NCPA - National Center for Policy Analysis

Rolling Back ObamaCare: Eliminate the Medical Loss Ratio

January 25, 2011

The health care legislation requires health insurers offering individual and small group policies to meet an 80 percent medical loss ratio (MLR), meaning they must spend 80 cents of every premium dollar on claims, with the remaining 20 cents going to administrative costs.  Large group policies have to meet an 85 percent loss ratio.  The MLR is nothing but a price control mechanism that will drive even more of the smaller and medium-sized insurers out of the market, dramatically reducing competition, says Merrill Matthews, resident scholar with the Institute for Policy Innovation.

One of the key questions that has to be answered -- and one that has created immense confusion -- is what would be considered administrative costs?  State insurance commissioners debated this and other issues for months and submitted their recommendations to the Department of Health and Human Services (HHS), which accepted many of them, say Matthews.

  • Agent commissions, for example, will be lumped into the administrative cost category, which will make it hard to sell individual policies.
  • Claims costs in the individual market usually run between 60 percent and 75 percent of total premium, falling afoul of the 80 percent MLR.
  • But that's not necessarily a result of inefficiency or profiteering; commissions have to be higher in the individual market to compensate agents for selling a policy to only one family at a time.
  • Another problem is that insurers cannot combine several different products, including across state lines, to come up with one MLR for the company.
  • Costs will be assessed state by state.

Congress should address the MLR's perverse economic incentives by dropping the provision completely.  Letting insurers -- or any company, for that matter -- manage their costs and profit if they are successful is the only way to ensure efficiency and lower costs, say Matthews.

Source: Merrill Matthews, "Rolling Back ObamaCare: Eliminate the Medical Loss Ratio," Forbes, January 18, 2011.

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