Medical "Lost Their Minds" Ratios

A majorly contentious portion of the "health care reform" debate (which was more of a debate about health insurance, as little about "health care" was really reformed) was the minimum Medical Loss Ratios(MLRs) that would be applied to commercial health insurance coverage.  MLR is basically the % of the premium $ collected by an insurer (that chunk of change taken out of your paycheck PLUS the amount paid by your employer, if you're employer covers you) that ends up paid out by the insurer to pay for medical claims.

For the individual and small-group markets, the minimum MLR contained in the Affordable Care Act is 80%.  That means, for every $1 paid in premium, $0.80 must be paid out for claims or "activities that improve health care quality."  Said another way, insurance companies are limited, for this market, to spending/keeping $0.20 per $1 collected in premiums for everything else, like administrative expenses (rent, payroll, travel, etc.) and profit.  In the large-group market, the minimum MLR is 85%.  A carrier who exceeds the MLR for a line of business must "pay-down" the difference in the form of a rebate to policyholders.

The intention is obviously to limit the profits of insurance companies, who were generally vilified during the debate.  But let's take a look at some big round numbers to see how this might play out.

United Health Group (UNH) had premium revenue of approx $79B in 2009.  They had approx $65B in "medical costs", which, using simple math, gives them a MLR of ~82%.  This MLR calculation doesn't take into consideration the new "activities that improve health care quality" allowance, so, if restated in "new" math, expect that MLR to be higher.

UNH also has a mix of small and large group clients, and the MLR on their different lines of business would be done separately.  Blended, expect their MLR "requirement" to fall somewhere in the 83-84% range.  I don't think they'll have any trouble meeting that.

So, for a mamoth of an insurer like UNH, who is running relatively efficiently, MLR reform doesn't seem to present much of an issue.  But the American economy's lifeblood is small business - and in health insurance, these would not be mom and pop insurance stands, but smaller, regional competitors of companies like UNH, who don't have some of the efficiencies and scale of UNH, who employes somewhere around 80,000 employees.

These smaller insurers will have a tougher time meeting the MLR requirements.  Many may have MLRs much  lower than UNH using today's math, and will be scrambling to come into compliance.  They'll likely do it in a few different ways.

First, they will get "creative" on what they will count in the quality bucket.  Don't worry, the regulators and auditors are already smaking their lips...  That won't last long for those who try it (and are not successful).  Next, they'll cut their expenses, likely drastically.  More lost jobs - lovely - and they will start to lose the ability to provide service (call centers) for their membership, who will begin to defect.  Finally, they'll look for a buyer.  Someone like, you guessed it, UNH.

In the end, MLR minimums will simply drive additional consolidation in the marketplace, leaving fewer, larger insurers.  Of course, without the ability to pile up cash from profits (remember profits are limited here), this will only last a short while.  Big companies will run out of money to buy little companies (and won't be able to pile up cash quickly to replenish their coffers) and then the little guys who are left will simply close up shop.  Imagine a news story telling you that your health insurance company simply shut down...

In a matter of a few years we could have significantly less health insurers, all of which (remaining) will be attempting to find new ways to make a larger profit, which means lower levels of personal service (lay off workers to increase the portion of premiums that end up on the bottom line).

And all of this does almost nothing to actually impact the true driver of health care cost growth - utilization of new, more expensive treatment options, with little to no evidence of superiority over existing treatment options.  So, we've reformed health insurance to something likely less desirable than it is today, and still will be experiencing huge increases in cost, because that premium (the ever growing paycheck whitholding) is and always has been tied to the costs of the medical claims coming in, which will keep on coming.