The New York Times
September 3, 2010
On Health Care, the Devil's in the Details
By Uwe E. Reinhardt
The recently passed Affordable Care Act requires heath insurance issuers to use at least some minimum fraction of revenue from the premiums it receives on medical services. While the idea might sound straightforward, this fraction, known as the "medical-loss ratio," is open to all sorts of creative arithmetic, and you can bet that interest groups from every corner are trying to get the math to add up in their favor.
Under the new law, health insurers are supposed to spend at least 85 percent of premiums collected from large groups of insured on something defined as "medical benefits and activities that improve health care quality." For small groups and individually sold policies, the standard is lower, at 80 percent.
Put yourself in the shoes of the health care providers.
They would like to put as many of an insurer's outlays – other than provider payments – as can be justified into the denominators as "selling or administrative expense." That would put pressure on insurers to increase payments to providers or to spend less on administration to meet the ratio requirement. Therefore, providers typically plead for a very narrow definition of an insurer's outlays for "health care quality improvement" that, by statute, are to go into the numerator.
Health insurers, on the other hand, would like to pack as many of their outlays as possible into the numerator of the ratio.
In a letter to the commissioners, the president of America's Health Insurance Plans, which represents about 1,300 member companies that provide insurance for more than 200 million Americans, pleads for inclusion in "activities to improve health care quality" such items as fraud prevention and detection, utilization review, costs associated with administrative simplification and health-information technology expenses, and the cost of implementing the new International Classification of Diseases, or ICD-10, codes.
Finally, there are the commissions that insurers pay to brokers, who currently play an important role in the small-group and individual market for health insurers.
The commissions usually range between 4 and 8 percent of the premium, depending on the state, but sometimes are 20 percent of the premium in the first year of a policy before dropping to the normal range.
How these commissions are incorporated into the ratio can have a significant impact on the economics of insurance brokers, whose future role in health care is of great concern to the commissioners.
Comment: My response, also posted at the link above:
10. Don McCanne, San Juan Capistrano, CA
September 3rd, 2010
Focusing on narrow issues such as whether the administrative cost of brokers' fees somehow represents patient care or quality improvement as opposed to being an administrative expense distracts us from the much more important overriding issue of the profound administrative waste throughout our health care system that is related to the dysfunctional, fragmented manner in which we allocate health care spending.
The first consideration is the administrative cost of the private insurers. Should we really be allocating 15 to 20 percent of the insurance premiums to the private insurers for them to use for their own intrinsic purposes - funds that never make it to paying for health care? When you consider the very high health care expenditures in our nation, 15 to 20 percent is a huge allocation for non-medical purposes.
Another very important diversion of health care dollars is the cost of the administrative burden placed on hospitals and physicians merely to deal with our fragmented system of a multitude of public and private plans - especially in claims processing, including not only the protracted process of managing disputed claims, but also other administrative diversions such as negotiating and managing insurance company contracts.
This administrative burden on the providers has been estimated to consume about 12 percent of premium dollars. Thus the combined administrative costs merely for the insurance function will be about 27 to 32 percent of the insurance premium - a very high percentage of our very high priced system. That does not include all of the other essential administrative functions that hospitals and physicians face. What a waste!
It is unfortunate that consideration of a single publicly-financed and publicly-administered financing system was excluded before the reform negotiations began. Such a financing system - a single payer or an improved Medicare for all - would have dramatically reduced this profound administrative waste.
Even more important, a single financing system would have created our own public monopsony (single buyer of health care) in which we could ensure that we would be receiving maximum value in our health care purchasing - avoiding excessively high prices while ensuring that enough funds are available to maintain adequate capacity in the system. That is the cost control that we really need. And, oh yes... everyone is included!
Wasn't that the goal of reform? Cover everyone and control costs?
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