Insurance Geek Time

25 March 2010



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Medical Loss Ratio Floor is Sleeper Clause in Health Bill

While the tea-baggers have decided to threaten duly elected members of Congress over the recently passed health insurance reform bill, very few have focused on the single biggest change to American insurance law, the establishment of a floor for the medical loss ratio [MLR]. The MLR is insurance geek language for the amount of money insurers pay out in claims relative to each dollar of premium income received. The bill sets a floor of 85% for larger group policies and 80% for individual and smaller groups. Combined with the clauses about the prohibition of denial for pre-existing conditions and of cancellation due to sickness, the MLR floor may end the escalation of insurance rates.

Under the previous system, insurers maximized their profits by denying care as often as possible. Under the new bill, their profit comes out of the 15-20% they are allowed to keep. They have very little incentive to deny care to keep their MRL at say 66% when they would simply have to refund the difference between 66% and 80%. Instead, insurers now have the incentive to get the actuarial part of their business right, charge rates accordingly, and let the laws of probability take their course.

Now if an insurer can only make a profit out of 20% of revenue, said insurer will have incentive to cut costs radically. Administration costs, rent, sales and marketing will all face pressure. Proponents of Medicare for All point out that that program has 3% overheads. By comparison, 15-20% for private insurers should be fat city. In fact, it won't. According to Senate analysis, large groups have an average MLR of 84%, smaller groups 80%, more or less on target. It's in the individual market that this will have a huge impact, where the average MLR is 74% and where is can be as low as 66%. It is individual policies that are marginal anyway, and these are the people who will be helped most.

Moreover, there are some places in the country where there is no real competition for health insurance. Insurance News Net said recently, "According to an early 2009 report from the Government Accountability Office that ranked the market share of insurers in each state, 17 states had a single insurer that served at least half of the market. Four of those states had insurers that controlled more than 75 percent. In Alabama and North Dakota, more than nine in 10 people with health insurance get it from a single company."

The same source stated, "Without rivals to compete against, a large health insurance company can take advantage of patients by raising premiums and dictating important aspects of patient care without fear of losing business," said AMA President J. James Rohack in a statement when his group's report was released. "Health insurers claim that eliminating rivals through mergers creates greater efficiency and lower health care costs, but this just isn't the case. Patient premiums, deductibles and copayments have soared in this increasingly consolidated market, without an increase in benefits."

Setting a floor on the MLR is not an ideal solution to the competition problem; more competition is. However if the market cannot deliver competition, other approaches become necessary. The new bill is far from perfect, but it is far from awful as well. Further reform is inevitable as the unforeseen flaws in this legislation appear. That said, the one clause that probably won't need changing is the MLR floor.

© Copyright 2010 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.

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