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New regulations issued Tuesday by the Department of Health and Human Services (HHS) will require health insurers to spend 80% to 85% of premiums on direct care for patients and improvement of health care quality instead of covering overhead costs or banking the money as profit. Any insurer failing to follow the new guidelines must issue rebates to its customers.

The stipulations, part of the Obama Administration’s Affordable Care Act, represent an attempt to prevent insurers from using premium payments to fund administrative costs, including executive salaries, overhead and marketing. It is slated to go into effect in January 2011.

“These new rules are an important step to hold insurance companies accountable and increase value for consumers,” HHS Secretary Kathleen Sebelius said in a written statement.

The regulation will protect up to 74.8 million insured Americans, according to HHS. Estimates indicate that as many as 9 million Americans could be eligible for rebates starting in 2012 worth up to $1.4 billion. Average rebates could total as much as $164 a person.

Currently, there are no stipulations concerning what amount of patients’ premiums needs to be spent directly on medical care, but many plans spend in the range of 60 to 80 cents per dollar.

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The new law has received opposition from some health care providers who feel that it does not adequately account for the marketing costs for attracting smaller employers. Some providers have even threatened pull out of the individual insurance market. Georgia, Iowa, Maine and South Carolina have already asked for an exemption from the federal rule, fearing it could lead to reduced coverage.

But federal officials stand behind the law, saying that its stipulations are designed to prevent providers from backing out of coverage. Small insurers with fewer than 1,000 enrollees, for example, are not required to provide rebates, and those with fewer than 75,000 enrollees can get adjustment so that they don’t have to pay the full amount. States can also apply for a waiver if regulators believe the requirement would lead to a loss of individual coverage in their area.
“These rules were carefully developed through a transparent and fair process with significant input from the public, the states, and other key stakeholders,” said Jay Angoff, director of the Office of Consumer Information and Insurance Oversight at HHS.

Republicans, for their part, have announced intentions to repeal the Affordable Care Act when they take control of the House in 2011, threatening the future of the new premiums rule.

For more about the Patient Protection and Affordable Care Act of 2010, check out MainStreet’s health care coverage here.

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