There are a number of state and federal laws and rules that require that health insurers must pay a certain percentage of premiums received out in claims for health services. Typically if they are under that percent they must rebate the policyholder the difference. A typical percent is 85%, which is too low. As is always the case with government rules, they incentivize behavior to avoid the requirement in some manner. One of the games insurers play is to categorize certain administrative items as a medical expense. The rule definitions have some fuzziness around items like quality assurance and utilization management. Another approach is to simply raise premiums, which is easier to do than you might believe since most markets are not that competitive. 85% of $110 is more than 85% of $100 and it probably doesn’t involve that much more adminstrative cost.
When insurers started buying health care providers, or for certain plans like Kaiser that were already integrated with a provider line of business, it was apparent to me and I wrote about this being a new tactic to avoid the medical loss ratio rules. If you own a provider, primary care clinics for example, you get profits from both your insurance product and your primary care clinics. Several insurers are in this business–UnitedHealth, Aetna, Humana and others. If your insurance line of business has a profit cap, which the medical loss ratio limitation effectively are, since your profit will be whatever is left after administrative costs come out of your 15% of the premium, you just move the profits to the provider line of business by paying that owned provider more for its services.
Health Affairs and others have finally caught on to the scam, and a current article describes how this works. Now I don’t think it is a particularly good idea for insurers to own providers or vice versa; I think it is likely anticompetitive and it isn’t clear to me that there are any cost or quality benefits. But this avoidance of medical loss ratio rules is just one more reason to prevent it from happening. At a minimum, the rules need to address this situation. Unfortunately, as I said above, it is likely government will do so in a way that just creates an incentive for some other warped behavior. (Health Affairs Article)
