NCPA - National Center for Policy Analysis

Medical Loss Ratio Requirement Could Raise Insurer Profits

April 26, 2013

The Medical Loss Ratio (MLR) is one of the primary features of the health reform law. It establishes a minimum dollar value of medical payments as a percentage of premium revenue with the difference going to administrative costs and profits. While the goal is to encourage insurance companies to restrain overhead and limit their profit, the MLR will result in higher premiums and increased profits, says Robert Book, senior research director of Health System Innovation Network LLC.

  • The MLR requires insurers to spend 80 percent of total premiums on medical costs for the individual and small-group markets and rebate what is left over from that amount back to consumers.
  • The remaining 20 percent of total premiums is to be spent on administration and profit, which is supposed to incentivize effective administration.
  • The MLR will result in higher average premiums because insurers must meet individual state regulations that require premiums to be high enough to meet claim obligations and remain solvent.

Under the MLR rule, insurers can no longer use reserves built up from low-claim years to pay claims in high-claim years. Instead, any reserves will have to be remitted as rebates to consumers, ensuring that premiums will have to be higher to accommodate for the lack of reserves.

  • Insurance companies stand to benefit from this arrangement because the MLR formula allows insurers charging higher premiums to retain high profits.
  • The formula calculates the amount leftover for administrative costs and profits as a percentage of the total premium, not medical costs, meaning that higher premiums mean a higher overall premium take from which to calculate profits from.
  • Because a large majority of people will be eligible for ObamaCare subsidies to cover private insurance premiums, the MLR rebates might encourage people to enroll in higher-premium plans.

This would lead to substantially higher profits for insurers who would be receiving most of this extra money from taxpayers as subsidies are used to pay premiums. The MLR formula also encourages insurers to increase their medical spending to reduce rebates, which would further drive costs up.

By interfering with the insurance industry, ObamaCare may raise health care costs, not lower them as intended.

Source: Robert Book, "How the Medical Loss Ratio Requirement Could Increase Health Insurance Premiums And Insurer Profits at Taxpayer Expense," American Action Forum, April 2013.


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