What does it signal when even insurance regulators fret that the rules they make might, in fact, be arbitrary and onerous? The National Association of Insurance Commissioners was originally told to hand in final rules for how to regulate medical-loss ratios, which govern how large a percentage of their operating budget insurers must spend on “clinical expenses,” more than a month ago. But they’ve yet to release anything but drafts, in part because both regulators and insurers are starting to understand the rule’s scope and importance—and how devastating the rules could be to the American health insurance industry. "This is the biggest issue right now for the companies," Kansas insurance commissioner Sandy Praeger told the Wall Street Journal last week.
What’s the worry? From the Journal:
One draft document on the NAIC's website suggests that large insurers with hundreds of subsidiaries could have to make each subsidiary meet the new thresholds, rather than averaging the numbers. That could force companies to quit markets where their medical-loss ratios are below the new requirements, or else cut prices, profitability or broker commissions to keep offering insurance.
Small insurers, who have less robust insurance pools and whose MLRs can swing wildly based on a relatively small number of unusual claims, are especially at risk. Insurance regulators say they don’t want to kill insurers with mindless implementation of the new regulations. "We don't want to drive companies out of business by being arbitrary," the Journal quotes Praeger as saying.
That’s a nice sentiment, and it’s probably a good thing that regulators understand that the economic fortunes of the industries they oversee often ride on the design and application of various rules and regulations. But it still misses the point. Rules designed to “protect” small businesses and account for their differences are just as arbitrary as rules that don’t. Indeed, as shown by insurance commissioner anxiety over whether or not to classify various insurance industry expenses (such as fraud prevention) as “clinical,” any definition of a medical-loss ratio is inherently arbitrary. The only way to avoid making arbitrary decisions here is to get rid of the regulation entirely.