The Medical Loss Ratio (MLR) provision of the Patient Protection and Affordable Care Act (PPACA) that was passed by Congress in March 2010 and recently upheld by the U.S. Supreme Court was supposed to drive down the cost of health insurance coverage. One of the ways it was going to achieve this goal was by keeping insurance companies honest and helping consumers get better value for their insurance dollar. The focus of the MLR provision was to limit the wasteful overhead expenses and large profits of insurance companies and then pass the savings directly on to the consumer in the form of rebates.
So how does the Medical Loss Ratio work? Basically if you are an individual or a business with fewer than 100 employees then insurance carriers must spend 80% or more of your premium on the cost of medical care. The rules are pretty much the same for larger companies but because it is has been shown that their claims are more predictable the insurance carriers are expected to be more efficient. Therefore insurers are required to spend 85% of the collected premiums on medical care expenses for the bigger (100 or more employees) companies. If an insurance carrier does not spend the required amount then they must issue rebates to the policyholders or employers in the affected category, individuals, small businesses or large businesses. The rebates must be sent by August of the following calendar year.
On paper this actually makes a lot of sense. When you think about what goes into the cost of health insurance you basically get two factors. The cost of the medical care and the overhead of the insurance company. So in limiting the overhead,and profit, of the insurers to a reasonable amount, usually 15%, it would seem that the MLR was a very smart piece of legislation. Now consumers would not be protected from insurance companies overcharging for health insurance policies so that they could make immense profits.
Here we are many years after the law was passed and the vast majority of employers and policyholders are still not receiving rebates. How can this be? Some politicians will tell you that insurance carriers have reduced their premiums to the point that they meet the MLR criteria and therefore do not have to send out any rebates. We represent a large number of employers in and around Pennsylvania and we are not aware of any such reduction. In fact it is quite the opposite. Renewal increases are at a nearly three year high according to our analysis. Something is not right.
It turns out that health insurance companies ran more efficiently then we had previously thought. Most of the carriers we represent had managed to keep their overhead well below the MLR required levels long before the PPACA was ever signed into law. Yet, health insurance premiums are staggeringly high. As we noted earlier there are only two driving factors for those costs, the insurance carrier’s overhead and the cost of medical care.
Perhaps the provision addressed the wrong part of the equation. Under the MLR the maximum percentage insurance companies can use for their overhead is under 15% of the total premium. That leaves the other 85% to pay for the policyholders medical care. It doesn’t take long to realize that congress needs to address the actual cost of medical care to truly drive down the cost of health insurance.