Medical Loss Ratios Tell You Exactly What Your Insurance Company Thinks About You
Regardless of what part of the country you’re from, you probably agree that the current state of U.S. healthcare is dysfunctional at best. American families everywhere are dealing with out-of-control premiums, inflated medical costs, unreliable insurance companies, and convoluted rules.
People also fundamentally worry about the quality (and cost) of their care. Some Americans are even opting to use Uber for emergencies, just to avoid the high cost of an ambulance ride!
The Affordable Care Act (ACA) was supposed to address some of these issues, but however well-intentioned, it has only made things worse. Costs have skyrocketed nationwide since the ACA’s implementation, leaving many Americans feeling hopeless. Whether you’re selecting through a state marketplace or employer, the problems remain the same: prices are unaffordable and plans are poorly designed.
Medical Loss Ratio (MLR) rules were a large factor in the ACA price increases. While the ACA provisions related to MLRs have caused many problems, the very existence of the MLR as a concept should trouble every American.
Insurance companies have always used the MLR formula as a way to gauge profitability. The MLR formula creates an inverse relationship between the amount of care that insurance companies provide and the amount of profit they generate from you. While you may want to keep your costs manageable, insurance companies consider any amount of money paid out to you for your care as a profit loss. Unsurprisingly, companies who view your healthcare as a hindrance to profits would do anything they could to limit your care.
The ACA Intended MLR Rules To Protect Consumers, But It Did Not Work
The Affordable Care Act (ACA) was signed into law on March 23, 2010, but was not fully implemented until 2015, with the intent of improving Americans’ access to healthcare. The goal of the ACA was to improve service, accessibility, and transparency of healthcare for all Americans. The ACA includes several provisions with the aim of transforming health insurance so that it was more available and profits could be capped to a reasonable level.
A key provision in the ACA is called the Medical Loss Ratio (MLR) requirement. Its purpose was to regulate how much money insurance companies spend on administrative costs (such as marketing and salaries) in comparison to how much is spent on medical expenses and quality improvements. The ACA tried to mandate the MLR down to 20%, whereas before it had typically hovered somewhere between 60% to 110%, with about 40% profits to 10% losses.
The ACA required insurance companies to publicly disclose their budgets to ensure compliance. If they failed to do so, or didn’t meet the guidelines, they would be fined. As an additional penalty for noncompliance, they would have to provide rebates to consumers.
Medical Loss Ratio Rules Create Higher Premiums
The Medical Loss Ratio, also known as the Medical Cost Ratio or the Medical Care Ratio, is not a new metric. It has been a major part of how insurance companies calculate profit loss for some time. Though it may sound outrageous, when insurance companies talk about “loss”, they’re referring to money spent on medical claims. Insurance companies view spending money on your claims as a direct “loss” to their profits – not as healthcare services to help their customers.
To keep insurance companies from generating and capturing excessive profits, The ACA-mandated MLR requires these companies to spend at least 80-85% of premium income on medical care, while also imposing tighter limitations on premium increases. Specifically, individuals and small businesses must be at the 80% MLR requirement while large companies must achieve 85%. Insurers must also provide regular funding reports, and failure to adhere to these guidelines means that they have to pay rebates to their customers.
To simplify things further: the MLR requirement demands that an insurance company must use 80 cents of every premium dollar to pay for medical claims and/or quality improvements. The remaining funds can then be used to pay administrative costs, including salaries and marketing, with whatever leftover kept as profit.
The reason this provision was included in the ACA is simple. Prior to healthcare reform, more than 20% of consumers had plans that kept over 30 cents of every premium dollar for administrative costs and profit. An additional 25% of consumers were members of benefit plans that kept between 25-30%. In the most extreme cases, insurance companies were capturing up to 50% of incoming premiums for administrative expenses and profit.
The MLR provision intended to increase transparency while simultaneously regulating the profits of insurance companies so Americans would receive more value for their healthcare dollar. The expectation was that insurance companies would respond to the provision by working harder to limit unnecessary expenses. In reality, insurers responded to these regulations by focusing more intently on maximizing the bottom line and instead of capping administrative costs, they raised prices to game the system or left markets entirely. Americans across the country have experienced both of these harsh realities in our new healthcare landscape.
Insurance Companies Consider Paying Your Medical Bills a Loss
To better understand how the Medical Loss Ratio formula impacted the health insurance industry, consider the following terms and their roles in our current health insurance model:
- Premiums: Income earned from policyholder payments, including those from the state and federal high-risk programs.
- Claims: Payments made by insurers for medical care and prescription drug costs.
- Quality Improvement: With regard to MLR, “quality improvement” applies to any activity that results in tangible improvements in patient care. This may consist of safety regulations, readmission prevention, wellness promotion, or health information technology. Provider credentials and fraud prevention are also included in this category. However, compensation for insurance brokers and agents is not considered a necessary expense for healthcare improvement.
- Taxes, Licensing and Regulatory Fees: Necessary costs include federal taxes and assessments, state and local taxes, and regulatory licenses and fees. Capital gain and investment income are not included. However, not-for-profit insurers have the option to deduct state premium taxes or community benefit expenditures, whichever is greater.
- Group Market Segments: This refers to any employer-provided insurance policy, and is classified by size (“small” and “large”). It’s important to note that the definition used within the MLR provision differs slightly from the general definition used in the ACA.
- The ACA defines a “small” group as 1-100 employees. However, for MLR reporting specifications, a “small” group is defined as 1-50 employees unless state law defines it otherwise.
- The ACA defines a “large” group as 101+ employees. However, for MLR reporting specifications, a “large” group is defined as 51+ employees unless state law defines it otherwise.
Insurance companies have always understood that less money paid out in claims equals more profit, so the Medical Loss Ratio calculation is nothing new. That said, the changes to the MLR prompted by the ACA led to consequences no one planned for.
Politicians Promised Us the ACA Medical Loss Ratio Rules Would Lower Costs
The MLR provision was supposed to encourage higher quality care while simultaneously reducing costs. Increased transparency was expected to result in lower administrative expenses and renewed trust in the healthcare industry. To make sure that insurance companies complied, punitive measures like fines and consumer rebates were implemented. This model theoretically should have encouraged the prioritization of American healthcare needs over insurance company profits. However, as with any good idea, theory and practice are often two very different things.
The Many Failures of the ACA’s Medical Loss Ratio Requirements
With any new policy, its success is largely based on its implementation. There is no denying that the MLR provision sounds good in theory, but what have been the actual results?
The Medical Loss Ratio Provisions Caused Premiums to Rise
The most obvious consequence of the MLR provision is that premiums shot up in price. Insurers who could not meet the 80% requirement by reducing administrative costs either raised their premiums or exited the market entirely. While the provision clearly explains how premiums should be used, a possible increase in administrative costs was not conceived of.
Even those that came out in strong support for the law couldn’t deny that premiums became more expensive. Research shows that since the ACA was passed in 2010, the average “family” premium has increased by 160% and the average “family” deductible has increased by 148%.
The MLR provision started a tug-of-war for insurance companies who couldn’t afford to remain in business without raising premiums: the exact opposite of what the ACA had intended. The inefficiencies become clear when compared to health care shares, which have no incentive to raise share rates to capture profits and have no incentive to leave a market in search of profits, or to avoid losses.
Medical Loss Ratios Swiftly Inflated Healthcare Prices
Medical loss ratios didn’t just cause premiums to rise – they also led to an increase in the cost of medical care itself.
To understand how this process works, it’s important to realize that insurance companies negotiate the actual price of health care services with providers. That’s why being uninsured can be extremely expensive – without insurance companies to regulate the price of services, doctors and hospitals are able to charge whatever they please.
The ACA did put some limits on insurance companies’ ability to raise premiums, though it may not seem like it. Since the MLR is based on a percentage of total revenue, insurance companies had to increase their overall income to have more money available to cover administrative costs and generate profits. If they couldn’t do that by raising premiums alone, they had to look elsewhere for solutions.
So, they turned to controlling the price of services. This led to insurers inflating the costs of medical services to bring in more money.
This meant that healthcare fraud actually worked in favor of insurance companies, because it increased the total dollar amount that was spent on claims, allowing insurers to keep more income from premiums for themselves.
No matter how you look at it, insurance companies have forced Americans to pay more for their health insurance and medical care, all to protect their bottom line.
The Medical Cost Ratio Provisions Took Away Insurance Options
Variety among health insurance plans and providers continues to decrease over time. For instance, Aetna and UnitedHealth left all but a few healthcare exchanges in 2017, and Humana announced that they will stop selling exchange plans completely in 2018. Last year, Aetna announced that it would stop selling exchange coverage in Iowa in 2018. Meanwhile, Anthem has indicated its intention to pull exchanges in many of the 14 states that it currently serves.
While the existing marketplace is proof enough of a decrease in competition, it’s even more alarming that the Medical Cost Ratio provision makes it virtually impossible for new companies to enter the market. Barriers to entry were already high before the ACA – now they’re virtually insurmountable.
This problem was exacerbated by healthcare reform because the MLR provision limits startup costs to only 15% for small businesses and 20% for large businesses. It caps profit margins, and investors aren’t interested in backing new insurers because it’s no longer financially rewarding. This puts new insurance companies in a bind; they’re strictly limited in the use of their funds and investors are unwilling to contribute.
The individual insurance marketplace has not fared much better. Despite the ACA’s requirement that all Americans buy insurance, no new carriers have entered the market since 2008. As options continue to disappear, it’s becoming increasingly difficult for consumers to find affordable insurance that suits their needs.
Ultimately, the lack of options in the marketplace helps insurance companies at the expense of consumers, who find themselves with overpriced, underwhelming insurance plans that are ill-fitting to their needs.
Medical Loss Ratio Rebates Are Less Than You Might Think
The ACA states that rebates must be a percentage of the premium amount paid by the member. For example, if you paid $1,000 in premium costs and your insurer paid $50 in taxes on that premium, then the 2% rebate percentage would be applied to a total of $950, resulting in a rebate of $19. The ACA also dictates how rebates should be distributed. If an employer is the plan administrator, rebates are usually issued directly to the employee in accordance with the guidelines of the Department of Labor. However, it’s been very difficult to regulate this process and costly for employers to follow regulations, especially in the event of small-dollar rebates per employee.
The idea of a Medical Loss Ratio provision sounds great in theory but in practice, hasn’t produced the results that Americans were hoping for. The fundamental reason for this is because Medical Loss Ratios, at their core, identify consumers seeking healthcare as detriments to profit. In the health insurance companies’ balance sheets, your medical care will always be a loss. Thankfully, there are other options on the horizon; health care sharing organizations are quickly growing in popularity, and they’re a viable alternative to traditional health insurance.
Profit Has Always Been the Focus of Insurance Companies
The very concept of a medical loss being created by customer’s medical bills is something that should concern Americans. Insurance companies use MLRs because they have a profit motive. Premiums function similarly: insurance companies are incentivized to keep the threshold high before they have to pay high, so revenue isn’t affected.
As long as medical costs (your care) are seen by insurance companies as an expense, they will never be interested in providing the best care possible. Insurance companies will always participate in a calculation of how much they are providing in claims payout and how it affects profit for the year. Worse still, health insurance companies are going to prioritize spending premium income on administrative costs, such as marketing and executive compensation, over providing quality care.
Health Care Sharing Can Fix Our Broken System, But No Set of Rules Can
It has yet to be determined whether the Affordable Care Act can be salvaged or whether the affordability of American healthcare will improve. It is clear, though, that however dysfunctional health insurance was before the ACA, it hasn’t gotten much better.
The Medical Loss Ratio provision was just one example of why the ACA failed, but it provides a clear insight as to why laws alone can’t fix a fundamentally immoral system. Despite lawmakers’ best intentions, insurance companies will always continue pursuing their decades-long objective: protecting their profits at the expense of Americans’ healthcare needs.
Luckily, people are beginning to realize that they have options. Instead of relying on traditional insurance, many Americans are turning to health care sharing organizations. The health care sharing model is a perfect fit in today’s sharing economy and, rather than being centered around profit, it focuses on community support. This alternative version of healthcare brings individuals and families together based on shared values and the desire for better care.
Health care sharing is not insurance and thus avoids many of the costly government overreaches of the ACA. Better yet, the health care sharing model has no profit-incentive and is based off our innate desire to care for others. In some respects, health care sharing borrows from the principles of crowdfunding found in Kickstarter or GoFundMe. Health care sharing leverages P2P networks and social payments to distribute risks, build reserves and to connect members into a community of mutual trust and rewards. As a result, health care sharing becomes a more structured and predictable process for medical financing that ensures the payment of the medical bills for ALL who participate.
Health care sharing is driven by a very specific purpose: to meet its members’ healthcare needs. It also offers a level of security that isn’t available with a typical crowdfunding campaign, where people must rely on web traffic and the kindness of strangers with no guarantee that they’ll meet their fundraising goals.
You can learn more about how health care sharing works better, and feels better by clicking here.