For the third year, many employers and individuals are receiving rebate checks from their health insurance carriers as required by law. While it is alluring to deduce that this rebate is indicative of price gouging by the insurance firms, it falls short of capturing the full picture.
A review of medical loss ratio
The medical loss ratio (MLR)
is a piece of the broad health care reform bill known as the Patient Protection and Affordable Care Act
(commonly referred to as the ACA). The MLR requires that insurance companies spend a specific percentage of their collected premium dollars on medical claims versus other costs, such as provider contracting, payroll and data systems. The intent is to create more value out of your premium dollars. For example, if an insurance firm’s MLR lags behind the specified threshold (80 percent in small group markets or 85 percent in large group markets), the carrier will be forced to write a check back to their policyholders.
There is an inherent problem with this: The MLR is a fraction. Merely inflating the denominator or deflating the numerator alone would get you the same results. If you told me that company A has a MLR of 82 percent and company B has a MLR of 90 percent, there is no way we could determine which company offers a lower-priced product. What has been created by the MLR requirement is a false mechanism for making premiums more affordable. Indeed, fixing the numerator at 80 percent gives the insurance companies incentive to charge more in premium: 20 percent of $10 million is greater than 20 percent of $1 million.
Tackling the real issues
Our health care system
suffers systemic issues: price and outcome transparency are too little; access to care is strained; third parties continue to pay the bulk of medical services; and cost-shifting from Medicare and Medicaid continues to increase. Receiving a few $1,000 checks from your insurance company may be satiating in the short-term, but it does very little, if anything, to solve the real problem of bringing down costs in the long term.