In 2011, a new Obamacare Medical Loss Ratio (MLR) equation was created and a minimum value set for comprehensive (major medical) health insurance (including Medicare Advantage and Part D prescription drug insurance) policies. Health insurance companies must now report their MLRs to the federal government for all to see and be subject to consumer rebates when they fall short. The new Obamacare Medical Loss Ratio (MLR) equation is the result of extensive insurance company lobbying efforts aimed at adding components to the traditional MLR equation that benefit the companies at the expense of the consumer.
The new Obamacare Medical Loss Ratio (MLR) equation includes some extra fudge factors as given below.
You can see that both fudge factors are designed to artificially inflate MLRs and thus make it appear that the insurance companies are operating at lower markups than they actually are. . At the present time, the fudge factors include the following specific items:
These MLR fudge factors are simply a couple of the health insurance company’s normal costs of doing business. Let’s take a look at a fudge factor 2 that didn’t make it into the Obamacare Medical Loss Ratio equation. Insurance companies tried to have the cost of fees paid to independent insurance brokers (a contracted sales force) subtracted from the premiums taken in, but the government didn’t bite . If that expense had been included, then how long would it have been before ALL of their sales force (and more) became contractors and not employees to further manipulate the Obamacare Medical Loss Ratio?
How about fudge factor 1? The ability to deduct the quality improvement expenses is particularly galling to me. I thought that quality improvement was a part of the business of managing healthcare. Quality improvement payments to healthcare providers are already included in the premiums paid out (in the MLR denominator) so they already show up in the MLR equation. If this fudge factor item is an extra health insurance company activity, then what exactly represents the core healthcare management business they provide? This is like having a automotive manufacturer tell the customer that assembly of the car is an optional expense I could take or leave.
In competitive industries, all of the costs of doing business that become Obamacare MLR fudge factors are simply costs that need to be minimized for efficient operation. What is point of defining a minimum MLR and then inflating the result? What does a minimum MLR of 85% (or 80% for individual and small group insurance) actual mean at this point? The traditional MLR equation without the fudge factors identifies health insurance company bloat and a minimum MLR defines a point of efficiency.
Insurers Demand More Adjustments
In addition to a watered-down Obamacare Medical Loss Ratio (MLR), our government gives inefficient insurance companies adjustments for further profitability. These include:
- credibility adjustments–if the company does not attract enough customers (risk pools are too small) then it is allowed to operate at a lower Obamacare MLR than the limit dictates and therefore keep a larger markup.
- State MLR adjustments–this adjustment allows lower Obamacare MLR (and therefore higher markup) in states where an 80% MLR is impossible (?) to achieve to keep inefficient companies in business. For example, in North Carolina , the individual (non-group) market is dominated by BCBS of NC (81% of the business) and 26 other companies share the rest. North Carolina asked for a state adjustment to the minimum Obamacare MLR requirement so that the 26 other companies can compete. They weren’t successfully competing before the Obamacare MLR limit so why does the state think that keeping bloated markups will make them more competitive? When Walmart comes to a town, does the state ask for special treatment for the 26 local businesses already operating in competition to Walmart? No, these companies are simply driven out of business in our very efficient capitalistic way. Why are health insurance companies any different?
It seems that our government is required to find a solution for every business failure associated with health insurance industry business models. I have only touched on those associated with the new Obamacare Medical Loss Ratio.
Why is the Government Favoring Insurance Companies Over Consumers?
If a company is not successfully selling its products at this minimum Obamacare MLR level, then it needs to become more efficient through whatever internal means available. This business strategy is practiced by every competitive company wanting to stay in business. Companies that do not do so will soon find themselves out of business. This reasoning assumes that health insurance companies are in a competitive marketplace. They are not.
Every effort to take away some of the health insurance company bloat is met with loud cries of “we will have to pull out of the market if that legislation goes through”. Our government’s response to these market-destabilizing cries tells us two things:
- Our government is more concerned about maintaining a structure of inefficient health insurance companies built on divided risk pools than on the fact that Americans are paying inflated health insurance premiums and
- Our government must bend over backwards to support the insurance companies at all costs because they do not have an alternative solution when private insurance companies threaten withdrawal. I have an alternative solution—sign up any people stranded by private health insurance withdrawals to the federal employee health insurance (FEHBP) plan or to Medicare. I think we will be surprised how hollow insurance company threats become when a government option suddenly opens up and takes business away from them.
This government coddling only makes inefficient health insurance companies more so. Insurance companies only need to threaten withdrawal from markets and our government jumps. Introducing Obamacare MLR fudge factors to hide the true health insurance company markup is simply one of many examples of government coddling the industry at the expense of consumers. The result is inflated premiums.
The Bottom Line
I thought the whole point of making health care more affordable was to shrink total health care costs and squeezing excessive, health insurance company markups is a good place to start. Premiums will not start coming down until markups are limited. Obamacare (PPACA) reform finally created a cap on excessive health insurance profiteering through a minimum Obamacare Medical Loss Ratio (MLR). Unfortunately, it also allowed for the insertion of fudge factors that artificially inflate the Obamacare MLR. Putting fudge factors into the Obamacare MLR equation is a recipe for manipulation (and even corruption) of a simple measure that should tell consumers how much markup is being kept by the insurance company.
The long-standing existence of self-funded company comprehensive health insurance plans tells us that private, competitive companies have seen the bloated markups for a long time. Their solution was to take on the business of insuring their employees themselves and letting the insurance companies only handle the paperwork. Lucky for the private health insurance companies that markets still exist where they can peddle their bloated, inefficient organizations through threats. Our government needs to think about alternate solutions to insurance company threats instead of always bending over backwards to accommodate them at the expense of the consumer.