Of Medical Loss Ratios and Men
My Facebook feed has been filled with gloating about a Rick Ungar column in Forbes: The Bomb Buried in Obamacare Explodes Today [12/2] — Hallelujah!
In his column, Ungar argues that new medical loss ratios established in the Patient Protection and Affordable Care Act (PPACA, “Obamacare”) will force private insurance companies out of business, leaving the market open for a single-payer plan that Ungar and others have wanted all along (therefore, his “hallelujah!”).
What is the medical loss ratio, is it really that critical, and what are the chances it will put insurance companies out of business?
The numerator of the MLR equals the insurer’s incurred claims and expenditures for activities that improve health care quality, and the denominator equals the insurer’s premium revenue minus federal and state taxes and licensing and regulatory fees. — Proskauer
That is, if an insurance company takes in 100 dollars in premiums, and spends 85 dollars of that money on health care, then it has a medical loss ratio of 85 percent. The PPACA sets the medical loss ratio at a minimum of 80 percent for small carriers and 85 percent for large carriers. If the medical loss ratio is below that threshold, then the insurance company is required to issue a rebate check to consumers to bring the ratio to the threshold. It’s not clear that medical loss ratios are related in any way to quality of health care delivered, but they appear to be the simplest and easiest way for Big Government to get a handle on whether consumers are getting value for their money. The graph below was developed by the Main Street Alliance, and shows the changes in the medical loss ratios for Medicare and for private insurers over time.
What’s clear from this is that by a rough-and-ready measure of efficiency, the Evil Government scheme is actually returning 98 percent of the money it collects to consumers in the form of health care outlays, while private insurers (for whatever reason) were once competitive with Medicare but now return to consumers only about 81 percent of the money they take in. That means a lot of rebates are on the way to consumers.
It’s not clear to me what factors might have contributed to the steep decline in medical loss ratios during the 14 years shown on this graph. One can see, however, what motivated Congress to select the 85 percent ratio and also why imposing a particular medical loss ratio threshold might become a sticking point for private insurers.
The big deal here is the definition of “activities that improve health care quality” in the numerator. What happened earlier this month is that the Department of Health and Human Services (HHS) issued its rules defining the numerator, and they were generally regarded as unfavorable to insurance companies.
It’s an open question whether this limitation will put insurance companies out of business. Senator Tom Coburn (R-OK), who’s also a medical doctor, thinks so, and describes it as part of the socialist takeover of health care inherent in the PPACA:
Much ink has been spilled about the claim that PPACA represents a government takeover of health care. In my view, there’s no disputing this claim. Even before the passage of PPACA, the non-partisan Congressional Research Service issued a report showing that 60 percent of health care spending in the U.S. is controlled by state, local and federal governments. Now, after passage of the controversial health care law, the federal government will effectively regulate health insurance markets and dictate what types of health coverage Americans can buy – even penalizing employers and consumers who do not offer or purchase coverage.
According to Sen. Coburn, a December 2009 Congressional Budget Office report said a 90 percent medical loss ratio would put all health insurance companies out of business. The essence of Sen. Coburn’s argument is that 85 percent is only five percent away from bankruptcy:
In other words, [85%] was just about as close as the Democrats could get without even CBO admitting it was a complete government takeover of the health insurance markets.
I don’t think the difference between 90 percent and 85 percent is that thin a slice of money, and I don’t believe that insurance companies will come apart at 85 percent. That’s what Ungar and Coburn, now strange bedfellows, are both arguing.
Tim Worstall has already written a Forbes counterpoint to Ungar’s column. In it, he explains that a medical loss ratio of over 100 percent is possible, if the money obtained in premiums is invested for several years before claims from that income stream are paid out.
One thing is clear: insurance companies were hoping that HHS would include administrative costs such as sales commissions in the definition of “medical coverage”. That the HHS did not should not surprise anyone, and I think the companies argued for the best possible cut of the cards from HHS as a matter of course, not as a matter of survival.
We’ll find out over the next few years, assuming this provision in PPACA survives this year’s Supreme Court challenge. Would Logarchism readers like to lay down their markers on whether a medical loss ratio of 85 percent is untenable? How about the chances of the Supreme Court overturning all or part of PPACA?
- Health Insurers Now Have To Take Their Medicine (crooksandliars.com)
- Insurance Brokers Get No Love in Medical Loss Ratio Rule (blogs.wsj.com)
- Insurance Commissioners Call For Another Look at Medical Loss Ratio (blogs.wsj.com)
- We’re not at the end of the beginning, but perhaps the beginning of the end (kaystreet.wordpress.com)
- An Obamacare apology to Obama | Blogging the Rambler
- The Obamacare Bomb: Explosive or a Damp Squib? | Private Health Insurances
- The Obamacare Bomb: Explosive or a Damp Squib?