NCPA - National Center for Policy Analysis

ObamaCare Will Dramatically Reduce Choice in Private Insurance

September 27, 2010

One of the ways in which ObamaCare will reduce individuals' and businesses' choices of health insurance is through regulating the medical loss ratio (MLR) -- the amount of dollars an insurer spends on medical care divided by the total premiums.  For example, if an insurer earns $10 million in premiums and spends $8.5 million on medical claims, its MLR would be 85 percent.  Under ObamaCare, policies that cover large businesses will have to achieve an MLR of 85 percent, while those for small businesses and individuals will have to achieve an MLR of 80 percent.  That shouldn't be too hard, should it? asks John R. Graham, director of health care studies at the Pacific Research Institute.

Actually, the MLR can be quite complicated -- especially when the government gets involved, says Graham.

  • Suppose, for example, an insurer invests in information technology that it gives to providers in its network in order to improve coordination of care. Is that a medical cost?
  • Also, health insurers pay taxes. Although these taxes are obviously not medical costs, is it appropriate for the government to punish an insurer that pays higher taxes, which are revenue to the government?
  • Suppose two insurers of the same size compete in a region's large-group market. They earn premiums of $1 million each. They each spend $850,000 on medical claims, thereby achieving an MLR of 85 percent.

Suppose, however, that one insurer is nonprofit and the other is for-profit that earns a profit of 4 percent ($40,000) and pays combined federal and state corporate income tax of 45 percent ($18,000).  Its MLR automatically shrinks to 83.5 percent and ObamaCare shuts it down.  It should be blindingly obvious to anyone that this makes no sense, except to the sponsors of the poorly worded ObamaCare legislation.

Source: John R. Graham, "ObamaCare Will Dramatically Reduce Choice in Private Insurance," Pacific Research Institute, September 9, 2010.


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