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.