But many health care policy wonks have warned lawmakers that that law does not go far enough in actually enforcing these rules and they argue that insurers will likely game the system. Already, Aetna and Cigna have announced that they plan to jack up rates in the short term and now, Consumer Reports is calling for an investigation into WellPoint in light of an electronic message the company sent “to investors describing how it would simply re-label administrative costs as ‘medical care’ in response to the new health reform law.”
In the March 17th message, WellPoint — the nation’s largest insurance company — announced that it has reclassified some of its administrative costs as medical spending in order to increase its medical loss ratio (MLR, a techinical terms which measures how much insurers spend on administrative spending v claims). The ratio is closely monitored by Wall Street investors and the new health reform law “requires that insurers spend at least 80% of customers’ premiums on medical care in the individual insurance market, and 85% in the employer/group market.” Here is how WellPoint put it:
“WellPoint’s (WLP) medical cost ratio should rise and its overhead-expense ratio decline this year as the insurer reclassifies various types of costs. Disease management, medical management and a nurse hotline, for example, ‘are being reclassified because they represent additional benefits provided to our members,’ representative says. They’ll now be part of the medical cost ratio, the percentage of premium revenue used to pay members’ health-care costs. These are claims-related costs incurred to improve member health and medical outcomes, WLP says. Accounting rules allow the changes, which better align MCR with anticipated health reform guidelines, Stifel Nicolaus says.”
Wellpoint is heavily invested in the individual health insurance market and has been among the most aggressive in opposing reform and skirting state regulations. In fact, the company has paid millions in fines for canceling individual health policies of pregnant women and chronically ill patients, illegally rescinding policies, denying prescription drugs to the elderly, and committing “serious violations that completely undermine the public trust in our healthcare delivery system.” In the fourth quarter of this year, net profits jumped to $2.74 billion from $331.4 million — mostly because the company sold a subsidiary — and CEO Angela Barly admitted that the company dramatically increased rates in the California individual health insurance market to ensure adequate profits. Meanwhile, the percentage of revenue spent on providing medical care, or medical loss ratio, “dropped to 82.6% from last year’s 83.6%.”
So while, WellPoint’s desire to skirt regulations may not come as a surprise, the story highlights just how vulnerable the MLR metric is to manipulation. As I noted here, establishing a medical-loss ratio still allows insurers to shift a disproportionate amount of premium dollars into profits. If anything, plans could pay more for certain services (to meet the benchmark), exclude certain benefits from coverage (benefits which would attract a sicker risk pool), or in the case of WellPoint, reclassify some administrative services as medical care and still meet the mark without necessarily providing more care.
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.
All of this suggests that regulators are going to have to be careful in how they define medical expenses and will need to “review the math on insurer medical loss ratios and premium calculations.”