Medical Loss Ratio Revisited: Cost and Coverage Controls that Work.

Back on July 28th I posted on what I considered to be the most important provision of the original House Tri-Committee Health Care Bill in Sec 116: Golden Bullet or Smoking Gun Smoking Gun referred to the belief by Republicans that this bill was designed to ultimately transition to Single Payer, and Golden Bullet to my belief that they were right, that if you forced private insurance to give up its predatory business model that ultimately they would abandon less profitable markets just as they did in the heyday of managed care.

What Sec 116 did was to establish minimum Medical Loss Ratios for all plans participating in the proposed Exchanges. Medical Loss Ratio is the industry term for percentage of premium dollar actually spent on provider payments with the remainder retained by the company to pay for marketing, administration, executive compensation, and profit. Under the House Bill the actual mandated MLR for each area would be set by an auction process and in that model you pretty much needed a Public Option to establish a baseline.

Over the course of the summer and fall the language of Sec 116 was displaced and minimized in a way that restricted it only to policies issued before the establishment of the Exchanges and so make it almost useless in the bigger picture. But then a near miracle happened at the last minute, the Team of Ten inserted Section 2718 “BRINGING DOWN THE COST OF HEALTH CARE
COVERAGE”. MLR Regulation was back, and better the ever. Text from the Manager’s Amendment and commentary below.

‘‘(A) REQUIREMENT.—Beginning not later than January 1, 2011, a health insurance issuer offering group or individual health insurance coverage (including a grandfathered health plan) shall, with respect to each plan year, provide an annual rebate to each enrollee under such coverage, on a pro rata basis, if the ratio of the amount of premium revenue expended by the issuer on costs described in paragraphs (1) and (2) of subsection (a) to the total amount of premium revenue (excluding Federal and State taxes and licensing or regulatory fees and after accounting for payments or receipts for risk adjustment, risk corridors, and reinsurance under sections 1341, 1342, and 1343 of the Patient Protection and Affordable Care Act) for the plan year (except as provided in subparagraph (B)(ii)), is less than—
‘‘(i) with respect to a health insurance issuer offering coverage in the large group market, 85 percent, or such higher percentage as a State may by regulation determine; or
‘‘(ii) with respect to a health insurance issuer offering coverage in the small group market or in the individual market, 80 percent, or such higher percentage as a State may by regulation determine, except that the Secretary may adjust such percentage with respect to a State if the Secretary determines that the application of such 80 percent may destabilize the individual market in such State.

The language is convulted but the result is simple, insurance companies can no longer make money by ensuring people who don’t make claims.

Under the current business model of private insurers the goal is to recruit insurees who in all likelhood won’t make claims, while denying those who are certain to either because of pre-existing conditions or simply by falling sick. The bill directly outlaws those practices but under 2718 they wouldn’t have the desired effect anyway. Take the hypothetical case where your entire risk pool is made up of healthy young adults whose claims are mostly limited to broken bones from skiing or biking accidents. Under 2718 unless those claims across the risk pool don’t add up to 80% or 85% depending the insurer has to rebate the extra premium. At the extreme the company would have to rebate the entire premium and so go out of business having no revenue to even pay employees. Under the new model the only ways to increase profits are one, to compete on the basis of volume, or two to reduce administrative costs, which is a 180 from the current model of hastling claimants into dropping coverage or simply finding excuses to rescind coverage.

Similarly 2718 limits or eliminates the utility of simply raising premiums because it would require a parallel increase of provider payments on an 85 to 15 ratio, otherwise the rebate provision would trigger. And while collusion between provider and insurer can’t be excluded the benefits would flow more than 5 to 1 to the provider while the price differential with other plans falls entirely on the insurer. The same effect occurs by eliminating a category of coverage, even if you didn’t fall afoul of the Acceptable Benefits Package requirements once again you risk triggering the rebate provision.

The words are not used in the bill but the result is nearly automatic cost controls. And enforcement is relatively easy, most of the information needed to calculate MLR is readily available in SEC filings and IRS returns, you don’t need HHS auditors rummaging around in the records, the SEC, the FBI and the IRS are already on the job.

On some other blogs I called this “The Most Important Health Care Provision You Never Heard Of”, something that is no longer true. It was reported the other day that the Health Care insurers were ecstatic at the passage of the bill, all those new customers delivered by the individual mandate! And Wall Street responded. But then some lobbyist realized what the real import of 2718 was and sent a follow up memo saying “not so fast”.

This language is not in the House Bill, at least not with the same effect, and we can expect that insurance companies will start working on the usual suspects to kill the bill on final. Which in my mind is reason to just get this bill signed to nail 2718 into law. Because on its own it has many of the same benefits on the overall system that the Public Option was supposed to deliver.