Tuesday, April 20, 2010

qotd: Fixed MLR will drive health care costs higher

The Washington Post
April 18, 2010
Health insurers weighing options to get ahead of reform
By David S. Hilzenrath

The idea was simple enough: Make sure that health insurers spend the vast majority of their revenue on patient care, instead of using it for things such as advertising, profits and executive pay.

To that end, the new health-care law says an insurer must give money back to consumers if it devotes less than 80 percent of premiums to paying medical claims and improving care. For insurers serving large groups, the target is 85 percent.

But even before the health-care overhaul was signed into law last month, one of the nation's largest insurance companies reclassified certain expenses in a way that increased its so-called medical-loss ratio. In January, WellPoint began including under medical benefits such costs as nurse hotlines, "medical management," and "clinical health policy," a WellPoint executive said in a March briefing for investors.

Redefining medical spending to make the requirement more attainable is just one way insurers might adapt to the new legislation.

Similarly, the requirement that insurers devote 80 or 85 percent of premiums to medical claims and related expenses creates conflicting incentives. At its simplest, it encourages insurers to cut overhead expenses. In addition, it might give insurers pause before raising copayments and deductibles, turning away applicants with preexisting conditions, or squeezing payments to doctors and hospitals, because each of those steps would reduce medical spending and make it harder for insurers to meet the required ratios.

On the other hand, the target ratios might give them added incentive to raise premiums. By doing so, they could keep overhead and profit fixed, even as those items decline as a percentage of the premium dollar.


United States Senate
Committee on Commerce, Science, and Transportation
Staff Report for Chairman Rockefeller
April 15, 2010
Implementing Health Insurance Reform: New Medical Loss Ratio Information for Policymakers and Consumers

The goal of the medical loss ratio provision of the new health care law is to make sure that consumers get the full benefit of the health care premiums they pay insurers. As this report discusses, the insurance industry is beginning to consider the financial impact of the new minimum medical loss ratio requirements. At least one company, WellPoint, has already "reclassified" more than half a billion dollars of administrative expenses as medical expenses, and a leading industry analyst recently released a report explaining how the new law gives for-profit insurers a powerful new incentive to "MLR shift" their previously identified administrative expenses.

As the National Association of Insurance Commissioners (NAIC) and the Department of Health and Human Services (HHS) work to implement the new statutorily required medical loss ratios, they need to make sure that insurers are spending consumers' premium dollars on delivering health care and improving the quality of this care. Boosting medical loss ratios through creative accounting will not fulfill the new law's goal of helping consumers realize the full value of their health insurance payments.


April 20, 2010
American National Exec: Company to Stop Selling Individual Health Plans

Two subsidiaries of American National Insurance Co. will stop selling individual medical expense health insurance plans due to the minimum medical loss ratio requirements contained in the new U.S. health reform law, an executive with the multiline insurer said.

The individual health plans are mostly high-deductible, major medical products that are a small part of the corporation's overall business, he said. They comprise about one-third of American National's total health sales a year.

The decision to stop new sales was made "after careful consideration of the recent health care legislation and based on the knowledge that the companies' individual medical expense plans will not meet the requirements" of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, the company said.

Comment:  Although this concept has been touched upon in previous qotd messages, it is important that we clearly understand that the newly enacted medical loss ratio (MLR) requirements provide insurers with an incentive to further drive up health care costs.

How could that be? The intent of placing minimum limits on the medical loss ratio (the percentage of premiums spent on actual health care) was to limit the maximum percentage of premium dollars spent on administrative costs and profits. When the administrative costs exceed the permissible limits, the insurers, it was suggested, would find administrative efficiencies in their own operations, thereby helping to control overall spending. But since administrative services are the product that they are selling us, why would they want to pare back their own business?

Rather than achieving compliance with the medical loss ratio by reducing their own product, doesn't it make much more sense from a business perspective to increase the amount of medical services being paid for, thereby achieving compliance with the ratio without any reduction in their own product? Of course it does.

One way to do that is to reclassify as health care as much as possible of the administrative services that they provide. As the Senate report indicates, WellPoint has already reclassified more than half a billion dollars of administrative expenses as medical expenses. This has a double accounting advantage on the ratio since it both reduces the administrative component while increasing the health care component.

What should concern us even more is the potential impact on health care spending. The more health care that the insurers authorize, the greater the health care component of the medical loss ratio. If they can hold their administrative costs at about the same level, increasing the health care component of the ratio allows them to increase... guess what... profits!

There are two ways to increase health care spending. The insurers can approve more medical services, increasing both the frequency and intensity of services authorized. More scary is that they are also motivated to increase health care spending by simply paying higher prices!

Let's look at an example using an $80 billion insurance fund. Once the state sets up the insurance exchanges, they will be dominated by individuals and small employers. For this market, the law will require that the insurers maintain a medical loss ratio of at least 80 percent ($64 billion must be spent on health care). If they have fixed administrative costs of 15 percent ($12 billion), they can keep 5 percent as profits ($4 billion). If they can hold their administrative costs steady (at $12 billion) while increasing health care spending by 25 percent over a couple of years (to $80 billion), and increasing their premiums by 25 percent ($80 billion insurance fund increases to $100 billion) their administrative costs decrease to 12 percent (still $12 billion). That leaves 8 percent for profits ($8 billion, up from $4 billion). Thus they DOUBLE their profits merely by being certain that health care costs continue to spiral upwards.

For those who insist that all we need is incremental fixes to the legislation that passed, tell us how you're going to fix this one. Private market forces will always place profits before all else. Change the rules, and they will always find another way.

Imagine instead a health care financing system with about 3 percent administrative costs, zero profits, and incentives to control excessive prices and limit the excessive growth in the frequency and intensity of non-beneficial, high-tech services and products. That's what we would have if we enacted an improved Medicare system that covered everyone.

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