ObamaCare demands that most health plans operate with a medical loss ratio (MLR) of 85 percent (or 80 percent for the individual market). This blog has noted that this regulation is arbitrary, meaningless, and will surely have negative unintended consequences. One of the nation’s top experts on Health Savings Accounts has analyzed these MLR rules and concluded that it will be next to impossible to offer consumer-driven plans under them.
Politicians, bureaucrats, and people in general are very fixated on how much of our premiums go to administrative costs, including executive salaries and profits, of health plans. It’s easy to understand a politician winning applause for promising that she’ll ensure health plans spend more of their revenue on patient care.
As already discussed the rules appear to be having the opposite result. But there is an even more fundamental question: Why are politicians not attacking other (non-health) insurers who spend only 70, 60, or even 50 cents on the dollar in claims? Surely these insurers are even “greedier” than health insurers.
U.S. property underwriters, for example, suffered a loss ratio of 71 percent in the second quarter of 2011. This was considered a catastrophe in the industry — the worst loss ratio since 2001. Loss ratios for the second quarter of the two previous years were 56 to 58 percent.
Automobile insurers experience similar losses. Indeed, when State Farm experienced a loss ratio of 86 percent in the second quarter of 2011 (due to tornados demolishing cars), this was a full 20 percentage points worse than normal. However, if State Farm had been a health plan, it would have barely met the regulatory standard. Almost all other auto insurers experienced loss ratios in the 60s.
So, why no outrage? I expect that it is because property insurers offer real insurance. They don’t get involved in our homes or cars until there is a catastrophic accident. We recognize that adjusting such claims is challenging and labor-intensive work. Furthermore, premiums are low (because claims cover only catastrophic losses), so this administrative load does not attract our attention. (My premiums for auto, home, and umbrella coverage combined is about $900 annually. And the last time I submitted a claim was 1985, if memory serves.)
The ability of health insurers to hit an MLR bogey of 85 percent is not a positive characteristic of our system of financing health care. On the contrary, it is a sign that health insurers are covering too much. And this will surely get worse under ObamaCare.
Take, for example the widely touted “benefit” that ObamaCare forces insurers to cover “preventive care” (e.g. annual check-ups) for everyone. Processing these claims is undoubtedly inexpensive: I go to the doctor every year for the same battery of poking and prodding that is due a middle-aged man. The cost to my health plan of processing the claim for this service must be trivial.
So, to hit the MRL bogey, health plans will have to work harder than ever to attract the healthy and shun the sick. In a competitive market of consumer-driven health plans, insurers would not be able to come close to scoring an MLR of 85 percent. Nor should we want them to.