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Guest post: Health Insurance Rebates Show How Bad Insurers and State Regulators Can Be

There is and will be a lot of conversation about the efficacy of the ACA (Affordable Care Act), whether it is a step to deal with the health care cost juggernaut or mostly a boon to private insurers.  What is true is that ‘medical inflation’ has resumed to previous levels of year to year increase after a lull during the last two years, except for Medicare, which comes in at about 3% and not the 9% for the commercial market. (post to come).  

Bruce Webb pointed to the medical loss ratio as a way to help control some costs several years ago. Kenneth has his own take on these issues.

Update 2:   Links repaired

by Kenneth Thomas

Guest post: Health Insurance Rebates Show How Bad Insurers and State Regulators Can Be

Health Insurance Rebates Show How Bad Insurers and State Regulators Can Be

Thursday’s health care ruling was a surprising victory for the middle class. I went to bed Wednesday dreading waking up, only to be awakened by a phone call that the law had been upheld. Most of the story is well-known, and summarized in the President’s speech: six million young adults under 26 who have gained insurance, children now (and adults starting in 2014) can no longer be denied insurance due to pre-existing conditions, an end to terminating people’s insurance when they get ill, closing the Medicare donut hole, etc. I want to focus on one provision the President mentioned in passing, the $1.1 billion in insurance rebates that 12.8 million Americans will be receiving August 1.

The rebates are due to the medical loss ratio or “80/20” rule that insurance companies cannot spend more than 20% of premium dollars on “administration, CEO pay, and profits,” as Health Care for America Now (HCAN) summarizes it. The requirement is 85% spent on actual medical care for firms in the large group market, according to HCAN). Of the $1.1 billion in rebates, $393.9 million will be in the individual market, $386.4 million in the large group market, and $321.1 million in the small group market.
Although $1.1 billion in rebates is not a lot of money in the multi-trillion U.S. health care system, it is enough to provide noticeable rebates to millions of consumer before the November election. Consumers Union has a state-by-state breakdown of which insurance companies owe rebates in each state, and how much. Three patterns emerge from these data: First, some companies routinely failed to meet the 80/20 rule in state after state after state. Second, Blue Cross/Blue Shield companies, which were once largely non-profit but were converted to for-profit corporations mostly in the 1990s, are now frequent violators of the medical loss ratio rule. Third, some states, most notably Texas, have such lax insurance company regulations that violations of the rule are rampant. The data below come from the Consumers Union link above.

1) Multiple violations by individual companies: The poster child for gouging consumers and spending premium dollars on things other than health care is Golden Rule Insurance Company (since 2003 a subsidiary of UnitedHealthcare), which operates solely in the individual market, and not in either the small group or large group health care markets. According to the Consumers Union data, Golden Rule owes rebates in 23 states where it operates. Comparing the CU data with Golden Rule’s website on where it operates, we find that in only nine states where it operates does it not owe rebates. We also learn that two Golden Rule subsidiaries also owe rebates, American Medical Security Life Insurance Company in Utah in the individual market, and Oxford Health Plans of New Jersey Inc. in the large employer market, bringing Golden Rule’s total to fully 25 states where it owes rebates under the medical loss ratio rule. In a number of states (Alabama, Florida, Indiana, Kentucky, Maryland, Michigan, Mississippi, and West Virginia) , Golden Rule owes more money than any other insurer in the individual market.

Furthermore, UnitedHealthcare subsidiaries carrying the UHC name owe rebates in 28 states in the small business market, large business market, or both.

I don’t mean to single out UnitedHealthcare for overcharging: depending on the state and the market, Aetna, Connecticut General, and Time Insurance Company, among others, owe substantial rebates to their customers as well. But Golden Rule and UnitedHealthcare failed to meet their 80/20 tests in so many states that they really stand out.

2) In many states in which Golden Rule does not owe the highest rebates in the individual market, Blue Cross/Blue Shield does. This includes states like Arizona, Missouri, Oklahoma, South Carolina, Tennessee, and most notably, Texas. This represents a complete repudiation of the historical BC/BS ethos, which included non-profit incorporation and community rating (i.e., not penalizing people for getting sick). But that’s what happens when you turn non-profits into for-profits in health care.

3) This brings us to lax insurance regulation, as in Texas. Blue Cross/Blue Shield of Texas owes $89.9 million in refunds, all of it in the individual market, which by itself exceeds all the refunds in the much bigger California economy, where total refunds only amount to $73.9 million. Total rebates in Texas will total $167.0 million. The only other state with rebates exceeding $100 million this year is Florida, at $123.6 million. However, a number of states have higher average rebates, led by Vermont at $807. I believe both the total and average rebates should be examined for evidence of weak insurance regulation.

To summarize, the Supreme Court’s decision was a great one for the middle class. On top of all the provisions that expand coverage and economic security, 12.8 million consumers will see refunds from their insurers to pay back for their price gouging.

This is not to say that we don’t have a long way to go to complete health reform. As Aaron Carroll points out, there is a great deal more that needs to be done to our $2.7 trillion health system, including making coverage universal and getting cost increase under control. But upholding the Affordable Care Act is a step in the right direction.

crossposted with Middle Class Political Economist

Mandate No! MLR SI!: Heard here frist (sic)

No not the striking down of the mandate part, heck probably a thousand fingers were poised over an equal number of ‘Send’ keys when the ruling came down. Me? I took a shower and started thinking about the practical implications of ACA as it will operate under current law as modified today.

Starting with the MLR. Which you did hear about here first in this AB post from July 2009 HR3200 Sec 116: Golden Bullet or Smoking Gun . MLR stands for Medical Loss Ratio which in the final version of ACA was set at 85% for the Group market and 80% for the Individual market for health insurance policies issued by private insurers. Now ‘Medical Loss’ is itself an interesting term of art, it represents the actual amount of insurance premiums collected ‘lost’ via being expended on actual care paid for under your policy. That is for insurance companies the actual end service being delivered from purchase of their product is from their perspective a dead loss to be reduced. Hence a business model built around denying claims.

MLR minimums start to flip that model on its head. Under the rule if the ratio of premium collected to provider payments issued exceeds 15% or 20% respectively in Group or Individual market the difference has to be rebated to the policy holder. And indeed such rebate checks actually went out this year, this provision having already kicked in. Well after this morning’s ruling that rule will continue to operate until specifically repealed. And it is important, though maybe not as much as I was able to convince Donny Shaw of when he put this post up on Open Congress on Nov 14, 2009 The Most Important Health Care Reform Provision You’ve Never Heard Of. For example Richard Escow of HuffPo and elsewhere is of the opinion (expressed semi-privately to me and some others), that while important MLR can be gamed. And in fact I discuss that somewhat in my original 2009 post, feel free to rip on this in comments. Me? I still think MLR is transformational.

So what things are NOT included as ‘medical losses’? In short: administration, management, and direct profits from operations. (For example gains from retained and reinvested profits would not I think count against the company). Currently a lot of health insurance administration is focused on making sure that people likely to submit claims don’t get signed up and/or denying claims to those who for whatever reason obtain coverage. Well various separate ‘must cover’ ‘no pre-existing condition exclusion’ rules take care of much of the first part, under ACA the companies have little room to just turn customers away. And MLR installs limits on the second part. While companies have an incentive to trim their medical ‘losses’ as close to the minimum as possible, every dollar spent doing so puts a squeeze on the same 15% or 20% of premiums they need to pay management salaries and return profits to shareholders. While every dollar squeezed out of the claims process by increasing efficiency and throughput of claims (i.e. actually paying providers on a timely basis with a minimum of paperwork requirements) leaves that much left over for management and shareholders. Gosh all of a sudden we have a business model based on efficient DELIVERY of services rather than DENIAL of them.

Paging Rusty Rustbelt! And Mike Halasy! Because I would love to see how this argument plays to people from the provider community. Particularly folk who have been on both sides of the overall issue. And of course I welcome comment from everyone else. I have been largely absent from the Health Care Debate since actually passage of ACA, the ball went into the lawyers’ court and I am if anything less a lawyer than I am an economist. But after this morning we are right back in the policy analysis game. To which I say “Put me in coach!”

Estimated returns from the MLR (administrative costs to medical costs)

Bruce Webb on Angry Bear was among the first of bloggers to point out that this aspect of the Medical Loss Ratio begins in 2009 and  here and points again to the MLR as it comes into play.

A non-profit group estimates if the Affordable Care Act provisions had been effect in 2010, U.S consumers would have received $2 billion in rebates.

Sara Collins, vice president of the Commonwealth Fund, a foundation supporting independent research on health policy, said the medical-loss ratio rules that went into effect in 2011 were designed to control private insurance administrative costs for consumers and government.
The rules require a minimum percentage of premium dollars to be spent on medical care and healthcare quality improvement — not administrative costs and corporate profits. Insurers must meet a minimum medical loss ratio of 80 percent in the individual and small-group markets, and 85 percent in the large group market — and issue rebates if they do not, Collins said.

Read more: here and here.

The report by the Commonwaelth Fund: The Commonwealth Fund estimates returns to customers from insurance companies who did not comply last year for all fifty states.

MLR bomb…

There is a amazing piece in Forbes that Tim Worstall (also at Forbes) notes reporting on scary news that is misleading:

I’m very confused by this piece from fellow Forbes contributor Rick Ungar. He tells us that there’s a bomb buried in Obamacare (or more formally, the Patient Protection and Affordable Care Act) and that it’s just gone off. Further, that it will mean the end of private, for profit, health care insurance on any large scale: whatever remains will be just a luxury item for those who like to beat the queues as such insurance is in the UK where we have the NHS.

Angry Bear’s Bruce Webb noted the MLR in the legislation on July 28, 2009 (and here and here), among the first to offer analysis, but hardly a surprise now.

Tim [edited for clarity] quotes Ungar and then refutes:

That would be the provision of the law, called the medical loss ratio, that requires health insurance companies to spend 80% of the consumers’ premium dollars they collect—85% for large group insurers—on actual medical care rather than overhead, marketing expenses and profit. Failure on the part of insurers to meet this requirement will result in the insurers having to send their customers a rebate check representing the amount in which they underspend on actual medical care.

This is the true ‘bomb’ contained in Obamacare and the one item that will have more impact on the future of how medical care is paid for in this country than anything we’ve seen in quite some time. Indeed, it is this aspect of the law that represents the true ‘death panel’ found in Obamacare—but not one that is going to lead to the death of American consumers. Rather, the medical loss ratio will, ultimately, lead to the death of large parts of the private, for-profit health insurance industry.

Why? Because there is absolutely no way for-profit health insurers are going to be able to learn how to get by and still make a profit while being forced to spend at least 80 percent of their receipts providing their customers with the coverage for which they paid.

What confuses me here is that in a competitive market it’s entirely normal for an insurer to have a loss ratio higher than 80%. There are plenty of entirely profitable and growing insurance companies that have loss ratios over 100%. So I cannot really understand why the law insisting on an MLR of 80% (or 85% in the large group market) is going to cause all for profit insurance companies to fall over.

Now of course one wonders what is important in addition to this scarey announcement of a medical cost bomb? Issues of accounting for expenses, a more recent mlr formula that is more permissive, enforcement issues. And even why the ratios may be central as a part of the legislation. Another post of course.