Sunday, May 23, 2010


(This is the first of a series of commentaries on details of the 2010 health care reform legislation.)

The Patient Protection and Affordable Care Act, signed into law by President Obama in March, is in many ways a significant step towards a more equitable health insurance system in the US, potentially making coverage available to millions of the currently uninsured. Unfortunately, health care reform’s political strategy of let’s-just-apply-lots-of-bandaids-to-the-present-broken-system is likely to produce some major disappointments.

Positive changes like assuring coverage for children with preexisting conditions are likely to be overshadowed by others that are equally well-intentioned but fatally flawed—like PPACA’s limits on insurers’ medical loss ratios.

Beginning in 2011, unless medical loss ratios (the percentage of premiums paid out for medical care) are at least 85 percent for large group health plans, and at least 80 percent for small group and individual plans, insurers will be required to offer rebates to enrollees.

Given that the MLRs of the ten largest for-profit health insurers dropped from 95 percent in the early 1990s to around 80 percent today (or, put another way, administrative expenses, overhead and profit jumped fourfold from 5 percent of premium to 20 percent in just over 15 years), it’s easy to see why this provision seemed so attractive to its principal backer, Senator Jay Rockefeller.

Unfortunately, as with other reform issues, the politicians’ understanding is proving incomplete. Two weeks after enactment of PPACA, the Federal Register invited comments on how the new MLR requirement should actually be interpreted. The 70-page response (including appendices) from the National Association of Insurance Commissioners demonstrates just how complicated the issue really is. (A separate response from AHIP, the insurers’ lobbying group, argues for treatment of almost anything that reduces medical expense as part of the MLR “medical care” numerator.)

PPACA’s (imprecise) MLR definition is quite different from that currently used by state insurance regulators, but NAIC does estimate that most large and small group health plans will meet the new requirement, thanks to the exclusion of state and federal taxes from non-medical costs (and implicitly assuming that the impact on MLRs of the currently uninsured will not be significant). In other words, most group plans are likely to be unaffected—and if AHIP is at all successful, may even be tempted to increase their profit percentages while boasting compliance with the PPACA limits.

Individual plans present a very different case, and one where the political cure may be much worse than the disease. NAIC comments “Some issuers would likely have aggregate MLRs below 80% in at least some states even after the adjustments...” The reasons for individual plans’ possible MLR problems include the higher administrative costs of such plans, the typically more restricted benefits (thereby reducing medical care costs relative to non-medical costs), and greater year-to-year volatility. So, are plans with MLRs below the 80 percent threshold going to pay rebates to enrollees or, alternatively, slash administrative costs or profit?

Probably not. No insurer will want to pay rebates, not only for the obvious reason of not wanting to see dollars going out the door, but because this will be perceived by consumers as a signal that premiums are too high. Equally, cutting profit for investor-owned plans will cut share value, something that insurance executives with stock options will certainly resist. Administrative costs could be cut by reducing care management and fraud detection efforts (assuming AHIP fails in its lobbying to include these as medical expenses), but doing so would simply increase the costs of care—and premiums.

Insurers are going to be left with a couple of strategies. One is to increase both benefits and premiums in order to reduce the impact on the MLR percentage of non-medical costs, an actuarially risky approach that could result in plans attractive only to high utilizers. The other is simply to withdraw from the individual market—one that plans like American National Insurance are already starting to choose.

It’s easy to criticize the shareholder profits and CEO incomes of investor-owned insurers (and the inefficiencies of some of their non-profit competitors), but this kind of political micromanagement isn’t the answer. While there is certainly a case for consumers knowing how their premium dollars are being spent, legislating expense ratios—rather than encouraging effective market competition—is more likely to lead to loss of coverage than to lower premiums.

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