In perhaps the most widely anti­cipated Supreme Court decision since Bush v. Gore in 2000, the Patient Protection and Affordable Care Act (PPACA) was upheld on June 28 in a narrow 5 to 4 decision. See National Federation of Independent Business et al. v. Sebelius, Secretary of Health and Human Services, et al., 567 U.S. ___ (2012), Case No. 11-393.

Many believed that the Court would hold the law unconstitutional because of a provision known as the “individual mandate,” which requires most U.S. citizens to purchase health insurance or pay a penalty. Instead, the Court decided that the mandate was constitutional because the penalty that one must pay for not buying insurance is a tax, which Congress has the authority to impose.

The Court did reject a provision of PPACA requiring states to comply with new eligibility requirements for Medicaid or risk losing their existing Medicaid funding, but the fundamental core of the law was upheld and remains intact. With the constitutionality of the law affirmed, the U.S. insurance industry now knows that the law’s requirements that had already been in effect will not soon be reversed. Health insurers will also have to comply with numerous additional requirements that will become effective between now and January 1, 2014. This article will summarize some of the law’s more significant requirements.

Existing Requirements

The following requirements, which have been in effect for group health insurance plans and self-insured plans for plan years beginning on or after September 23, 2010, remain in place:

  • Must cover adult children as dependents up to age 26, without regard to the typical criteria for determining dependent status, such as whether the child is married, resides with the employee or is a full-time student.
  • Must eliminate lifetime dollar limits for “essential health benefits” and phase out annual limits on “essential health benefits” coverage through 2014, when annual limits will be prohibited.
  • Must eliminate pre-existing condition exclusions for any participant under age 19.
  • Cannot cancel or rescind health coverage once the individual has become a covered participant, except in cases of fraud or intentional misrepresentation of material fact.
  • Cannot discriminate in favor of highly compensated individuals as to eligibility and benefits (guidance has delayed the effective date of this requirement for certain fully insured group health plans).

Perhaps the most onerous provisions in PPACA are those that impose medical loss ratio (MLR) requirements on insurers. These requirements, which are already in effect, will be discussed below.

New 2012 Requirements

Other requirements are not yet in effect. Beginning September 23, 2012, every group health insurance plan and sponsor of a self-insured health plan must provide participants a uniform summary of benefits and coverage that describes the health benefits offered under the plan, limits on coverage, cost-sharing provisions, and any restrictions on the continuation of coverage. Participants must be notified of any material changes to this information, at least 60 days in advance of the change. Failure to provide this summary will result in a $1,000 fine per failure. For calendar year plans, this summary of benefits and coverage must be provided to participants in any open enrollment that starts on or after September 23, 2012.

In addition, a new “Patient-Centered Outcome Research Trust Fund Fee” is being imposed on issuers of certain health insurance policies and plan sponsors of certain self-insured health plans to fund the Patient-Centered Outcomes Research Institute. The fee will be equal to the average number of covered lives multiplied by $1.00 for each policy or plan year ending on or after October 1, 2012, increasing to $2.00 for plans ending after September 30, 2013. For calendar year plans, the first fee will be imposed for the current 2012 plan year and for each of the next six years.

New 2014 Requirements

Additional changes mandated by PPACA will be effective on January 1, 2014. Waiting periods under group health plans and self-insured plans will not be able to exceed 90 days. After that date, any employer with more than 200 full-time employees that offers a health plan will be required to enroll new full-time employees in the plan automatically, subject to any waiting period authorized by law. Employers must provide an opportunity for employees to opt out of employer-sponsored health insurance in which they have been automatically enrolled. Also, most employers with 50 or more full-time employees that do not offer minimum essential coverage, or that offer “unaffordable” health coverage, will incur an annual penalty.

Health Insurance Exchanges

One of the most significant changes in the industry will be the establishment of state health insurance exchanges. PPACA mandated that online exchanges be created and operating in all states by October 1, 2013, so that individuals and small groups can enroll in plans in advance of a January 1, 2014 start date. States that intend to operate their own exchanges, alone or in partnership with the Department of Health and Human Services (HHS), must notify HHS of their intention to do so by November 16, 2012. In states that do not create their own exchanges, the federal government will be required to implement federally operated exchanges.

The federal government has expressed a preference for states to establish their own state-based exchanges, and is allowing states considerable flexibility to tailor their exchanges to the needs of their own marketplaces. However, not all states will be ready to operate their own exchanges by the deadline, and politicians in a number of states have refused to take the necessary steps to prepare for their implementation. Where necessary, HHS will assume the administrative tasks required by PPACA, including plan management, eligibility and enrollment functions, and financial management responsibilities, for health plans to be sold in the state exchanges.

All plans that wish to become “qualifying health plans” and participate in state insurance exchanges will be required to provide coverage for 10 designated categories of “essential health benefits” (EHBs), including ambulatory care, emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services, prescription drugs, rehabilitative and habilitative services and devices, laboratory services, preventive care and chronic disease management, and pediatric services. HHS’s definition of EHBs will be based on the benefits offered by a “benchmark” insurance plan selected by each state. If a state does not select a benchmark plan, HHS will use the plan with the largest enrollment in the state’s small-group market as the default benchmark. The three largest plans today are considered the potential default benchmark plans for 2014.

Medical Loss Ratio (MLR) Requirements

With PPACA remaining in force, so do its MLR requirements. Individual and small group health insurance plans must spend no less than 80% of their premium dollars on health care provided to subscribers and on certain quality improvement activities. For large-group plans, the required ratio is 85%. The remaining 15% or 20% may be used for administrative expenses and profits. Insurers began reporting their MLRs to HHS on January 1, 2011, and those whose MLRs fall below the required threshold are required to rebate the difference to their insureds beginning in the 2012 plan year. Insurers with fewer than 1,000 insureds are exempt from the rebate requirement.

Many states have long maintained their own MLR requirements, some of which exceed those required by PPACA. Because each state defines medical care differently, with differing levels of competition (i.e., number of insurers) and different geographic mixes (e.g., urban vs. rural), the state-determined MLR rates differ widely (e.g., North Dakota at 55% vs. New Jersey at 80%). Under PPACA, if a state has an MLR requirement higher than required by PPACA, the higher MLR requirement prevails.

Under PPACA and its regulations, commissions paid to insurance producers (both agents and brokers) are considered administrative expenses. Insurance agents and brokers have expressed concern that classifying commissions as administrative expenses will cause insurance companies either to reduce the commissions they pay to agents and brokers, or to increase the premiums they charge to policyholders. A Government Accountability Office report supported this position, stating that almost all insurers it interviewed were reducing brokers’ commissions and making adjustments to premiums in order to comply with PPACA’s MLR requirements.

Opponents of PPACA’s MLR requirements argue that insurers’ actions will result in industry consolidation and reduced levels of customer service. They contend that lower commissions will force small producers either to cease operation or to sell themselves to larger competitors that can remain profitable with lower commission rates. With fewer small producers in the marketplace, customers will have fewer choices of producers to use. Some consumer advocates, however, believe that enforcement of the MLR requirements will ensure that customers receive the highest value for their premium dollars.

PPACA allows HHS to adjust the minimum MLR in a state if it determines that the MLR may destabilize the state’s individual health insurance market. Of the 17 states that applied for temporary adjustments, however, only six were granted in whole or in part. All of these temporary adjustments will end in 2014. Congressional bills have been proposed that would either exclude compensation paid to licensed insurance producers from administrative expenses when calculating an insurance plan’s MLR or repeal PPACA’s MLR requirements entirely, but passage of any of these bills is considered unlikely. The National Association of Insurance Commissioners has asked Congress and HHS to adjust the MLR component of PPACA in order to preserve consumer access to insurance agents and brokers, so far without success.


The contentious national debate over healthcare reform continues, and the final chapter on PPACA may not have been written. The ultimate fate of the law may depend on the outcome of the upcoming presidential and congressional elections this November. For the moment, however, insurers (as well as other healthcare industry parties) must plan to take the steps necessary to comply with PPACA’s myriad requirements.