Surprise, Surprise: Faced With Onerous Regulations, Insurers Game the System

Wonk Room notes that health insurers, faced with new regulations that require them to spend a minimum amount of their operating budgets on medical care (rather than administrative or other costs), are simply reclassifying administrative costs as medical costs. To some degree, it seems, they're not changing their behavior, just their accounting.

But this is hardly surprising considering that these requirements, which mandate what are known as "medical loss ratios," are set at a threshold point between kinda-sorta free enterprise and government-operations-in-all-but-name: If the MLRs had been set any higher, the Congressional Budget Office would have ceased to consider the health insurance industry a private enterprise and instead, reclassified it as "an essentially governmental program."

The Affordable Care Act sets the minimum MLR at 80 percent in the individual market and 85 percent in the employer market, meaning that insurers must spend either 80 or 85 percent of their budgets on medical care. During the writing of the law, Sen. Rockefeller tried to set the requirement a bit higher—calling for a 90 percent MLR. But the CBO said that doing so would "be likely to substantially reduce flexibility in terms of the types, prices, and number of private sellers of health insurance"—ie: it would put many insurers and plans out of business—and would constitute significant enough government interference in the insurance marketplace that the industry's costs (including the price of all those newly mandated premiums) would have to be figured into the agency's cost projections. In order to keep those costs out of the official estimates, the 80 and 85 percent MLRs were the highest that the CBO would allow.

To put it another way, if the MLRs were just a few points higher, the CBO would have been forced to officially label ObamaCare a government takeover of the health insurance industry. "This further expansion of the federal government’s role in the health insurance market would make such insurance an essentially governmental program," the office wrote in December.

Given the stakes—and the obviously severe regulatory burden imposed by high MLRs—is it any wonder insurers are finding creative ways to meet the requirements? You may or may not think that ObamaCare constitutes a wholesale government take over of our health care system. But according to the CBO, at least when it comes to the insurance market, we're awfully close.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • Almanian||

    Last paragraph = nice summary. And to that - well, knock me over with a feather. Whoda thunk it? I am shocked. If we had but known...

    My greater concern is the 95% of Amerika who won't see, know, understand or act based on the implications. Thanks for dragging the rest of us down with you, assholes!

  • Brian Sorgatz||

    I have a practical question to ask at this point. How do we libertarians help keep the health insurance industry from looking like villains for responding in their pretty much inevitable way to this government meddling? (Those meddling kids!)

  • Peter Suderman||

    I think the point to make is that a third-party payer/insurance dominated system like the one we have isn't going to produce great outcomes. I'd prefer a system where fewer people thought of insurance as medical prepayment, where more routine costs were paid for out of pocket, and where insurance was actually treated as a hedge against high, unexpected expenses. Limiting the role of insurers would go a long way to creating a better system.

  • ||

    In spite of the claims to the contrary, this can not happen without tort reform.

    As long as I can sue my insurance company because "I didn't understand that treatment was not covered" costs will continue to increase.

  • Motherfucking Truth||

    In spite of the claims to the contrary, this can not happen without tort reform.
  • ||

    I'd prefer a system where fewer people thought of insurance as medical prepayment, where more routine costs were paid for out of pocket, and where insurance was actually treated as a hedge against high, unexpected expenses.

    Ah. Catastrophic insurance.

    Limiting the role of insurers would go a long way to creating a better system.

    Err, that doesn't follow. Catastrophic insurance was pretty much the norm back when "the role of insurers" wasn't "limited" by the State. In fact, when investigating "whatever happened to catastrophic insurance", one keeps lifting the fingerprints of the state: insurance mandates, various tax provisions, and the like.

    Perhaps, just once, we could try to imagine our preferred outcome arising, not from a state mandate that it occur, but from people doing what they want?

  • ||

    Ah. Catastrophic insurance.

    Is it available? If I could purchase some medical insurance with a very high deductable, say $10,000, I would, but I am unaware of any such thing. I haven't really looked but am under the impression I can't.

  • Sean W. Malone||

    I have a low-premium plan with a $3,000 deductible. That's about as good as I think you'll find anywhere though anymore.

  • ||

    Well, the more insurance that companies sell that doesn't result in shelling out health care expenses, the higher the proportion of administrative costs to health expense costs the insurance company has.

    It's the catastrophic-insurance killer built into the legislation.

    Joy.

  • Wiley Long||

    Plans are available with $20,000 deductibles. The highest family deductible for an HSA-qualified plan is about $12,000. You can run quotes on our site (no need to wait for government exchanges). www.HSAforAmerica.com

  • ||

    Sentences to ponder
    - Tyler Cowen (Marginal Revolution)
    For every doctor, there are five people performing health care administrative support.
    That's from Catherine Rampell.

  • ||

    Comparative advantage. First, administrative support people are cheap and doctors are expensive. Second, doctors neither want to nor are good at administrative support.

    Furthermore, administrative support people don't have to be licensed by the state after being matriculated from a school certified by a giant union interested in restricting supply.

  • ||

    And administrative support people aren't good at practicing medicine. Your point?

    If the quote were about ratios of doctors to physicians assistants or nurses, then you'd have a point.

  • ||

    To put it more simply, if an auto repair shop had five administrative support people working for every mechanic, you probably wouldn't be claiming "comparative advantage" as an excuse.

  • ||

    Of course I would. If auto mechanics found it more profitable to have someone besides auto mechanics handling the administrative duties, who am I to question that decisions?

    I'll grant that, because third party payment for health care is massively subsidized in the US, there is too much of it -- hence more administrative support people than there should be. But that doesn't change the essential fact that five administrative support people cost less than a cheap doctor and do a better job at what they do.

  • ||

    But that doesn't change the essential fact that five administrative support people cost less than a cheap doctor and do a better job at what they do.

    In that case, Microsoft should have a bunch of potato chip inspectors working for them for every software developer. "How come it takes us months to develop new software but it only takes them 3 seconds to make a potato chip?!" (with apologies to Dilbert's boss)

  • ||

    Let's guess that doctors are 250k apiece, managers are 125k, nurses are 75k, and admins are 30k.

    According to the figure, admins would be consuming 5*30k/(250k+125k+6*75k+5*30k) = 150k/975k ~= 15%.

    Considering that Medicare's fraud rate is around 15%, it would make sense for insurers alone to spend up to 15% of remuneration to prevent fraud. Then add all the things that administrative support people do in doctor's offices, such as scheduling, staffing, bookkeeping, etc., and 15% of budget isn't ridiculous.

    I do agree that, under the proper 300,000,000-payer plan, maybe one in ten doctors' patients would need to deal with insurance claims in a year, so the requirement to frustrate fraud -- along with the administrative staffing -- would be significantly decreased.

  • ||

    If the quote were about ratios of doctors to physicians assistants or nurses, then you'd have a point.

    If you had gone to the original source of that quote, you'd have seen that there are six nurses for every doctor.

  • ||

    And if someone were questioning why that were the case, you would be correct in saying it's not a bad thing.

  • Jake||

    So, 80 & 85% = "not a gov't takeover of the health insurance industry," but 90% = "gov't takeover of the health insurance industry"... is that right?!?

  • ||

    80 & 85% = "enough latitude to rationalize that they are operating according to their own decisions;" 90% = "too little latitude to believe that they are operating according to their own decisions."

  • ||

    Yeah, if that's the case, why wouldn't the CBO consider some increasing fraction of the insurers' costs in the cost of the bill, rather than 0% or 100%?

  • ||

    I'm... you know... shocked.

    Totally.

  • Barack Obama||

    But according to the CBO, at least when it comes to the insurance market, we're awfully close.

    Don't worry, wigga, we'll get it all in time.

  • ||

    So when the government controls 80-85% of your life, then you are by these standards "Free". As long as they allow you more than 3 hours of sleep a day, then you aren't a slave! Ain't freedom a hoot!

  • Drax the Destroyer||

    "The more you tighten your grip, Tarkin Obama/Pelosi/Whomever, the more star systems businesses will slip through your fingers."

    -Princess Leia

    The most apt Star Wars qoute for the unintended consequences of "good-intentioned" social policies.

  • James||

    How frustrating. Gaming the tax system is expected! I am not an advocate of any gaming of the system. I do support specialization in the market. Having high paid employees perform mundane tasks does drive up costs. Also, Another commenter mentioned fraud. While it's true that fraud is around 15%, I would suspect that the majority of inefficiency comes from poor management and rigidity. Former President Clinton gave a speech at a conference I was attending a few weeks ago on Short Term Loans (which is unrelated to this post). But he mentioned that the problem with developed nations is that they become to rigid and can not react to the market quick enough. Health care and insurance are two of the perfect examples of that.

  • replica watches||

    good post

GET REASON MAGAZINE

Get Reason's print or digital edition before it’s posted online

  • Video Game Nation: How gaming is making America freer – and more fun.
  • Matt Welch: How the left turned against free speech.
  • Nothing Left to Cut? Congress can’t live within their means.
  • And much more.

SUBSCRIBE

advertisement