Policies could dictate medical loss ratios

January 1, 2010

Administrative spending supports care coordination, prevention and technology investment

NATIONAL REPORTS–As Senate leaders abandoned efforts to establish a government-run health plan for individuals and small groups, they also proposed to set specific limits on insurer profits and administrative costs. The legislators have often promoted the public plan as a way to "keep insurers honest." Stricter controls on industry policies and practices could accomplish that purpose even without a competing public option.

Medical loss ratios (MLRs) are being examined. The House health reform bill approved in November requires insurance companies to spend no less than 85% of insurance premiums on administrative costs and profits; the Senate is looking to raise the level to 90%. Several states have such limits, ranging from 50% to 80%.

Reformers have been highly critical of insurer profits, salaries and other administrative costs, compared to low outlays on actual medical claims. Senate Commerce Committee Chairman Jay Rockefeller (D-W.Va) has been investigating insurer practices in this area, particularly for the individual and small-group market where MLRs are higher than for large groups. Last month, Rockefeller blasted Aetna for overstating the proportion of small-business premiums spent on care. Senate investigators found that Aetna had a 79% medical loss ratio for 2008, not the 82% MLR reported in company regulatory filings, which amounted to a $4.9 billion classification error.

BLOCKING INVESTMENT

Insurers object that arbitrary MLR limits will make it difficult for companies to carry out a broad range of initiatives designed to improve patient care. Administrative money supports disease management, care coordination, prevention and wellness strategies as well as investment in health information technology and personal health record systems.

AHIP cites National Health Expenditure data indicating that administrative expenditures by private plans accounted for only 7% of private health expenditures in 2008, and for only 5% of spending increases from 2003 to 2008.

A study from the Blue Cross Blue Shield Assn. in August 2009 similarly concluded that private plans spend an average of 9% of premiums to administer benefits. That's much lower than the 12.4% of premiums, or $96 billion, spent by private plans in 2007 on administrative costs, cited by a July 2009 report from the Commonwealth Fund.

Calculating administrative spending by insurers is a tricky business, though, as Rockefeller's investigators found out. Insurers might be motivated to tell state insurance regulators that they pay out large amounts on medical claims and prefer to show investors that they have low MLRs, an indication that the company operates profitably. Pressure to maintain low MLRs, according to the Senate analysts, leads insurers to rescind high-cost policies and to raise premiums on policies for small companies with high health care expenses.

The Senate MLR limit emerged last month as part of a deal to find alternatives to the controversial public plan option. Senate majority leader Harry Reid (D-Nev.) and a diverse group of Democrats proposed instead to allow uninsured people aged 55 to 64 to "buy in" to Medicare, which was met with plenty of criticism. Insurers objected that the buy-in approach would aggravate the cost-shift to private payers and lead to higher premiums.

At the same time, expanding Medicare could enlarge the market for Medigap and Medicare Advantage plans. High premiums for those who buy in to the program may limit interest in this option.

The Senate deal also called for the federal Office of Personnel Management to negotiate with insurers to offer a range of national, nonprofit health plans, similar to those offered by the Federal Employees Health Benefits Program. It's not clear how such plans would establish networks and compete with private plans.

At presstime, legislators were working into the late hours of the night, debating the sticking points, such as abortion coverage. In a December 17, 2009, editorial in the Washington Post, Howard Dean blasted the entire reform package, saying, "the American taxpayer is about to be fleeced with a bailout in a situation that dwarfs even what happened at AIG."