This whole medical loss ratio (MLR) provision in the new health care law is a fool’s errand. When it comes to controlling health care costs it is about as productive as taking your shoes off at the airport is valuable at improving air travel security.
Without a doubt, the new health care law does far too little toward making health care costs affordable. And, marginal health insurance carriers have little hope of doing a lot to bring costs under control.
But for consumers what matters is cost--and that is measured by a health plan's monthly premium. The cost of an insurance policy is market driven. In any market on any day, that insurance company has to quote a competitive price no matter what their expense ratio in that market.
Which insurance policy is low cost health insurance is determined by its price—not some convoluted MLR formula developed by bureaucrats that runs about 300 pages.
Too often people inside the Beltway underestimate how price competitive the health insurance market is. Go to the Internet and you can almost instantly get a number of quotes comparing benefits and price. Go to your local insurance agent and you get the same thing.
Show me a health plan with a 78% MLR and one with an 81% MLR and I cannot tell you which one has the lowest price. The higher MLR plan may be doing more to manage costs and thereby producing a lower premium rate. Heck, Medicare has the lowest MLR in America and is under constant criticism that it does not manage costs.
And don't underestimate the value these little health insurers bring to the market. They are the ones who must quote low rates to survive and they do more than many can imagine to keep the big guys honest.
But the authors of the new health care law think consumers are dumb and need the federal government to draft thick incredibly complex MLR regulations so they can be saved from themselves.
The insurance exchanges make a whole lot more sense than these MLR regulations—side-by-side comparisons of plans by cost and benefits making the health insurance shopping experience clear will be enough without this huge addition to the federal bureaucracy.
By HHS’s own calculations over 20% of those in the individual market are in plans that spend more than 30% on administration—another 25% are in plans that spend 25% to 30% on administration.
HHS expects 9 million consumers to get premium rebates.
But that assumes that the insurance companies that would pay those rebates are going to stay in the market and lose money paying them. Of course many insurers with little hope of ever being able to comply are not going to do that.
The new guarantee issue and pre-existing condition reforms don’t go into effect until January 1, 2014.
How many of those 9 million consumers are going to see their insurance company exit the market instead of lose money paying rebates?
If these consumers lose their insurance because their carrier exits they have to buy it from a different insurance company—but they are going to be subject to underwriting and pre-existing condition rules that are still in effect. You can see the headlines: “Cancer patient loses coverage under the Obama health plan and can’t get new coverage.” And, yes they can go to the new high risk pools--in six months and maybe for less coverage and higher costs.
Afraid that many people will lose their coverage, HHS has said it will grant waivers to these rules when there is the potential for the market to be “destabilized” by the implementation of the MLR rules.
I presume that means Democrats are scared of headlines reporting about consumers who have lost the insurance they wanted to keep because of the new law.
So, when the day is done, HHS is getting ready to implement a huge and complex regulation complete with massive reporting requirements but won’t do it if it disrupts any of the high expense carriers with big state market share the law is intended to go after.
And to the extent HHS does implement these new MLR rules who do you think the winners are going to be? It won't be consumers, it will be the giants of the health insurance market who dominate the market today and have an expense ratio advantage driven by their size. This is the jumbo health insurance company full employment act!
HHS and the TSA—just take your shoes off and keep your mouth shut!
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7 comments:
Large insurers showed their stripes way back 1993 when they formed the Alliance for Managed Competition. If PPACA forces smaller insurers out only two possibilities will be left:
1. Big insurers as regulated public utilities with set profit rates on trillions in premium.
2. Big insurers as government contractors for the Single Payer plan that will replace a failed private market.
Either way competition dies and the public loses.
When reviewing a specific consequence of this massive reform effort, it's very difficult for an outsider -- i.e. most people -- to tell whether it was foreseen or not. "Foreseen by whom?" might be the better question.
Similarly, does it qualify as as a Bug or a Feature to the agents promoting reform? This, too, is usually unclear.
So glad you're writing again Bob--you bring up a perfect point on the MLRs of 78 and 81%--which has the lower premium?
Thanks for your insights!
In "Intellectuals and Society" by Thomas Sowell,"consequential knowledge" is described as knowledge whose presence or absence has serious consequences.
Your insights on the PPACA's MLR rules and their public policy implications are based on your expert knowledge of health insurance and healthcare market dynamics.
This is an excellent example of exactly what Thomas Sowell is describing in this Hoover Institution video:
http://ideasmatter.typepad.com/ideas-matter/2010/11/thomas-sowell-consequential-knowledge.html
Hopefully, this time the 112th Congress and other federal and state policy-makers will listen.
Your analysis is astute. The market is contracted, favoring large carriers and further inflaming monopolies. a private exchange without the MLR (do away with it) would solve the problem. Can we wait until the cavalry comes?
Bob hint the nail on the head.
But another way of saying this is that there is a new law out now that mandates spending. Think about it. As if we did not have enough upward pressures increase demand for health care. Now, we have a Federal law that mandates spending of 80 to 85%. What incentive do insurance companies have to manage costs when the fruits of their labor have to be returned to the insureds. Will this change health care spending immediately. No. But it another Governmental force pushing utilization upward.
Second, the loss ratios are already having insurance companies cutting compensation to independent brokers and agents. These brokers and agents do not work for the insurance companies, they work for the insureds trying to find them the best value in the market. Americans today are find that brokers and agents will no longer assist with individuals with their insurances choices since their is no longer enough compensation in the products.
Individuals are left to sort things out for themselves.
MLR sounds great to the uninformed person. But lots of bad unintended consequences for the patient.
When I worked for a pretty big regional insurance company, here's how we determined our administrative costs: at the last management meeting of the year (the one at which bonuses were calculated), we'd subtract the amounts paid out in claims from the amount collected in premiums. The difference was the administrative cost ratio.
While I agree that the lion's share of health insurance premiums is comprised of medical costs (which are very sensitive to insurer size and local market share), I see very little evidence that insurers have had any incentive to exercise any control over their administrative costs, especially in the small group and individual markets.
There is plenty of evidence to support the contrary position. Since admin. costs are calculated as a percentage of premium, if premiums rise 20%, admin. costs generally rise 20% as well. This is akin to giving the company a 20% raise for doing no additional work.
Increasing administrative efficiency is one element of the health care "reform" package which could have been pursued voluntarily by the industry...But it wasn't.
While I agree that regulation is probably the worst way to control business costs, the lack of interest on the part of insurers to produce lower prices by reducing their administrative costs created the opportunity for legislators to...do something.
The fact that admin. costs consistently average 25-27 percent of premiums for small groups and 30-40 percent for individuals, and that the percentages have remained consistent even as premiums have increased does not suggest that insurers have been equally diligent in keeping their costs down; it suggests that they have been equally lazy in not attacking them, because they have had no incentive to do so. They can raise their prices...and their admin. costs at any time, without any questions from consumers or regulators.
Together with health insurance exchanges, perhaps a cap on admin. expenses will lead insurers to consider how to do business more efficiently, both through the new public entities and through the private exchanges I expect will emerge to enable insurers and those brokers who are left to compete.
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