Does A Higher Medical-Loss Ratio Reduce Insurer Profits?

healthprofitOver at Open Congress, Donny Shaw wonders why the House health bill doesn’t extend its requirement that insurers maintain an 85% medical-loss ratio once the Exchange becomes operative in 2013:

Once the bill is enacted, all health insurance plans would be required to spend at least 85 cents of every dollar paid in premiums each year to providing actual health care. If, in a given year, an insurer doesn’t spend that amount on health care, they would have to give their extra profit back to their customers in the form of rebates. […]

But there’s a twist to all of this. The version of the bill that was passed by the House last weekend includes the provision, but also includes some curious, new “sunset” language. The sunset language states that the new minimum medical loss ratio requirements “shall not apply to health insurance coverage on and after the first date that health insurance coverage is offered through the Health Insurance Exchange.” In other words, in 2013, when most of the bill takes effect, the medical loss ratio language would be null and void. There would be no more profit control, just the market competition that is provided by whatever form of the public option is included in the bill.

“This really doesn’t make a whole lot of sense. What’s the point of including it in the legislation if it’s not going to apply once the bulk of the bill takes effect?,” Shaw asks.

Shaw’s concern is well taken, but a higher medical-loss ratio would not prevent private insurers from shifting a disproportionate amount of premium dollars into profits. It would do very little to improve care quality. If anything, plans could be encouraged to pay more for certain services (to meet the benchmark) and exclude certain benefits from coverage (benefits which would attract a sicker risk pool).

As James C. Robinson points out in this Health Affairs article, “High ratios can be achieved either through a large numerator (high medical expenditures) or through a small denominator (low insurance premiums).” In 2007, for instance, 6 of the 7 largest publicly-traded health insurers reported that their profits increased by 10%, while their medical loss ratios also went up. The same could happen after 2013. Once the Exchange is established, insurers will spend less on administrative expenses (reform will limit their ability to underwrite policies and the Exchange will streamline certain administrative tasks), and their medical-loss ratio will likely increase. This does not mean that they’re spending more money on patient care or shifting less towards profits.

Health reform should strongly encourage insurers to spend more premium dollars on financing quality health care, and less on administrative costs. The House legislation accomplishes that goal by prohibiting insurers from maximizing profits and denying coverage to Americans with pre-existing conditions. It establishes guaranteed issue and renewal rules, prohibits rescission, requires information transparency and plan disclosure, mandates plans to offer minimum benefits packages and eliminates cost sharing on preventive services. Still, more can be done. Policy makers may better achieve the goal of forcing insurers to spend premium dollars on health care by increasing the minimum actuarial value of health plans and only admitting insurers with high quality standards and low administrative overheads into the Exchange.