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The Medical Loss Ratio in Your Future

Most people have never heard of the Medical Loss Ratio (MLR), but that’s about to change.  It’s an insurance company measure of how much of your health insurance premium is spent on actual medical care vs. administration costs.  State insurance regulators already require insurance companies to report and adhere to a standard MLR.  However, it’s about to be re-defined by the recently passed Patient Protection and Affordable Care Act.  Like all government regulations, it is certain to affect you.

The new health care legislation requires that 80-85% of premiums must be spent on medical services with the remaining 15-20%  spent for administrative expenses.  (salaries, overhead, marketing, etc.)   Insurance companies unable to meet these standards must rebate the difference to policy holders or go out of business.  Presumably, this provision is designed to provide more and better health care from your premium dollars.

There are several problems with this, however.  Most basic is the difficulty in determining what is considered a ‘medical’ service and what should be categorized as ‘administrative’ costs.  Many patient benefits aren’t strictly medical services.  Fraud prevention, over-dose monitoring, patient counseling, wellness programs, care-coordination, discharge planning, chronic disease management are a few examples of non-medical services that insurance companies, under various plans, provide.  Will they be allowed to add these to the amount
they’ve spent on medical services?  To deal with the problem, the National Association of Insurance Commissioners (NAIC), the body that represents the states’ insurance regulators,  has been called in to help draft the rules.

Another critical issue concerns how to ‘count’ the role of insurance brokers. Right now, insurance brokers receive a commission for the polices they handle.  Most states don’t factor this into the administration costs when calculating the MLR because of the value brokers offer in customer service to the policy holder and the savings  in administration costs they offer to the insurance company.  If these commissions were to be counted as administration costs, broker services such as counseling people on policy choices and providing insurance
information and advice would be curtailed or disappear.

Here’s another problem: Small insurance companies servicing remote areas and scattered communities have higher administration costs and most probably wouldn’t meet the regulation guidelines.  In addition, the added paperwork would be particularly burdensome to smaller companies.  (An example of the paperwork all insurance companies will be required to submit for each of their plans can be found on the NAIC website.)

One of the most controversial issues involves the treatment of insurance company taxes.  The NAIC recommended that taxes, because they obviously can’t be used to pay for medical services or administration costs, should be subtracted from the MLR calculation.  Incredibly, the chairmen of  the congressional committees involved in drafting the original health care reform bill want the taxes paid to be added to the administrative costs so that, in effect, insurance companies would be taxed on their taxes.

On top of all this, serious studies call into question the use of the Medical Loss Ratio at all.  James C. Robinson, a professor of economics in the School of Public Health, University of California, Berkeley, in the paper, Use and Abuse of the Medical Loss Ratio to Measure Health Plan Performance has determined that the Medical Loss Ratio is a poor measure of health insurance efficiency and health care quality.

Throughout the discussions surrounding the passage of the health care reform bill, insurance companies were accused of excessive profits. These new MLR standards reflect this understanding but the facts say otherwise.   As measured by profit margin, the Insurance Industry is the 86th most profitable industry with an average margin of 3.3%.
(As compared with the top, Beverages, at 25.9% or Drug Manufacturing at 16.5%, or Restaurants at 7%)

Given all the difficulties in calculating a meaningful MLR, it’s hard to believe this new health insurance regulation will result in better or more affordable health care for us.  On the contrary, there’s the fear that this, like so many government requirements, will lead to inefficiencies, frustration, mistrust, and higher costs.

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