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Senator Max Baucus recently admitted that he never read the new health care law. But that hasn’t stopped him from trying to re-write it after the fact, in a way that would drive more health plans from the market and give consumers less choice.

The new law reduces choice of health plans by giving government the power to control the Medical Loss Ratio (MLR) — the amount of dollars an insurer spends on medical care divided by the total premiums. Policies that cover large businesses will have to achieve an MLR of 85 percent, while those for small businesses and individuals will have to achieve an MLR of 80 percent. This sounds simple but leaves many issues unresolved.

Calculating he MLR can be quite complicated — especially when the government gets involved. Suppose, for example, an insurer invests in information technology that it gives to patients or providers in its network in order to improve co-ordination of care. Is that a medical cost?

Furthermore, the MLR regulation is deadly for increasingly popular consumer-directed plans. Suppose a traditional policy costs $4,000 and spends $3,400 on patient care, for an MLR of 85.00. With the consumer-directed policy, the patient controls $800 more of the medical spending than with the traditional policy, through a higher deductible, and his premium goes down by $800. In this case the MLR goes down to 81.25 ($2,600/$3,200). There is no real difference, but the new regulation could require insurers to rebate $120 — the amount by which the ratio falls short of the required MLR. (In real life, the consumer-directed plan would have lower total costs than in this simple arithmetical example, because cutting out the middleman and giving more health dollars to patients to control themselves motivates them to get better value for money.)

But Senator Baucus wants to throw yet another wrench into the works. Taxes are not medical care, and they are not under any health plan’s control. So, the legislation excludes taxes from total costs used to calculate the MLR. Senator Baucus leads a group of senators who now assert that they meant to pass a bill that exempted some taxes from health plans’ MLR calculations, but not corporate income taxes.

If it prevails, Baucus’ flawed notion will lead to an even greater reduction of choice of health plans. Suppose two insurers of the same size compete in a region’s large-group market. They earn premiums of $1 million each. They each spend $850,000 on medical claims, thereby achieving an MLR of 85 percent. One insurer is for-profit, earning a profit of 4 percent ($40,000), and pays combined federal and state corporate income tax of 45 percent ($18,000).  Its MLR automatically shrinks to 83.5 percent and ObamaCare demands a rebate that likely drives the for-profit carrier from the market.

The whole focus on MLRs is a politically seductive waste of time: MLRs are irrelevant because the insured and their employers tend to choose health plans based on other criteria — likely invisible to politicians and bureaucrats. Plans with relatively low MLRs have increased market share in the last few years.


John R. Graham is Director of Health Care Studies at the Pacific Research Institute,
& Senior Fellow at the National Center for Policy Analysis.

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17 Responses for “Mau-Mauing the Medical Loss Ratio”

  1. Barry Carol says:

    The MLR limits also don’t make sense because they reduce the incentive to innovate. Suppose an insurer, for example, after some investment in IT and new software development, developes a better way to mitigate fraud and/or to steer patients toward the most cost-effective providers. Utilization would decline but the insurer would have to pass all the savings through to policyholders if it were at its maximum allowed MLR ratio previously. It would be better to just have transparency around the issue including providing small group members with their own claims data so they can better manage costs and shop for better value. Why are we determined to thwart free market principles at every turn in this industry?

  2. Minivet says:

    Interesting discussion, but I don’t follow your last point:
    MLRs are irrelevant because the insured and their employers tend to choose health plans based on other criteria — likely invisible to politicians and bureaucrats. Plans with relatively low MLRs have increased market share in the last few years.
    This seems to posit “consumers don’t choose it” as logically equivalent to “it has no relation to quality”. We know the health industry is full of, practically characterized by, market failure. Perhaps the fact that choice criteria don’t include MLR is one of the market failures.

  3. Chris LeBeau says:

    Regardless of MLRs current impact, corporate income taxes certainly seem like a flawed item to include in the ratio being that businesses cannot elect whether they want to pay them or not.

  4. Nate says:

    what a shell game this would become. If I make money on life insurance and pay taxes does that effect my MLR? Or are they going to calculate what your income taxes would have been on only your medical line of business, in which case how much of your office building, website, and other cost are medical related or related to other lines. It’s like they are trying to come up with the most complex solution possible.

  5. Peter says:

    “Utilization would decline but the insurer would have to pass all the savings through to policyholders if it were at its maximum allowed MLR ratio previously.”
    Barry, isn’t that the purpose of health reform, to save policy holders/patients money? See if this were a government run single-pay system those savings (IT/Fraud reduction) would automatically be passed on to tax payers, who are the policy holders, and not to stock holders/exec bonuses.

  6. Nate says:

    “See if this were a government run single-pay system those savings (IT/Fraud reduction) would automatically be passed on to tax payers, who are the policy holders, and not to stock holders/exec bonuses.”
    LOL….LOL….LOL no really Peter LOL that was a great one.
    Where did all that extra Medicare money go? All that excess SS premium gets refunded right? Tabacco money that was sspposed to pay for treating illness caused by smoking where is that now?
    Your so drunk on the coolaid you don’t even know where you are any more

  7. “Minivet”: Thanks for your comment. The evidence of growth in market share of plans with high MLRs is from an analysis I did of change in market share in California (hyperlinked in the post).
    With respect to “market failure”, I generally do not accept that markets fail. I suppose my case could be described as tautological, but I’ll just state it for now. However, we could not have an empirical debate on market failure in American health care because governments have not allowed markets to operate in American health care since WW2.
    Although only a small fraction of individuals buy their own health insurance, almost all of us have bought life, homeowner’s, and/or auto insurance. I have all three and I never spent one second investigating the loss ratio of the carrier. I trusted A.M. Best and the state Insurance Commissioner to determine their solvency. I doubt any consumer could report the loss ratio of their life or P&C insurers. That tells me that it is not an important factor for consumers.

  8. Barry Carol says:

    Peter – Nate beat me to the bunch, sort of, but I’ll give you my answer anyway. Neither Medicare nor Medicaid has proven itself up to the job of either mitigating fraud or controlling utilization. All they seem to be good at is dictating prices and issuing payments. For Medicaid, that means paying so little that few doctors are willing to see Medicaid patients. For Medicare, they manage to create shortages in some areas like primary care because of inadequate payments and excess supply elsewhere like heart surgery and hip replacements where reimbursements are generous.
    I’m more than willing to give private insurers and service companies a profit incentive to come up with approaches that control fraud and utilization. I think the private insurers already run rings around Medicare and Medicaid when it comes to limiting fraud though it is admittedly difficult to quantify precisely.

  9. Peter says:

    Nate and Barry, Medicare and Medicaid are not true single-pay systems. If you think so then your private insurance company is a single-payer (it hasn’t been able to keep medical costs under control either), but all exist in this multi-pay private system with no real system cost controls. Just paying less (or trying to, if Congress let’s you) does not make this a single-payer system with cost controls, just payment controls. And Barry, I think you’re right, how do we know how much fraud private insurance incurs since that is not really what they want to make public.

  10. Barry Carol says:

    Peter – I think most health policy types would say that Medicare is, in effect, a single payer system for the 65 and older population. It serves some 46 million people which are more than the population of Canada and not much less than the UK’s population of 55-60 million. CMS has plenty of clout, especially with hospitals. Many single payer advocates in the U.S. want to extend Medicare to the entire U.S. population. If that were to magically happen, I don’t see how CMS would do any better at controlling fraud or utilization for 305 million users than it does now for 46 million. It has a long record of failure on both fronts. It’s basically a price dictator and a big dumb payer with many of its coverage and payment decisions subject to political pressure as opposed to sound science or cost-effectiveness.

  11. Peter says:

    CMS has been hamstrung by the Feds, that I will agree with, but it doesn’t have to be that way with a single-pay system. Every time it tries to cut payments or do cost cutting like, negotiating with drug firms, congress prevents it, that’s not a true single-pay system, except in America. There is way too much political pre$$ure from providers and over 65′s, but you know the private market has not been able (or willing) to control utilization any better unless you agree that 6%-10% compounded increases each year, pre-existing, caps and policy cancellations are good utilization control policies. With or without these new MLR rules this system will not control costs.

  12. Nate says:

    “but it doesn’t have to be that way with a single-pay system.”
    Hospitals don’t have to charge to much
    Patients don’t have to consume to much
    Crooks don’t have to steal to much
    but hello, they do. And single pay as proven less able to combat these problems then any other system.

  13. Nate says:

    “Every time it tries to cut payments or do cost cutting like, negotiating with drug firms, congress prevents it, that’s not a true single-pay system, except in America.”
    Every time private insurance tries to do anything congress outlaws it or passes any willing provider, mandated benefits, mandated access, etc etc and you have no problem placing all that blame on private insurance and saying we should do away with it. Why don’t you allow private insurance the same excuse you allow single payor ran by the government who is creating all the problems?

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  16. Rachel says:

    could you set your feeds to show the whole blog post, not just the title or the first few sentences? I’d be more likely to read.
    Thanks for your consideration.

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