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The Effect of Minimum MLR Requirements

By April 19, 2013Commentary

Minimum medical loss ratio requirements have been around for decades and were designed to keep health insurers from gouging consumers with higher than necessary premiums, with regulators, of course, defining what is “necessary”.  While not the worst idea in insurance regulation, it isn’t the best either, with a number of unintended consequences.  The federal health reform act picked up this mediocre idea as a centerpiece of its supposed efforts to keep down costs and protect consumers.  An analysis from the American Action Forum summarizes the usual criticisms of the MLR provisions, with some twists unique to the reform law.   (AAF Paper)  As the authors point out, the law may actually encourage insurers to raise premiums, even if they have to pay more rebates, because they still will make more profits.  And because of the subsidies in the law, many consumers won’t care about the higher premiums, so there in essence is an even more massive transfer of funds from taxpayers to both the health plans and those receiving subsidies.  The authors also claim that higher premiums could result because state regulators might require them to ensure that insurers have adequate reserves.  There are other issues than those mentioned by the authors.  One is that the natural effect of any regulatory “price-fixing”, which this is, is for prices, in this case margins, to clump at the limit.  So insurers who might have been more efficient and had higher MLRs, will tend to migrate down.  But the biggest problem is that an MLR removes an incentive to keep medical costs down.  The higher medical costs are, the higher the premium and the more absolute dollars an insurer makes.  There is also a clear incentive to spend less on the “administrative” functions which are covered by the non-MLR part of the premium, in the interest of a higher profit, which could worsen customer service.  The paper provides a useful function by pointing out the problems with MLR regulation.  A better approach is to use competitive bidding to determine subsidy levels, employer and employee contribution levels and to thereby control insurer pricing.

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