The Great MLR Calculation Debate

As part of the villainization of health insurers in the reform debate, Congress enacted limits on how much of the health insurance premium dollar can go for non-health care expenses.  For large group policies this number is 85% and for small group or individual coverage it is 80%.  This medical loss ratio calculation is obviously the subject of a protracted struggle among insurers, regulators and consumer advocates.  The National Association of Insurance Commissioners has traditionally overseen the definition and submission of categories of cost and has issued a proposed form for the calculation, which will now be reviewed by HHS.   (NAIC MLR Form)

To really understand the definitions you have to look at the NAIC’s Statement of Statutory Accounting Principles, but the form instructions give a fair amount of guidance.  Insurers shouldn’t be too displeased.  The real concern about this whole exercise is the incentives it creates, incentives which should be obvious to anyone, but apparently eludes the geniuses that populate the Administration and Congress.  Think about it this way, if you have a hundred dollars of premium and you can only keep $15 of that to cover administrative costs and make a profit, what are your overall incentives.  First, you have no incentive to keep medical costs low.  If they go up, you can raise your premiums and get to keep 15% of a much larger premium.  Second, if you have to count all your efforts to keep medical costs low as administrative expense, then you might as well eliminate that expense, because you get a double benefit–higher medical costs leading to higher premiums and less of your 15% going to expenses.   Really a stupid provision and when the behavior which inevitably will follow the incentives occurs, then regulators will scream even louder about having to control rate increases.

Our guess is that HHS will try to tighten up the calculation to make it look like it is being really tough on insurers, who it likes to bash anyway, which will only increase the incentives mentioned above.  You have to continue to suspect that this Administration wants the private insurers to look really ineffective and expensive, so it can justify creating first a “public plan” option and then a single-payer government system.  Certainly everything it has done both in the legislation and the accompanying rules has the effect of driving up insurance costs, contrary to the supposed aim of reducing costs.  Empowering insurers to use every weapon in their arsenal to control health care unit prices and utilization would be a far better approach.  That coupled with moves to undermine provider market power might actually succeed in reducing insurance premium growth.  The current approach won’t.