Washington, DC – The nonprofit Commonwealth Fund reported today that insurance companies had boosted profits instead of passing on savings to consumers under provisions of the health reform law that require at least 80% of consumer premiums go to medical care instead of overhead. The report recommends rate regulation and additional measures to ensure consumers benefit from reduced administrative spending under the health reform law.
The report notes that many insurance companies reduced administrative costs in 2011, but retained those savings as profits rather than reduce premiums for customers. Despite insurance companies’ failure to pass on all administrative savings, the 80-20 rule did result in $1.45 billion in savings for consumers, largely in the form of rebates.
“Absent rate regulation, health insurers are gaming the health reform law to keep premiums high and increase profits. Health insurers should be required to open their books and justify their charges – including why they haven’t passed on to consumers nearly one billion dollars in savings,” said Carmen Balber, Washington DC director for Consumer Watchdog.
Consumer Watchdog warned against just this eventuality as the health reform law was being debated and in comments on regulations implementing the rule, called the medical loss ratio provision.
As Consumer Watchdog wrote to Health and Human Services Secretary Sebelius in May 2010: “… medical loss ratio requirements will—absent strict rate regulation—encourage insurers to raise their premium rates. In the same way that a Hollywood agent who gets a 20 percent cut of an actor’s salary has an incentive to seek the highest salary, insurers will have incentive to increase health care costs and raise premiums so that their 15 percent or 20 percent cut is a larger dollar amount.”
The Commonwealth Fund found that group insurers reduced administrative costs by $975 million in 2011, but increased profits by $1.18 billion. The result was a $210 million increase in overhead costs – the opposite of the effect envisioned by the medical loss ratio rule requiring more premium dollars go to medical care. Individual insurance policies reduced both administrative costs and profits overall.
The report concludes that stronger rate regulation, stricter medical loss ratio rules, or market pressure may be needed to make insurers pass along administrative costs as savings to consumers.
Consumer Watchdog is supporting a ballot measure on the 2014 general election ballot in California to require health insurance companies to publicly justify and get approval for rate increases before they take effect. Senator Dianne Feinstein, author of legislation in Congress to require regulation of health insurance rates, and California Insurance Commissioner Dave Jones also support the measure.
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Consumer Watchdog is a nonprofit consumer advocacy organization with offices in Washington, DC and Santa Monica, CA. Find us online at www.ConsumerWatchdog.org