NCPA - National Center for Policy Analysis

Health Care Plan Rebates Have Hidden Costs

June 4, 2012

A relatively obscure provision of the health care reform law establishes minimum loss ratios (MLRs) for health insurers, which places a cap on their administrative costs, marketing expenses and profits.  The goal is to force plan operators to allocate a greater share of premiums directly to health care and preventative measures, say Jerry Ellig, a senior research fellow at the Mercatus Center at George Mason University, and Christopher Conover, a research scholar in the Center for Health Policy and Inequalities Research at Duke University.

However, the provision will also have a number of unintended consequences that Congress likely did not consider when passing the original law.  Importantly, the MLRs discourage efforts to constrain fraud.

  • The Kaiser Family Foundation recently reported that an estimated $1.3 billion in rebates will be delivered from health insurers to their customers for last year.
  • These rebates are delivered by those plan operators that spent less than the MLR-required 80 to 85 percent of premiums on health care.
  • However, efforts to fight fraud and limit its spread are designated by the MLR provision to be "bad" expenditures that do not count towards the 80-85 percent requirement.
  • Supposing an insurance company is exactly at the maximum allowed spending on administrative costs, but it needs to spend an extra $100 to prevent $1,000 worth of fraud, it would choose not to do so because it would be penalized.
  • Given that the National Health Care Anti-Fraud Association estimates that fraud accounts for 3 percent to 10 percent of total health care spending, this problem is substantial.

Perhaps more importantly, by attempting to control profits, the law creates a perverse incentive for insurers to game the system.

  • Experience shows us that when regulation limits profits and allows companies to pass on costs to consumers, it kills the incentive for cost control.
  • The easiest way for a company to make profits look reasonable relative to cost is to raise prices.
  • For example, 85 percent of a $16,000 annual family premium leaves a bigger profit than if the premium were only $15,000.
  • As long as the company can convince regulators that the cost of medical care has gone up, it can justify higher premiums.

Source: Christopher Conover and Jerry Ellig, "Conover and Ellig: Health Care Plan Rebates Have Hidden Costs," Roll Call, May 21, 2012.

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