Call me crazy, but I’m fascinated by one of the provisions in the new federal health care reform law, the one about medical loss ratios. The change promises to pull back the curtain behind which health insurance firms have operated. And it may result in lower premium increases this year, or heaven forbid, refunds to customers.

Effective Jan. 1, health insurance companies will be required to maintain minimum loss ratios of 80 percent for the plans they sell to individuals and small groups and 85 percent for their large group plans. If they have not met those targets by next year, they’ll have to offer rebates to their customers. 

The medical loss ratio is an odd insurance term. It refers to the percentage of premium payments that the company spends on claims from customers. As an example, look at Anthem, the largest health insurer in Virginia, and its spending in 2009. For the policies that it sold in the small group market that year, Anthem spent 67 percent of its premium revenue on the claims submitted by its customers. The other 33 percent went for salaries, advertising, agent commissions, overhead and profits.

These numbers were published in a U.S. Senate committee report from April. The report shows that in 2009 in Virginia, Anthem also had a medical loss ratio of 72 percent for the insurance plans it sold to individuals, and a loss ratio of 79 percent for the plans it sold to large groups.

All three ratios–67 percent, 72 percent and 79 percent–were below the new minimums. That means that if Anthem has the same ratios this year, it will have to offer rebates to its customers.

But don’t spend your refund check yet. To improve their ratios, the insurance companies may be able to shift some of their expenses. Costs that had been seen as administrative may be reclassified as medical benefits. Wellpoint, Anthem’s parent company, recently did that, according to the senate report. The companies also may be able to increase spending on activities that improve health care quality.

But as John McInerney, health policy director for the Commonwealth Institute for Fiscal Analysis, a nonprofit think tank in Richmond, pointed out this week, the law also requires insurance companies to publish their ratios. In the past, these numbers have been hard to come by.  Now consumers will be able to compare plans to see which ones return more in claims payments and which ones are administratively top-heavy. It reminds me of the way consumers are cautioned to check the expense ratios of mutual funds before purchasing one.

“It gives the consumer more information to make informed decisions,” McInerney said.

So stay tuned. As McInerney said, “Throughout 2011, we’ll be hearing more about it.”

(The Senate report can be found here.)