Medical loss ratios

One of the provisions that got added to Harry Reid’s manager’s amendment at the last minute was a requirement that insurance policies sold through the exchanges have medical loss ratios of at least 80%.

In insurance jargon, the “loss ratio” is the percentage of premium dollars paid out in claims.   The “medical loss ratio” of  a health insurance policy is the percentage of premium dollars going out to providers, as opposed to marketing, administrative overhead, and profit.  So the provision is  the decisive answer to the charge that the individual mandate in the bill gives the insurers a license to steal by offering junk insurance that people would be required to buy.  The enforcement mechanism is staightforward:  any firm that pays out less than 80% must rebate the difference to its policyholders.

A required payout ratio has to be up there with guaranteed issue, age-adjusted community rating, and the bans on recissions and lifetime caps among the central reforms the bill will achieve.  If the Democrats are smart, we’ll be hearing a lot about this between now and November.

(Bill Nelson of Florida, a former insurance regulator, did an excellent riff on this just before the cloture vote.)

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com

26 thoughts on “Medical loss ratios”

  1. I'd be prepared to bet that Wall Street had figured the 80% medical loss ratio in when it pushed health insurance stocks to all time highs at the end of last week. Which makes a kind of interesting statement on who Wall Street thinks won this fight. $240 million of lobbying money extremely well spend.

  2. After multiple stock boom-bubble-bust cycles in the last ten years (Enron, Dotcom, Mortgage securities,etc.), why are there so many who think that the judgment of Wall Street as reflected in the daily stock prices means anything more than a fart in the wind? If Wall Streeters were so smart would they have pumped so much money into Pets.Com?

    Stock prices don't reflect objective reality. They reflect what equity traders think that other equity traders think about the stock.

  3. Yeah, I was impressed when it was set at 90%, but the CBO couldn't abide that, so here we are. Tell me, what's the overhead on medicare again? 3-6%, right?

  4. I keep hearing about all these great speeches people have made in the Senate in the last week. TPM or Kos or somebody ought to do a highlight reel of them. Mark, do you have Josh Marshall's ear?

  5. What is the current loss ratio levels? If they're at (say) 80% or so, then keeping them there in return for tens of millions of added customers is a good deal for the insurance companies.

  6. Eighty percent is at least five percent too high.

    According to Bruce Webb at Angry Bear, Aetna is currently at about 80%.

    This is not reform; this is reification.

  7. Either I am not understanding this or some others aren't. Doesn't an 80% loss ration mean that out of every dollar paid for insurance, .80 would go to care while .20 would go to overhead? what are the current ratios? Joel says he's heard that Aetna is at 80%, any confirmation? A link to the article that Joel spoke of was not provided. Anyone have one?

    Also, insurance company profit is a symptom, but not the goal of reform. While I would expect to see profits drop a bit from reform, I have read that most of the cost of care comes from hospitals. Is there really that much to be had from companies like Aetna?

    Just wanting some facts here.

  8. 20%!!! And explain to me exactly what value the US citizen, COMPELLED to pay this money, is getting for that 80%?

    Of course there is some overhead to running any organization, and I'm prepared to believe that the cost of billing, answering questions, and suchlike, take up 1%, heck, maybe even 2% of the medicare or VA budget.

    So explain to me why I am being forced to pay an additional 18% to support various CEOs in the lifestyle to which they have become accustomed? And why this is a great win for the forces of progressivism?

    (Not to mention that the very foundations of this bill are broken. Even if we did NOT have parasites pocketing 18% of the money flowing through them, since when did a poll tax rather than a graduated income tax become a central tenet of progressivism?)

  9. The Senate wanted a 90% loss ratio, but the CBO said 80% (85% for big, corporate plans) was the max they could go. I'm not sure of the the reason. I believe Minnesota has a 92% mandated ratio.

  10. The 80% is a pretty low figure, especially since private plans usually force a lot of extra overhead expenses on the provider end as well. Still, it's a start. Given that it's 85% for group plans, and private insurance covers only around half our medical expenses, the total waste will be in the neighborhood of 1.5% of GDP. Bad, but we can gradually push it down.

  11. I'm a lawyer and not a sophisticated policy analyst, but I think that .20 x 10,000 is not as big a number as .20 x 20,000. That strikes me as an interesting way to hold down premiums.

  12. Talk about the soft bigotry of low expectations.

    To allow 20% of premiums to be flushed down

    the rathole of overhead, advertising, naming rights on sports arenas, profits and,

    let's not forget, executive compensation,

    and to boast about it afterwards, is pathetic criminality.

  13. Correct me if I'm wrong, but I think that 20% number refers to the group market. I believe the individual market is 25%.

  14. The rule is 80% for individuals, 85% for groups.

    According to Nelson, ratios in the 70s are now typical in the individual market.

    Averaging individual and group policies (with the group market being much bigger) here are the ratios for the big for-profit insurers, according to Physicians for a National Health Program:

    76.9% – Aetna

    82.3% – Cigna

    83.9% – Health Net

    83.2% – Humana

    78.6% – UnitedHealth Group

    80.6% – WellPoint

    http://www.pnhp.org/news/2006/march/medicalloss_r

  15. Currently most recission is justified as fraud. Putting language in the bill that says recission is only ok if it is used in cases of fraud doesn't seem like it does much.

  16. Hi, I haven't studied the bill on this, but MLR is usually a lot lower for individual than for group coverage. Large groups are often close to 90% or even above, on an actuarial adjusted basis (because they are self-insured). Which means that individuals and small groups subsidize other lines — but SG and Individual are also more expensive to sell. The real losers here, that no one talks about, are insurance agents, who tend to get a fairly generous commission. Buying on an exchange, presumably, would do away with that. So to the extent the exchange would reduce insurer costs of selling coverage, that would help bring MLR up.

    Also, please everyone remember: MLR is relative. It won't reduce costs if it ends of being 90% at incredibly inflated provider rates. Insurers no doubt have their inefficiencies, but high provider and medical care costs are what is really driving up the cost of health care — even Medicare is going up at an unsustainable rate.

  17. I'm a statistician, not an economist, but 80% strikes me as too low.

    The companies are getting a purchase mandate out of this, that should reduce their marketing costs. Conventional Medicare runs 2-4% (it varies some by year) in administrative costs. Of course, Medicare has no marketing expenses, and it doesn't have executives making 8 figures either. So exactly what does this 80% MLR get us?

    I'm really amused by people saying that the health insurance racket isn't really that profitable, only about 3.3% (apparently net). That doesn't sound like much, until you consider that most of the money in our health care system (and almost all the private money) flows through their accounts. 3.3% of a billion is 3.3 million. That's a lot of pizza and beer, and they're making it being the middleman.

    I'd like to know the CBO's reason for claiming that 90% is not viable.

  18. Kickbacks, anyone? I foresee a lot of insurance companies getting into closer relationships with health care providers (perhaps through affiliates or subsidiaries to launder the accounting) so that the apparent loss ratio hits the right numbers while the amount trousered remains the same.

  19. 80% is on the high side for currently-operating insureres, definitely high for the individual market. But the 20% goes to a lot of things other than CEO salaries and profits: anything that isn't a provider bill, including things like nurse lines, education campaigns and incentive payment schemes (for meeting particular outcomes, or standards of care), which almost everyone agrees are good and useful things.

    How much of the 20% goes to that? We don't know; it would be good to find out.

  20. Paul,

    We already have that going on, and other forms of vertical integration. For example, physicians owning their own surgical facilities, and now full-blown hospitals. We have insurers owning medical practices: Cigna bought out the Lovelace Clinic in Albuquerque 10 or 12 years ago. The nice thing about vertical integration is that you have lots of places to hide profits. If the insurer owns the practices in their network, then they can elevate their MLR by jacking up provider payments and taking profits off the provider side.

  21. Dennis, considering that you state to be a statistician your math skills sure must be better than this: 3.3% of one billion is 33 million, not 3.3 million. Maybe that's why the middlemen in health care can afford champagne and caviar.

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