MLRs: The Seductive Myth of ObamaCare

By Ross Schriftman

Would you invest your money in a company whose managers spend most of their time focused on how to reduce 15% of their spending?  Wouldn’t you find it weird if they conducted lots of meetings about how to cut back on the number of desk staplers they purchased rather than figuring out how to keep their overall prices competitive and improving their customer service so they could sell more of their products or services?

Unfortunately the new health care “reform” law in Washington is forcing health insurance companies to do just that.  Within the massive act referred to as ObamaCare there is a whole section dealing with Medical Loss Ratios. (Also referred to as Minimum Loss Ratios).  Insurance companies are going to be required to spend no more than an arbitrary 15% of your premium dollars on “administrative” costs in the large group market and no more than 20% in the small group and individual markets.  If they do spend more they will be required to refund customers.

For years I have heard advocates supporting more government regulation of health insurance promote this concept.  They honestly believe that if the government could simply get insurance companies to spend less on running their companies the savings would pay for all kinds of new benefits and give everyone lower premiums.  This is a simplistic answer to a complex problem but the idea is very seductive. They really believe that the government can make a private industry more efficient by piling on even more regulations. In reality they will be lucky to reduce costs by more than one or two percent.  In reality this absurd provision will have many unintended consequences which will drive up dissatisfaction among the public for Obamacare.

By the way, last year most health insurance companies were already in the minimum loss range talked about.  The industry made a whopping $3 billion in profit last quarter which actually breaks down to less than 3% of premiums collected.  The drug companies enjoyed a 7% profit last year.
So where will they find the savings for our health insurance premium dollars?

What is included in the administrative side of the equation?  The new regulations list includes paying claims, collecting premiums, fraud management, some taxes and paying employees as administrative costs.  They also include paying out commissions to insurance agents including independent agents, who must pay all of their own expenses themselves.  It also includes compliance costs such as making sure every word in plan materials are in compliance and the printing and distribution of dozens of required documents to consumers.  Finally, the insurance companies are required to set up an administrative process to send out refunds if they spend too much on administration which this provision in itself adds to their costs.

With these added costs how will insurance companies comply?  Where do they have wiggle-room?  The answer is customer service.  Already health insurance companies are laying off employees leaving those who still have a job with even more work to do.  Call center wait times for customers will increase dramatically.  Insurance companies are now sending letters to the insurance agents they partner with telling them that their compensation for selling and servicing their health insurance will be cut by as much as 40%.  Many agents are considering selling other lines of insurance that will allow them to remain in business.  Many small businesses and individuals rely on their personal insurance agent to help them navigate all the new rules of ObamaCare.  Health insurance agents help keep insurance companies rates competitive by shopping coverage for their clients every year.  With fewer agents to help them many small business will now be forced to hire benefit managers at the very time when they are struggling to meet payroll and keep their own workers.  The “reform” law has forced these business owners to spend countless hours trying to figure out if they are in compliance with the new law.  Medical Loss Ratios will cut off many of them from the help they need by no longer having their own agent to help them.

The whole idea of medical loss ratios was to keep premiums down.  Instead, in order to comply some insurance companies are raising their premiums so that they can match their 15% or 20% share with the added reporting and other requirements demanded by our government officials.  In addition, health plans that do a poor job of wellness and end up with a sicker group of customers will be rewarded by not having to give refunds while those who help their customers stay healthy will be penalized with more administrative costs.

The Medical Loss Ratio provision is just another example of our government gone wild.  Rather than having this bizarre rule and requiring refunds the next Congress should throw out Obamacare and instead focus on wellness, health education and streamlining the regulations on the health insurance industry.  The elimination of medical loss ratios will actually lower administrative costs, improve innovation and may result in lower rate increases going forward.  I believe my clients would rather see better rates at renewal time than getting some kind of refund after it has gone through a nightmarish administrative process overseen by government bureaucrats that ends up costing them money.


6 Responses

  1. Insurance compnies will cut commisions and gut customer service to comply with the MLR. Forget about individual insurance. No insurance agent will sell it and it will become a customer service nightmare for the pitiful insurance company that stays in the marketplace

    • Hey Hank, Greg, et al,
      I will take this opportunity to join this blog and make my initial post as blasphemous as I can.

      As a career (37 years) insurance agent I would offer these thoughts: 1) there is nothing good about health insurance companies. The only difference between health insurance companies and the government is that the Feds have people with guns. But the ideas and culture of these behemoth organizations is exactly the same. Insurance companies are not institutions that rational beings should defend. For example, do you have any idea of how insurance companies conspire with PBMs to split revenue at the expense of the customer? The Gambino Crime Family never came up with such a scam. Can you explain to me how insurance company network deals with providers are in the best interest of cash paying patients? Or how lobbying state insurance commissioners to disqualify list billing for individual plans under Section 125 of the IRC is beneficial to consumers?

      2) agents need to learn to be representatives of the client and not the company. Moving to a fee based practice is how this entire business enterprise need to go. The model for all of this is already in place – that would be 401(k) plans. Agents have to learn to run a business just like doctors and other medical providers must – the customer is king and everyone and every other organization exists on to service that customer.

      Look, there is no easy answer here – we all know that. But we need to keep a focus on the real bad guys here. And that is not the government. Hell, we all know how bad they are. It is the lying bastards that run the insurance companies that we need to look out for as we move forward. Those and the idiot Republicans that have absolutely no idea of how insurance works – or even how markets work.

      Hey Greg – can we swear and besmirch reputations and name call on this blog? Or must we behave?


  2. I strongly support the MLR minimum provision of the PPACA statute. The MMLR represents a valid “bid” by medical consumers in the contract between patients and insurers. Insurers not able to meet the bid will be absorbed by those which can, creating a stronger marketplace. The MLR greatly strengthens the private markets by forcing survival of the fittest and creating market pressures.

    • Bill,

      The MLR is a horrible idea. Why pick 80% on small groups; why not 90%. In fact, I mandate that the government tell all business how much profit they should make.

  3. Bill,

    Thanks for posting, but I couldn’t disagree more, for several reasons —

    1. MLRs deter innovation just when we need it most. A company rolling out a new product or entering a new market will have extraordinary admin and marketing expenses until it gains some market share. Plus, it will be collecting premium long before it has to pay out claims, skewing the LR in the short term.

    2. MLRs encourage higher, not lower, premiums because the more premium dollars collected, the more money available for admin and profits. The incentive is entirely wrong.

    3. MLRs discourage high-deductible plans because there is a smaller premium base over which to spread fixed costs. This could be solved in an HSA situation IF the HSA contributions were considered part of the premium base, but I haven’t seen any interest in doing that, have you? What is more likely is carriers will build HSA contributions into their premium. But then they will take a processing fee for what should be a simple cash transaction between the customer and his bank.

    Overall, the MLR standard is calculated to advantage large incumbent carriers and disadvantage smaller rivals (as you note.) That is not a good outcome, imo. We have too much concentration already in this market.


  4. Including compliance costs in the MLR is a nifty form of double jeopardy. The government imposed the compliance measures without funding them; thus, passing those costs on, ultimately, to consumers, and now they penalize consumers further by including those same costs, already incurred once, in the MLR. If anything, compliance costs should have been excluded from the MLR.

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