Obamacare

Medical Loss Ratios: A "Novel" Way For the Government to Intervene in the Health Insurance Industry

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Yesterday, the Department of Health and Human Services certified a new rule requiring most health insurance companies to spend either 80 or 85 percent of their premiums on so-called "clinical services"—i.e., medical expenses—starting in 2011. The rule, which deals with health industry medical loss ratios, has been the subject of much controversy recently, and it will likely have a significant impact on the shape of the industry for years to come. As a result of the new rule, according to The Washington Post, "the government will reach in novel ways into the workings of the insurance industry to try to drive down bureaucracy, profits and executives' pay."

Look! Off in the distance! Is that a giant pot of money that we can use to pay for everyone's health care? I've been looking for that!

The Post is certainly right that federal MLR requirements represent a novel federal intrusion into the industry, but it's not clear that the law will produce better health outcomes or cost efficiency. For one thing, health insurance industry profits margins are already fairly—about 3.4 percent in 2008, according to one research firm's measure. So even if total profits seem high, there's not a lot of profit-related fat to be pulled out of each insurance dollar.

Nor is it clear that trimming administrative costs actually produces a cheaper, more efficient system overall. Administrative activities such as fraud prevention can actually help keep costs down. But when regulations make it harder for insurers to engage in activities like fraud prevention by limiting how much of any given dollar can be spent on those activities, the result is that it becomes harder to weed out unnecessary expenses.

If anything, mandatory MLRs encourage health insurers to drive overall spending upwards: Because profits and administrative costs will be limited to a small portion of each premium dollar, they end up tied to spending on medical services. So if an insurance company wants to expand the pool of potential profit dollars, one easy way to do that is by increasing spending on medical services and thus increasing premiums. And with some administrative cost-saving activities limited as well, that will be even easier.

HHS Secretary Kathleen Sebelius says the rules "guarantee that consumers get the most out of their premium dollars." I'm not sure they guarantee much of anything, but a better bet is that they'll result in insurers getting more premium dollars out of consumers.

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  1. Obama is one smooth operator. Check out that reach around.

    1. I wonder how’s his “stop short?”

  2. News today also that “mini-med” plans, like McDonalds offers its part time help, are getting waivers on the MLR requirement.

    I have a feeling the same people who think ObamaCare is great also hate teh corporashzuns. Can they see the problem of when the government passes a vague law and large companies can then negotiate their way out of it.

  3. Some “bright idea” gets legislated to make things better and ends up only making them worse. But they’ll find some obscure “success story” and trumpet it around as proof that their policy works.

    They do the same thing in government agencies.

    1. No, they’ll lament the failures of “the market” and say “see, this is why we need to go ‘all the way’ and create a single-payer system!”

      1. After all, it’s just like how we’re still in a recession because we didn’t stimulate it “enough”.

      2. You’re probably right but hopefully everyone will realize that it was the legislation that ruined everything and that the market had nothing to do with it.

        1. Your hopefulness is so cute! Hope and change, baby, hope and change.

          Off to lower the sea levels now….

          1. I thought the sea level started receding the day you were elected. That’s what you promised in your Berlin speech.

      3. Bingo. Its the only reason Obama pushed for the Senate version to become law after Brown won in Massachusetts.

        They saw this as their “golden opportunity” to create a “crisis” sometime in 2014-2015 timeframe and propose “single payer” as the only solution to the knotty problem the health care industry will be facing as a result of “obamacare”. In the meantime, Grandma and Grandpa will be dying in droves over the next 5 years due to the massive cuts in Medicare taking affect beginning in 2011. This is also part of the strategy to the eventual introduction of single-payer, government-run healthcare as the only viable solution to save our grand-folks and make health insurance affordable. In other words, obamacare is “good”. But the “evil” insurance companies made it not work, so now the only real choice is to let the government run it. If obamacare is not repealed, I bet you we will be hearing claims like this within the next two years.

  4. So if an insurance company wants to expand the pool of potential profit dollars, one easy way to do that is by increasing spending on medical services and thus increasing premiums.

    For commerical members this is true. For Medicare and Medicaid memebrs the premiums are set by the governemtn, so mandating the MLRs could be an effective tool in controling costs.

    Unless too many plans/doctors opt out of Medicare and Medicaid, or course.

    1. Here you go, price controls.

      In medicare and medicaid the price is set low, causing shortages. With the MLR, you force the insurance company to spend excessively.

      The result will be that medicare and medicaid will experience increasing shortages, while the pricate insuance system will experience spiraling costs.

    2. Actually, it may not be true for Commercial insurers, as PPACA also bans “Unreasonable” rate increases. Of course unreasonable has yet to be defined, but you can be sure that HHS will use the unreasonable and MLR provisions to squeeze health insurers and make the health insurers akin to public utilities. The adminstration(s) will also use the “unreasonable” provision as a political hammer to keep the public outraged at insurers and push for a single-payer.

  5. the government will reach in novel ways… to try to drive down bureaucracy.

    OK, WaPo owes me a new keyboard. I just spit coffee all over the place. Who knew journalists could be so funny?

  6. If anything, mandatory MLRs encourage health insurers to drive overall spending upwards: Because profits and administrative costs will be limited to a small portion of each premium dollar, they end up tied to spending on medical services. So if an insurance company wants to expand the pool of potential profit dollars, one easy way to do that is by increasing spending on medical services and thus increasing premiums. And with some administrative cost-saving activities limited as well, that will be even easier.

    Right. All they have to do is not make an effort to negotiate lower prices with doctors and hospitals. Just let the doctors and hospitals charge whatever they want, medical spending will rise, and so will your MLR.

    It actively removes the incentives for insurance companies to try to push costs down.

    1. Thus triggering the “if a consequence is predictable, is it really unintended ?”

      1. I don’t think their intention is out of control spiraling costs. I think their intention is to turn the insurance industry into an administrative fiction.

        The spiraling costs are merely due to their complete fucking ignorance of basic economics.

        1. But it’s not, in any way whatsoever, socialism. In fact, if you suggest it, we’ll do you for treason.

          1. Precisely. It is universally agreed upon by all intelligent people that comparing anything to socialism is laughable.

            Only actual existing socialism is like socialism. And even then, it’s not really socialism because the wrong people implemented it.

            1. I mean, socialism would be great, if we could get there. But Obama is definitely not a socialist, even though he is still great. And this health care bill is definitely not socialist, although we wish it were. But it is a step in the right direction. But definitely not towards socialism.

              1. that’s really confusing. I mean what is socialism? Whoa, just thinking about it makes my head hurt.

                1. Socialism? It’s taking over title and complete ownership of the means of production and nothing else. If you suggest otherwise, you’re a bad, bad, bad teabagging Republican shill who needs counseling to deal with your unmutual ways.

                2. Under capitalism man exploits man.
                  Under socialism the reverse is true.

        2. “The spiraling costs are merely due to their complete fucking ignorance of basic economics.”

          Didn’t you know? Obamacare repealed the law of supply and demand.

          Quaint notions like price controls causing shortages don’t matter because that law has been removed from the books.

          Next on the agenda is a partial repeal of the law of gravity to solve our epidemic of obesity.

          1. Michelle’s working on the law of gravity now.

            There are those who say we should partially repeal the so-called “law of gravity”. But we’re going for full repeal – nothing less than that is good enough for the American People?.

            Hope and change, baby, hope and change.

  7. “the government will reach in novel UNCONSTITUTIONAL ways into the workings of the insurance industry to try to drive down bureaucracy, profits and executives’ pay.”

    FTFY

    1. … but… interstate commerce… or something!

    2. The constitution has been reduced to seven words: general welfare .. regulate commerce .. necessary and proper.

      That’s it. The whole thing. Seven words.

      1. Actually only five words:

        The … President … shall have Power.

  8. HHS Secretary Kathleen Sebelius says the rules “guarantee that consumers get the most out of their premium dollars.”

    It’s… almost like she says stuff without caring whether it means anything.

  9. Well, no shit. You can’t just go right to a single-payer system. Intended consequences are achieved through incrementalism. It’s better to incrementally fuck things up before you swoop in with a new improved gubmint solution.

  10. “so-called “clinical services”?i.e., medical expenses?starting in 2011.”

    OK, what is a medical expense …uh…er ‘clinical services’ – is that both, either/or? Note as Sherlock Holmes would, the dog that doesn’t bark, and the definition that doesn’t define. Is a ‘medical expense’ something performed by a doctor? A nurse? How about a service, or act performed by a doctor or nurse or physicians’ assitant at an insurance company?
    When my insurance company sends me a brochere stating that if I’m diabetic(they don’t even bother to see if I am) I should see that my blood sugar is monitored – is that a ‘medical expense’?
    Its not the end of the world – but it will make prices more opaque, price competition even more elusive, and generate more unintended consequences.

    1. Well, we had to pass the law to find out what’s in the law. And what we’ve found so far is that it will take years to find out what’s in the law, decades perhaps, maybe forever…we may die still finding out what is in this law.

      1. Well, we had to pass the law to find out what’s in the law. And what we’ve found so far is

        corn and peanuts.

  11. “the government will reach in novel ways into the workings of the insurance industry to try to drive down bureaucracy, profits and executives’ pay.”

    Because nothing says reduced bureaucracy, profits* and compensating people only what they are worth like the government.

    * I will admit the government is actually pretty good at reducing or eliminating profits from it’s own operations.

    1. The gummint’s pretty good at reducing profits for private industry, too. Sometimes even when they don’t put their proverbial “mind” to it…

  12. Down with profits! We should make profit illegal and force all businesses to constantly operate at a loss! That’ll teach’em!

    1. Apparently the geniuses who brought us Government Motors think they’ll still make it up in volume.

      1. *sigh*

        NO – through more deficit spending!!

        My LORD you people are slow…

  13. As a former health insurer underwriter, this attempt by the federal government to control costs is an asinine attempt by people who don’t know what they’re doing, that will likely result in higher costs.

    Does anyone think that private insurance companies fiercely competing for business have all this waste and inefficiency that they will only reluctantly eliminate as a result of the government dictating admin expenses?

    The federal government has “low” admin expenses on Medicare because they don’t investigate and eliminate fraud. If you have a lot more payouts to ineligible parties, and fewer admin expenses trying to end these ineligible expenses, your admin ratio goes down, but your actual costs go up.

    This is the sort of stupidity the feds will try to dictate once they establish that they have a “right” to intervene like this.

    1. Whats stupid is the belief that health insurance markets are in any way competitive. What’s equally stupid is the assertion that the federal government makes no effort to control fraud–ask a hospital administrator about the multitude of auditing processes associated with participating in Medicare or Medicaid. All that “red tape” you clowns constantly bitch about is in fact the government zealously guarding your precious precious tax dollars. Waste/Fraud/Abuse and Medical malpractice laws are strawmen for dimwits who deal in cheap slogans like “free markets good, government bad.”

  14. I understand why the politicians think they know how to run insurance companies; their hubris knows no bounds.

    But why in the fuck does anybody else believe they can do it? They’ve demonstrated breathtaking incompetence and stupidity more times than I can count, for my entire life and then some.

    1. Hee hee! Well, we elected Barack Obama, didn’t we!

      He’s so dreamy! We just need the right people in charge! Then it will all work OK!

      Yaaaaaaaaaaaaaaaaay!!!

  15. Further cartelization

  16. Off topic: A certain disagreeable person with the initials A. A. W. has shot Lassie, cursed at a baby, and wiped his ass with the American flag. The whole world must know these facts.

  17. “[W]hen regulations make it harder for insurers to engage in activities like fraud prevention by limiting how much of any given dollar can be spent on those activities, the result is that it becomes harder to weed out unnecessary expenses.”

    Which will drive premium costs up.

    “As a result of the new rule, according to The Washington Post, ‘the government will reach in novel ways into the workings of the insurance industry to try to drive down bureaucracy, profits and executives’ pay.‘”

    Since when is driving down “profits” a prerrogative of the government? And why this aversion to profits?

  18. I don’t know why this is so hard to understand, you guys. By reducing profits and executives’ pay, they’ll be reducing the size of of the industry itself to a few shills, thereby reducing the size of the bureaucracy. Ta-da!

    1. According to you, I suppose, no legislation ever generates unintended consequences.

  19. Gee, can we get federal government to operate at 85% efficiency?

  20. Gee, can we get federal government to operate at 85% efficiency?

  21. for hazel meade, pro liberte et al
    Socialism: ownership/control of BOTH the means of production AND distribution.

    For those who want socialism – there are plenty of alternatives for you – See Venezuela and Cuba eg. Why do you insist on turning this country into a socialist country when it would be much easier all around to go live in a socialist country

  22. What’s ironic about the self-proclaimed “policy wonks” on the left is that they are just not very good at making policies. For decades the left has taken it as an article of faith that “administrative costs” related to insurance companies is the reason why Americans allegedly spend more on health care than other industrialized countries (we don’t actually spend more – we just have a much larger notion of what counts as “health care”.) The whole time I was in law school, all the budding little leftist “policy wonks” went on and on and on about how it was all about the administrative costs – if only we could control the insurance companys’ administrative costs. Well, folks, two decades of silly slogans and oft-repeated propaganda is what has produced this remarkably silly regulation. As the writer points out, this actually gives insurance companies an incentive to up the costs of health care: If they want to increase their profits they have to increase their health care spending. Sad, because right now the insurers are pretty much the only link in the chain that is attempting to control costs. This will cause even more rapid inflation of health care costs. The government has already distorted or destroyed all the natural market constraints.

    1. All according to plan. Dork the system so severely that the only solution is single payer/government run health care.

      In some ways, I think the insurance execs that cheered for this crap are dumber than the politicians that pushed it. They thought they were playing the politicians that were busy cutting a hole in the bottom of their fucking boat. Numbskulls.

  23. If there are any old soviet central planners left they can start a second career here. Five-Year Plans, anyone?

  24. 1 Nov 2010
    Folks,
    Obama’s GAME (Great American Marxist Experiment) is over, a failure. Marxism goes against the basic human instincts that freedom is a natural, God-given right, that what you make (or earn) is yours to keep, that family, not government, is the basic social unit. Democrats have historically been the party to raise taxes and increase the size of government, but Obama, Reid, and Pelosi have taken these mistaken policies to the extreme. Republicans, Independents, and Tea Party members will now be forever vigilant of the Left and we will vote.
    Tom Johnson, Largo, Florida

    1. If Obama’s GAME is in play then there ought to be rules to the game he is playing. Like it is aid, two can play that game. I or we can make the rules as we go along can’t we. We need to come up with rules everyone can understand and abide by in it’s very simplicity.
      With some rules, we can play the game as if it were a 3 dimensional chess game. There are people who can outwit the game masters who originated the game.

  25. It’s time for the insurance companies to openly flout the law, and to announce to all the major media they intend to continue doing so until ObamaCare is repealed.

    If they had the guts to pull a Henry Reardon, ObamaCare’s real-world impact would be gutted long before the Supreme Court gets around to it.

  26. I have been the President of a health insurer and this is bone headed as the day is long. Lots of the dollars in Administrative costs go to hold down costs! For example, all the pre approvals of elective surgery. These keep doctors from “lining” their pockets with unneeded surgery. Medicare does not do this so it pays billions for procedures that are not medically necessary. Oh, but Medicare has low administrative costs. Yea, but it spends tons more than it needs to.
    While we upped spending for pre approvals, medical reviews, care managers etc we drove down the cost per person covered! Wow and everyone got the care they needed.
    At least half of the health premiums go to non profit insurers – no profit to eliminate.
    And what an insult to all the states who have had the power to regulate this for years and did not do so because it is a dumb idea.
    Washington is really busted.
    This all could have been avoided with one easy step – interstate competition.

  27. Suderman nailed it. As a 20 year veteran of the health insurance industry, I’ve seen all manner of “minimum loss ratio mandates” pushed by liberals at the state level. But, unlike the “novel approach” taken by Congress here, most state legislators have merely squeezed on insurers profits and administrative costs with lower loss ratio targets than these. Often, expenses for proven cost saving measure are exempted from the regulation or allowed in the calculation to show compliance.

    The difference here is that state politicians generally understand they can not afford to destroy the health insurance system that covers their constituents. No altruism imputed here – just a pragmatic realization that such a collapse would land in their laps to fix. Unlike state actions inherently tempered by accountability for the consequences, Congress and the Obama administration have sought to bring down the private health insurance (which consistently polls positively with an 80%+ majority of Americans it has covered for years) in order to replace it with an inefficient, government-run system that they can use to pursue the “social justice” they deem most important. Reps Frank and Pelosi, and our president are all on record as believing a government run system is their highest health care goal.

    Despite the understandable appeal of repealing this legislative malignancy, current Congressional politics will require a more patient approach by Republicans, utilizing defunding, attempts at amendment and Congressional hearings (to bring the light on this legislation that America deserved in lieu of the hasty, secretive, strong-armed passage of such massive change).

    No one is seeking to eliminate the few positives in the bill. However, coverage can be made available to those unable to obtain it for health reasons without dismantling the current health care insurance system. The health insurers themselves have proposed practical solutions to the problem of access for years. These have gone unheeded – due to the inestimable hubris of federal legislators and the party in power had no interest in solutions that preserved a private system.

  28. Here’s an idea. How about we require the federal government to spend 85% of the tax dollars it spends or goes into debt borrowing on the legitimate constitutional functions of government: national defense, securing the borders and the postal service.

    Administrative costs for all else mandated by law to be no more than 15% of expenditures.

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