NEW YORK (CNNMoney.com) -- Insurers were dealt a blow Thursday as state regulators endorsed a tough new law that boosts the amount of premium money they'll have to pay for patient care.
Beginning on Jan. 1, insurance companies will have to spend 80% to 85% of the premiums they collect on medical care instead of toward their own profits and overhead costs.
This spending allotment is known as the "medical loss ratio" and was a key provision of the health care reform law enacted by Congress in the spring.
Currently insurers don't have to meet any minimum requirements in some states. Other states require as little as 40% of premiums to be used for medical care.
Insurers that don't increase that allotment to the new federal standard will have to give customers a rebate for the difference beginning in 2012.
The Department of Health and Human Services still must issue regulations detailing exactly how insurers will have to allocate their premium money. Kathleen Sebelius, head of the agency, said she appreciated the commissioners' recommendation and would release the regulation "in the coming weeks."
Insurers want more time. The insurance industry is afraid that the Jan. 1 deadline is too abrupt and has been pushing for a phased-in approach to implementing the rule through 2014.
The state insurance commissioners agree with the industry. In fact, just last week, the National Association of Insurance Commissioners sent a letter to Sebelius arguing that all states may need a phase-in approach.
"Insurance companies in some markets will need a transitional period to comply with the 80% MLR limit," the group wrote. "In the absence of the transitional period, the markets of some states are likely to be destabilized."
The insurance industry expected the phase-in approach recommendation to be part of Thursday's vote. But the NAIC only voted on the medical loss ratio.
"We're very surprised that the NAIC did not vote today on recommending a transition period given what they wrote in their letter last week," said Robert Zirklebach , spokesman for America's Health Insurance Plans, an industry lobbying organization.
Many insurers are seeking waivers from having to comply on Jan. 1. Sebelius has the final word on granting those requests.
Survival of the fittest. The concern is that many smaller insurers won't be able to meet the new standard by 2011, and could either exit the market or not take any new customers.
The consequence of not phasing in the change would be a "potential disruption of coverage for millions of Americans and reduced competition prior to 2014 market reforms," said Karen Ignagni, president of AHIP wrote in a letter to state insurance commissioners last week.
One industry expert agrees that the new requirement could knock some carriers out of business or force them to drop customers.
"The issue that some carriers will leave the market as a result of this is real," said Deborah Chollet, senior fellow and health economist with Washington-based Mathematica Policy Research.
Even if the smaller carriers exit the market, Chollet said that most individuals will easily be able to find coverage from large carriers who can meet the new standards.