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. Today, thirty-eight states have medical loss ratios below 75% or no medical loss ratios at all. (16) In fact, only California, New York, and Vermont have medical loss ratios that meet or exceed the new federal ratio of 80% for small group or individual carriers. (17) No state has a medical loss ratio that meets the federal medical loss ratio of 85% for large group carriers. (18) Congress only gave states the option of increasing their medical loss ratios above the federal minimum. (19) State regulation decreasing the medical loss ratio is subject to the Secretary of Health and Human Services' approval. (20) States may apply for an adjustment if the federal "standard may destabilize the individual market" and "result in fewer choices for consumers." (21) The decision to set a medical loss ratio is now reserved solely for the federal government, not for the states.
This Note evaluates the constitutional and statutory viability of the PPACA's insurance rebate provision, specifically the federal medical loss ratio. The federal medical loss ratio has received some scholarly attention with respect to its constitutionality. Professor Richard Epstein and practitioner Paula Stannard contend that the ratio is unconstitutional under the Fifth Amendment's Takings Clause because the government has not compensated for regulatory losses after it reduced the health insurance industry's return on investment. (22) Professor Epstein also wrote another paper with a similar argument prior to the PPACA's passage, arguing that the government's failure to provide a risk-adjusted rate of return or any due process to insurance companies was unconstitutional under the Fifth Amendment's Takings and Due Process Clauses. (23) Judicial clerk Wesley Markham responded to Professor Epstein's concerns by contending that the ratio may be constitutional because insurance companies can still earn a reasonable profit. (24) Despite this scholarship, no examination of the medical loss ratio's statutory viability or constitutional viability under the Commerce Clause exists to date. Considering that the Supreme Court could find the federal medical loss ratio to be constitutional under any number of avenues, as it surprisingly found the individual mandate constitutional under the taxation power, it is of vital importance to examine whether the medical loss ratio would be upheld under the federal government's insurance regulatory statute, the McCarran-Ferguson Act.
This Note argues that, although the codification of a federal medical loss ratio may be constitutional under the Commerce Clause, there is no federal statutory basis that permits Congress to preempt state regulation of medical loss ratios. To provide a framework for presenting this argument, the first Part of this Note presents a summary of the PPACA's general goals and resulting litigation. The second Part discusses the history of insurance regulation and its role in the state regulatory sphere. The third Part explains how Congress has the authority to regulate insurance companies' medical loss ratios under the Commerce Clause. The fourth Part demonstrates that although the federal medical loss ratio may be constitutional under the Commerce Clause, it is not statutorily permissible under the McCarran-Ferguson Act. This Note concludes by addressing the legal and policy implications of allowing the federal medical loss ratio to continue to exist.
THE PATIENT PROTECTION AND AFFORDABLE CARE ACT
Processes and Goals of the PPACA and Its Medical Loss Ratio
President Obama signed the PPACA into law on March 23, 2010. (25) Through over 900 pages of text, (26) the Act "put in place comprehensive reforms that improve access to affordable health coverage for everyone and protect consumers from abusive insurance company practices." (27) Congress established the federal medical loss ratio and its resulting rebate requirement in order to advance the goal of providing affordable health care to everyone. (28) In fact, the Democratic Policy and Communications Committee cited the medical loss ratio as one of the PPACA's immediate improvements, which "[c]ap[ped] insurance company non-medical, administrative expenditures." (29)
The new federal medical loss ratio requires health insurers offering policies to individuals or small groups to spend at least 80% of premiums on direct medical care and efforts to improve the quality of care. (30) Insurers selling to large groups of fifty or more employees must spend 85% of premiums on care and quality improvement. (31) In order for the Secretary of Health and Human Services to assess whether an insurance company must issue a rebate, the PPACA requires insurers to submit data to calculate the medical loss ratio. Specifically, insurance companies must provide the percentage of premium revenues used to pay for "clinical services and quality improvement." (32) If an insurance company fails to meet the required medical loss ratio, the Secretary of Health and Human Services has mandated that the company send rebates to its consumers. (33) The rebate can be in the form of a check, a reduction in premiums, or a lump sum reimbursement in the insured's account. (34) Reporting by insurance companies began on June 1, 2012 and rebates were sent throughout the summer of 2012. (35)
Litigation Surrounding the PPACA
Parties and amicus curiae mentioned the federal medical loss ratio in briefs submitted in National Federation, (36) but it was not an issue raised before the Supreme Court. (37) Eight federal courts have ruled on other constitutional and statutory challenges to the PPACA. (38) Although some aspects of the resulting decisions are no longer good law after the National Federation decision, they do show an important trend of how the district and circuit courts rule on challenges to PPACA provisions.
District and circuit court trends appear to favor the constitutionality of federally imposed insurance laws. Five district and circuit courts upheld various provisions of the PPACA, most frequently reviewing challenges targeting the individual mandate. (39) These courts collectively stated that...