Last month, I pointed to a Congressional Budget Office memo saying that if the Affordable Care Act had set its medical loss ratios—the rules that require insurers to spend a minimum percentage of their operating budgets on medical care—any higher, it would have transformed the health insurance industry into "an essentially governmental program." Today, the Washington Post helps explain why: In determining how to implement the new MLRs, the government has to determine what counts as medical care and what doesn't:
If you were a regulator interpreting the new requirement that health insurers use at least 80 or 85 percent of their premium dollars to pay medical bills or otherwise improve consumers' health, which of the following expenses would you count toward the quota:
1. Combating fraud and other overbilling by doctors and hospitals.
2. Running "utilization review" or "pre-certification" departments to determine whether the insurer should cover treatment that doctors have proposed.
3. Conducting internal or external reviews when patients appeal an insurance company's decision to deny coverage.
Insurers have urged regulators to give them credit for all of the above.
In comments submitted to the National Association of Insurance Commissioners (NAIC), which is helping the government translate the new requirement into detailed rules, members of the industry have asked for permission to count a wide range of expenses.
The BlueCross BlueShield Association, for example, has told rulemakers that its efforts to improve health quality include "reducing inappropriate and sometimes potentially harmful care."
In some ways this is nothing more than typical bureaucratic haggling. But the overall effect is to give regulators significant power to determine exactly how insurers will shape their practices and product offerings. It's no wonder that the CBO warned that if the PPACA's loss ratios were set any higher, the rules would be "likely to substantially reduce flexibility in terms of the types, prices, and number of private sellers of health insurance." Indeed, I suspect we'll see some reduced flexibility and choice with the numbers set where they are.
And, as the piece makes clear, depending on how regulators decide to account for certain practices, the law's high MLRs could result in increased medical costs as well: If insurers have to cut back on anti-fraud programs or reviews that weed out wasteful services, or if they simply decide to let medical costs run wild in order to justify beefed up administrative spending (remember, these are percentages, not dollar-figure caps), we could see health costs begin to increase even faster than they are now.
This is not exactly news, either. As health economist James C. Robinson argued more than a decade ago in the journal Health Affairs, MLRs are merely an accounting tool, and were "never intended to measure quality or efficiency." It's easy to think of MLRs as measures of insurer effectiveness and commitment, but it's also a mistake. "Neither premiums nor expenditures by themselves indicate quality of care," he writes. In fact, he says, the high medical loss ratios that the PPACA requires can be understood as "proof of medical waste"—or, for those who prefer blunter rhetoric, "an accounting monstrosity that enthralls the unsophisticated observer and distorts the policy discourse." On the other hand, it may be that distorting the policy discourse is exactly the point.