Medical Loss Ratios Debated Under State Health-Reform Efforts

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OLDWICK, N.J. — The effect of mandating a medical loss ratio requirement on health insurers is a topic generating heated debate — especially in California.

For publicly traded health insurers, the medical loss ratio — a measure of health-care expenses as a percentage of premium revenue — is closely watched by company chief financial officers and Wall Street analysts. Health insurers’ stocks can rise or fall sharply, depending on how their ratio fares in a given quarter’s earnings.

Health-reform proposals aimed at covering the uninsured in California, as well as in Pennsylvania, would require health insurers to spend 85 cents of every premium dollar on direct medical care for patients; the other 15 cents would go to administrative and other expenses, said J.P. Wieske, director of state affairs for the Council for Affordable Health Insurance, a group comprised mostly of health insurers.

“The effort to increase the amount they are actually paying in claims can be, in most cases, a good thing because you are, in fact, spending more on direct patient care,” he said. However, the loss ratio isn’t a one-size-fits-all. It should be based on the type of product — a high-deductible, high co-payment health plan or a traditional, richer benefit plan with higher premiums, he said.

Health insurers’ administrative expenses include the costs required to conduct the business of health insurance, according to an article Wieske authored on loss ratios, posted on the council’s Web site. These include, among others: monitoring efforts to ensure patients are getting appropriate care, especially those with chronic medical conditions; the cost to process a medical claim accurately, customer service, agent commissions as well as profit and general overhead costs.

Setting an “artificially high” loss ratio could make it difficult for health insurers to offer low-cost products and may be detrimental, especially to the individual health insurance market, Wieske said.

For example, problems with distribution can arise, especially in a complicated individual market, he said, because an agent must invest significant time and effort in the sales process. Companies must be able to pay these agents a commission, Wieske said.

Earlier this year, when California Gov. Arnold Schwarzenegger unveiled his broad health-reform proposal and plan requiring health insurers to put at least 85% of their premium revenues into patient care ‘ instead of profit or administration — he said the industry would benefit “because mandatory insurance means private carriers will have four to five million more customers to handle” (BestWire, Jan. 9, 2007).

Schwarzenegger’s proposal includes a mandate that individuals buy insurance or face financial penalties.

Nick Garcia, a spokesman for Blue Cross of California, a unit of WellPoint Inc. (NYSE: WLP), said Blue Cross doesn’t support an 85% medical loss ratio because it would prohibit the company from investing money toward things like emerging technologies that would drive down costs for members.

Most health insurers’ administrative spending serves to control costs, such as through disease management and anti-fraud efforts, another Blue Cross spokesperson said earlier this year.

Ultimately, Blue Cross‘ goal “is to serve our enrollees by controlling costs and improving medical outcomes — not to spend an arbitrary amount on medical care,” the company has said.

If other states propose an 85% medical loss ratio, there’s “no incentive” for health insurers to control medical expenses and they would be forced to raise premiums, Wieske added.

That’s why an 85% medical loss ratio is “meaningless,” said Jerry Flanagan of the Foundation for Taxpayer and Consumer Rights, based in Santa Monica, Calif. In California, almost all of the large insurers are for-profit, including Blue Cross, which also is among the most profitable, he said.
Legislation requiring individuals to buy coverage from private, for-profit insurers with no cap on what the health insurers can charge is “a recipe for gouging,” Flanagan said.

Massachusetts, unlike California and most of the rest of the United States, he added, is a largely nonprofit insurance market. However, the new Massachusetts law didn’t include a cap on what insurers could charge “because the insurers did not want it and they spent a lot of money in campaign contributions to make sure it stayed out,” Flanagan said.

AB 1554, which passed the California Assembly in June, would require health insurers to justify overhead costs including “excessive profit” and seek approval for rate increases just like automobile, homeowners and other insurers must already do under the state’s “landmark” insurance reform initiative, Proposition 103, Flanagan said. Since 1988, Prop 103 has saved California drivers $23 billion, he said.

However, according to July 14 local press report, AB 1554, authored by Dave Jones, D-Sacramento, fell one vote short of passing the Senate health committee. The bill was granted reconsideration and could be heard again in January, the report said.

Listen to the entire interview with J.P. Wieske at
Email the author at: [email protected]

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