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.

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