in benefits or lower premiums, which could mean cheaper health care for students as early as next year. The only problem, of course, is that health insurance providers still have a say in how the new system shapes up -- and they aren't letting go of that other 70 cents without a fight.

This week, the blog Higher Ed Watch released a rather damning article suggesting that college-sponsored plans would soon have to begin paying out more in benefits, and even went so far as to question whether school-sponsored student/health insurance benefit plans (SHIBPS) might cease to exist in the new dawn of health care reform. While the article doesn't elaborate on all its claims, it states that "SHIBPS [currently] distribute as little as 30 cents in benefits for each dollar in premiums collected," and that "in the future, it is likely that SHIBPS will have to distribute a minimum of 80 cents (possibly much more) on the dollar in benefits to students, and send reimbursement checks to enrollees if they fail to do so."

While I've covered college health care plans in the past, the 30 percent figure struck me as something I hadn't come across before. Turns out it comes from a 2008 investigative article in BusinessWeek, at least as far as the Higher Ed Watch piece indicates. Sure enough, when BusinessWeek managed to obtain benefit ratio statements from several colleges in Florida, benefits payed out to students for the given semesters lurked at appallingly low percentages of the cash raked in: 35 percent, 61 percent, 10.2 percent.

More recently, the New York attorney general's office conducted an investigation into college-sponsored health plans, and concluded that insurers were short-changing students in terms of payouts and coverage. The office's report, issued in April, found similarly low ratios for benefits payed at several New York colleges: 49.3 cents on the dollar, 28.4 cents on the dollar. Attorney general Andrew M. Cuomo sent letters to the 65 colleges investigated (most in New York, but several across the nation) and outlined the possibility of legal action against the schools if payout ratios didn't improve. Seems like Higher Ed Watch's 30 percent payout figure, while a bit of a loose generalization, holds water in a discussion of school-sponsored health care plans.

Meanwhile, the 80 percent figure comes from a provision in the new health care reform bill that controls a number known as the Medical Loss Ratio (MLR). Basically, the MLR is how insurance providers keep track of the percentage of paid premiums they're paying out in ways that directly benefit policyholders -- medical expenses and the like. If an insurer maintains an MLR of 75 percent, it means they're spending 75 cents of every premium dollar paying policyholders' medical claims, while 25 cents go toward applications that don't directly benefit its customers, like administrative expenses, employee salaries, advertising, and, of course, profit. According to BusinessWeek, any MLR under 75 percent is often considered sub-par and grounds for renegotiation within the industry, which casts the college numbers in an especially harsh light.

Beginning in January 2011, however, the new health care reform law mandates that insurers maintain a MLR of 80-85 percent, which may provide a wake-up call for the SHIBPS and their dismal payout ratios. According to Joel J. Ohman, a Certified Financial Planner and the founder of the online health insurance marketplace HealthInsuranceProviders.com, these low payouts are pretty much par for the course among college-sponsored health care plans, and insurers could indeed find themselves forced to either pay students more benefits or lower premiums come January.

"While there is still some clarification forthcoming on what components actually make up the Medical Loss Ratio described in the recent health care reform bill," he said, "one thing is for certain, and that is that many school-sponsored health plans have woefully small benefit ratios. Some might say this is because students rarely use their health insurance because they're typically young and healthy, while others say this is because of plan overpricing on the part of the schools and the insurance companies underwriting the plans."

Ohman also said that insurers won't give up the lucrative profits of the student plans easily, and students can expect every effort to maintain the status quo.

"Look for insurance companies to double down on their current efforts in designing and marketing school-sponsored plans," he said, "because as health insurers have their margins pinched with traditional health plans due to health care reform, these profitable school health plan contracts will become increasingly important to them."

Sure enough, Cuomo's investigation also revealed that many colleges force students to purchase school-sponsored coverage, even if they're already covered by Medicaid or a parent's plan. If students don't sign up, schools often charge them heavy fees to use their existing coverage at campus health centers. Meanwhile, trade associations of college health care professionals like the American College Health Association have expressed concern about too many students staying on parents' health insurance; one such association, the Lookout Mountain Group, even argued openly in a position paper that schools should be able to compel students with parental coverage to purchase their school's plan as well.

With President Obama's health care reform law expanding Medicaid and extending parental coverage to students until age 26, all of this gives off the impression that insurers may try to make up the gap in student plan enrollment by forcing as many students as possible to purchase their school-sponsored plans via school-sponsored mandate.

Of course, if insurers are forced to bring school-sponsored plans up to that 80-85 percent payout rate, these SHIBPS might not prove such a windfall for insurance companies come January. Last month, though, Sen. Jay Rockefeller, (D–W. Va.), warned that some insurance companies are already "gaming" the new payout requirements by reclassifying administrative expenses as medical spending. Seems like January's sea change could turn into a mere shell game if that's the case.

What to take away from all of this? A gathering cloud of looming questions for students as lawmakers hammer out the details of how to interpret the health care reform law and its implications for school-sponsored plans - and an assurance that the battle over student health care (and over students' disappearing premium dollars) is just starting to heat up.