Friday, June 7, 2013

Flawed Analysis––Medical Loss Ratio Rules Led to $1.9 billion in Lower Premiums

The Kaiser Family Foundation is out with a study contending that the Medical Loss Ratio (MLR) requirements of the Affordable Care Act ("ObamaCare") saved consumers $1.9 billion in premiums in 2012:
"So how might these (new MLR requirements) changes have affected premiums? As noted above, one way to address this question is to compute what these consumers would have paid in premiums in 2011 and 2012 had the traditional individual market MLRs stayed at 2010 levels (the year before the provision went into effect). Looked at this way, premiums would have been $856 million higher in 2011, and premiums would have been $1.9 billion higher in 2012."
The past few weeks have seen one side or the other in major league spin mode over the implementation of the new health law. A couple of weeks ago, the California exchange––in full support of "ObamaCare"––selectively released data on the coming insurance rates while declaring victory over their avoiding rate shock.

Yesterday, the Republican administration in Ohio, opponents of "ObamaCare," released the data they wanted us to see declaring consumers would have to pay an average of 88% more because of the law.

Let me be clear, based upon independent analysis I've seen in recent months, the Ohio result looks more likely than the California result. But both sides clearly have a political agenda and have used the results in their respective states to advance it.

In the midst of all of this intense spin and major league political combat over the new health law, the Kaiser Foundation, who I have always had great respect for, has given the Obama administration just the headlines they need exactly at the point they need them.

The current hypersensitive political environment means the Foundation has to be particularly careful if it wants to continue to be seen as impartial and fact driven.

Let me suggest that, at the least, their conclusions this time are highly debatable.

The Kaiser Family Foundation study points to the individual market's 2010 MLR of 78% and then compares that to the industry's 2012 MLR of 83%. They then declare a victory for the new health law's minimum loss ration requirements, suggesting the higher MLR––which is better for consumers––occurred because of the new rules. They then calculated this improvement saved individual market consumers $1.9 billion.

That headline immediately got picked up in hundreds of press accounts––where reporters were happy just to repeat it unchecked––and the Obama administration loves it.

Let me give you an alternative analysis for why the MLR rose from 78% in 2010 to 83% in 2012––and benefited consumers.

In 2009, we were in the depths of the great recession. But insurance companies came into 2009 and 2010 using projections for health insurance cost increases (trend) at levels much higher than we actually experienced. For reasons we are still trying to understand, health care cost trend levels about collapsed in 2009 compared to recent historic levels and the levels that were prospectively priced into the individual insurance market for 2010.

Because the health insurers missed their pricing objectives––they priced too high a trend rate in 2010 and thereby charged too much, as a result the 2010 MLR ended up being a comparably low 78% (too much premium compared to claims develops a lower MLR).

By 2011 and 2012, the individual health insurers began to understand something had changed and therefore began to moderate their trend projections and effectively gave back the extra pricing cushion they found themselves with in 2010. Therefore, the MLR rose––to 83% by 2012.

This is not rocket science on my part. It is the way I have observed the health insurance underwriting cycle behave over 40 years––the industry misses claims projections on the low side, makes too much money, reprices, makes too little money, reprices, and on and on.

Whatever critics of the insurance industry think about how smart we are or aren't, getting the pricing just right over any period of time is about impossible. The health insurance pricing cycle has been around a lot longer than I have.

Now, I will be the first to admit that what changed the 2010 MLR from 78% to 83% in 2012 is likely the combination of many events some we can observe and some we can't. But at least my thesis is grounded on events in the historical context of how the industry works.

I will also concede that the new MLR rules have brought individual market expense down––though not by the overly optimistic analysis the Kaiser Foundation has offered.

For one, insurance companies have dramatically cut agent commissions. Many "ObamaCare" supporters applaud that as just lopping off unneeded expenses. My observation is that it has also meant insurance buyers are now often having to pay agents their compensation directly if they want to continue to get professional assistance in what is a complex marketplace. Any careful analysis of just what value the new MLR rules have created needs to be offset by an estimate of the shift in agent costs directly to buyers.

The MLR rules have also driven out a great many "less efficient" competitors. They may be less efficient but these little guys have also been the ones that have kept the big guys on their toes over the years. The MLR rules have caused more market consolidation meaning the big guys are more dominant than ever. It is hard for me to see how this helps consumer costs in the long run.

Now, if you were one of the very many reporters who today led with a headline like this one, "Health law led to $2.1 billion in savings for consumers, report says"––LA Times, I will suggest there might have been more to the story.

But, you made lots of people happy in the White House this morning.

What do you want to bet President Obama will be liberally quoting you during his "ObamaCare" campaign trip to California today?

Recent Post:
Rate Shock in California!––The New Health Insurance Exchange Plans––Comparing Apples to Oranges to Grapefruit
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