Will The New MLR Standards Undermine Health Quality?

In reporting on the new medical-loss ratio provisions in the health care law, I’ve expressed concern that the law could allow insurers to reclassify administrative costs as medical expenses, artificially inflating their ratios without improving care efficiency or quality. But over at the National Journal’s National Experts Blog, Paul Ginsburg worries that tight MLR restrictions could discourage insurers from investing in improvements like payment reform:

One of the major purposes of health insurance exchanges is to make the health insurance market for individuals and small groups more competitive. Exchanges do this by facilitating consumers’ process of gathering information about plans and making informed comparisons. In contrast, MLR regulation is designed for situations where competition is not possible and approaches more suitable to public utilities must be used. Any need for MLR regulation will clearly be lower starting in 2014 than it is today.

A second contradiction concerns innovation in the organization and delivery of care. Recognizing that we do not have the answers today about how to get care that is higher quality and less expensive, the legislation has numerous provisions designed to increase innovation in this area. Payment reforms strike me as having particularly large potential. Private insurers have a very important role to play in payment reform and many other areas of fostering improved delivery of care. But there are real risks that much of this activity could be precluded if administrative costs incurred to support reformed delivery are treated in the same way as selling costs and profits. The last thing that we would like to see is insurers deciding that the only path open to them is to do little beyond processing claims–that can lead to very high MLRs. Constraints on Medicare’s administrative budget has led to a program that is very efficient in paying claims but does little to make the delivery of care more effective.

Ginsburg is right to note that after 2014, actuarial values in the exchanges will undermine the need for MLR. MLR is designed to control insurer profits and would do very little to improve care quality. 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 in 2014. Once the exchanges are established, insurers will spend less on administrative expenses (reform will limit their ability to underwrite policies and the exchanges 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. In fact, the law recognizes this reality and only requires insurers to maintain an 85 or 80% ratio until 2014.

As for his second concern about constraining insurers, the law creates a new category of expenses: “activities that improve health care quality.” Theoretically, if certain expenses really do help “get care that is higher quality and less expensive,” then insures should be able to convince regulators to include them in that definition (and by extension in the numerator of the MLR ratio).