Real Insurance Could Never Operate with An 85% Loss Ratio

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.

Comments (11)

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  1. Ken says:

    Excellent post.

  2. Mike Ainslie says:

    I think the ultimate aim of Obamacare is to destroy yhe private health insurance market. Once these are gone than the single payer white knight nirvana can be ushered in. I always have one question for the single payer types- Name one thing the gov’t does cheaper and more efficient than the private sector? So far no answers.

  3. Joe Barnett says:

    Profit, interest, dividends and advertising costs — under the second-hand Marxist assumptions the majority of people accept as true — serve no useful economic purpose and are taken by greedy capitalists from workers and consumers.

  4. Nancy says:

    Do you, Mr. Graham, support Medicare? Do you agree that Medicare is socialized medicine? People who refer to the health insurance reform that was finally voted for as Obama Care are ignorant and misinformed. The health insurance reform that was voted in serves to benefit Wellpoint/Aetna/United/Cigna and big Pharmaceutical companies – thanks to the millions they spent to stop universal healthcare. Those same people probably would not want to lose Medicare for themselves or their parents. Medicare is socialized medicine. As a country we should not be able to pick and choose which segments of our population deserve to receive entitlement health insurance. And for those of you who ignorantly believe that people paid into it and deserve it, you are very wrong! Contributing to Medicare through taxes is NOT a requirement to qualify for it. The only requirements are that you are a U.S. citizen and are 65 years old. The age requirement is waived if you are disabled. Furthermore, the citizen requirement has been waived in circumstances where people have had a political connection strong enough to get approval for very expensive medical care/surgery covered in and by our country for people from foreign countries.
    We already have socialized medicine for 52% of the population in this country. We force low income people to pay taxes for Medicare, Medicaid, Veterans, and other government programs. Yet millions of those wage earners can not afford health insurance or health care for themselves. How is this socially responsible or acceptable? As a person employed in medical financial management and billing I am disgusted at the games played to set fees at terribly inflated rates to be able to receive payment at a reduced rate from Medicare and Medicaid. We need universal health care in this country by a single payer. Investors who have made profits by investing in health insurance companies can find other companies to invest in and make a handsome profit. Either we eliminate ALL government health insurance entitlements or we provide basic health insurance for all citizens. End the current bloated Medicare and Medicaid insurance programs and create basic insurance for everyone.

  5. Don Levit says:

    How might the MLR rules play out if a policy is paid-up with each monthly premium?
    Might the benefits be 100% at that point?
    Isn’t it easier to meet the MLR on catastrophic claims, such as those at least $25,000, and, preferably $50,000?
    Don Levit

  6. John R. Graham says:

    Mr. Levit:

    I’m not sure I follow the first part of your question, but to the second: emphatically “no”!

    The cost to process a claim of $25,000 or $50,000 would surely be expensive. It would demand investigation by the payer ensure fraud that the providers were not padding the bill. (Of course, if the health insurer indemified according to a schedule of payments for bundled services, as often advocated in this blog, it would not even have to concern itself with the latter. But it would always concern itself with fraud.)

    On the other hand, to process the claim for standard blood work in an annual exam, for example, must be trivial: Just pay the lab once a year. Which is why we don’t need insurers to be involved in such tasks.

    I have oversimplified here, because in an environment of chronic illness, I think things are a little more complicated. For, example, I think there is evidence that insurers reducing co-pays on some prescription drugs leads to lower overall health costs, but I don’t think that there is a general theory of managed care, as some assert.

  7. Don Levit says:

    I agree with you about the catastrophic claims.
    Being diligent in how they are paid will keep costs down, and still, hopefully, meet the MLR.
    I and my partners have met with Milliman to get a better sense of how this might play out.
    Their objective analysis could be helpful when we bring our idea to various insurers.
    If the primary policy coverage builds monthly, and is paid-up, there is no MLR to worry about in my opinion, for there is no cost – it is paid up.
    Maybe we should correspond offline, as it seems the blog is not too interested in the details.
    Don Levit

  8. Todd Keefer says:

    High Deductible (Real)health insurance is not just a good idea. It is essential to the repair of the failed status quo and the extent of its adoption will define the success of any meaningful state based reform. The problem is much more a story of economics and personal finance than healthcare. It’s about how we spend and why it matters and how the free market works.

  9. Todd Keefer says:

    Insurance is about statistics and probabilities. Why Insurers never cried about low deductible non-insurance prepayment schemes is because although low margin the huge number of claims (data Points) insured much more predictable outcomes and a method to print money. With HDHP (Real) insurance the number of claims is much lower demanding that variability of outcomes over different time periods will be much higher also. They can then achieve the required MLR numbers by printing and sending out lots of wellness info which counts toward healthcare spending thereby driving costs up even more! It’s about time those who understand basic economics take charge!

  10. frank timmins says:

    Mr. Keefer is correct of course, but the entire discussion (debate) on whether a carrier should be able to operate on 15% or 20% margins and what should or shouldn’t be included in that figure gives credibility to the presumption that this is a legitimate process.

    Perhaps the debate should be whether or not it is economically sound policy to even consider a regulatory cost control measure. Clearly, attempts at cost control have never ever been successful in the past, so why are we even discussing the details. It’s almost like having a foreign government lay claim to New Jersey or Texas, and instead of booting them out we choose to negotiate which part of the state they get. Shouldn’t we be arguing the legitimacy and efficacy of the concept of price regulating an enterprise.

    Certainly the arguments are certainly there regarding the methodology being used to determine the percentages (as John points out), but legitimizing the concept only leads to silly conclusions like that of Nancy (posted above).

  11. Beverly Gossage says:

    Let’s add three consequences of the recent MLR legislation to this discussion.

    Smaller carriers who must maintain the administrative costs but do not have the volume of premiums coming in, can’t begin to meet the MLR. They are closing up shop or selling to larger carriers, thus reducing competition and choice for the consumer.

    Carriers have laid off employees, most of whom were serving in the customer service departments. Notice longer wait times when calling your carrier?

    Agents’ commissions have been slashed by 50%, prompting some to leave the marketplace and others to cut back on time invested in customer service with more focus on new business or a part time job to feed the family.