Rolling Back ObamaCare: Eliminate the Medical Loss Ratio

This author makes some great points.  I just wish he used more to back them up.  I understand that Medical Loss Ratio means small and medium sized insurance companies are going to get pushed out and that higher spending and overuse may be encouraged, but I’d like to see some statistics.  I’d also like to see what would happen to auto insurers if they had the same rules applied to them.  No more annoying commercials!  Hooray!  :)  But somehow I don’t see that happening.  Drat.

By Merrill Matthews, from Forbes

If Republicans are looking for ways to dismantle ObamaCare, they should start with eliminating or dramatically adjusting the provision known as the “medical loss ratio” (MLR), which went into effect on January 1.

The health care legislation requires health insurers offering individual and small group policies to spend 80 cents of every premium dollar on claims, with the remaining 20 cents going to administrative costs.  Large group policies have to meet an 85 percent loss ratio.

Team Obama claims that setting a medical loss ratio at those levels will ensure that the lion’s share of premium goes to paying health care costs, not excessive salaries or profits.  That fear of high profits was always bogus; Fortune magazine ranks the health insurance industry 35th on the Fortune 500 list of top industries in 2008 with a 2.2 percent profit.

The MLR is nothing but a price control mechanism that will drive even more of the smaller and medium-sized insurers out of the market, dramatically reducing competition.  That’s in part because large insurers have better economies of scale to keep administrative costs lower.

One of the key questions that had to be answered—and one that has created immense confusion—is what would be considered administrative costs?  State insurance commissioners debated this and other issues for months and submitted their recommendations to the Department of Health and Human Services (HHS), which accepted many of them.

Agent commissions, for example, will be lumped into the administrative-cost category, which will make it hard to sell individual policies.  Claims costs in the individual market usually run between 60 percent and 75 percent of total premium, falling afoul of the 80 percent MLR.  But that’s not necessarily a result of inefficiency or profiteering; commissions have to be higher in the individual market to compensate agents for selling a policy to only one family at a time.

To their credit, the HHS regulators have made exceptions for some types of policies, like limited-benefit plans (sometimes known as mini-meds).  But the exceptions are only temporary; the doomsday clock for these plans is still ticking.

Another problem is that insurers cannot combine several different products, including across state lines, to come up with one MLR for the company.  Costs will be assessed state by state.  Fortunately, some taxes will be excluded from admin costs—a decision that upset several leading Democrats.

As for cracking down on health insurer inefficiency and profits, the MLR provision may actually encourage more.

Normally, whatever insurers don’t spend on claims and administrative costs is profit.   Thus they have an economic incentive to manage their admin and claims costs to keep both as low as possible.

For example, paying nurses to monitor at-risk pregnancies, making sure prospective mothers are getting the rest or medications they need, is good for the patient—and avoiding the cost of a premature delivery is good for the bottom line.

However, under ObamaCare’s medical loss ratio insurers have little reason to care about managing claims costs below the MLR; they will even be financially penalized for doing so.

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