Agit­prop caduceus.

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?

 

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