Revisiting Medical Loss Ratios

This week we witnessed Aetna pulling out of the Obamacare Exchanges in some states, which followed the pull back by UnitedHealth Group in April and Humana earlier this month.

Although all three would have you believe the motivation for their withdrawal is a failure to make a profit, it is now being alleged that Aetna’s decision was”payback” for the denial of its proposed merger with Humana by the Obama administration.

Given all this drama in an otherwise (dare I say bland?) industry I thought it might be a good time to revisit other reasons why insurance executives are not loving the Affordable Care Act [ACA] right now, specifically how their profits are already limited under the “80-20 Rule” within the law.

Mandated Medical Loss Ratios- A.K.A the 80-20 Rule

Someone recently asked me over lunch how the health insurance industry itself can even make sense-

“I am giving them money- they pocket it- and promise they will cover me if disaster strikes. It is like a really bad pyramid scheme! Why am I paying for their investors? Why wouldn’t I just save my own money to do the same?”

Fair question– and one I will be getting back to.

But let’s start with the implication behind the question- that it is distasteful for corporate America (and its investors) to make money off the tragedy of others. Not an uncommon sentiment. Most of us are at least a bit uncomfortable knowing that our good health [or lack thereof] is someone else’s profit margin. We stay healthy- they win. We fall under the bus- they lose.

This reverse perspective of the insurance industry from those of us who are patients is conveyed in the very name of this part of insurance reform- “Mandated Medical Loss Ratios”.

What is “Medical Loss”? The money that goes to us (the patient) and not the investor.  For a company making profit in health insurance, any money spent on patient care is a loss which cannot be invested in administrative costs (such as salaries, overhead, and marketing) or returned to investors as profits. So from that perspective caring for our sick child, curing our mother’s cancer, or repairing our knee injury are all bad things.

To calculate the Medical Loss Ratio (MLR) the percentage of premium dollars spent on administrative costs and profits is divided by direct health care services. For example, if a company collects premiums totaling $100,000 but only has to return $85,000 on medical services to patients who are covered under their policy (including both care and investing in improvements to the quality of care), they have an MLR of 85 percent.

The ACA isn’t the first attempt to require insurance companies to spend a certain proportion of policy premiums on their policy holders- many states had done so before- but in some states insurance companies were allowed to operate with an MLR as low as 60 percent.

In contrast- now all* insurance plans offered through large employers (those with more than 100 employees) must have an MLR of at least 85 percent (policies for smaller employers and those sold to individuals have a lowered required MLR of 80 percent).

It is because at a minimum 80 cents on the dollar must go toward caring for us patients that many in the press and in policy circles commonly refer to this portion of the ACA as “The 80-20 Rule.”

What happens if a company exceeds that limit you might ask? They have to pay the policy holders back! In is undoubtedly a dim memory- but this explains why about 12.8 million policy holders received $1.1 billion in August of 2012, and another 8.5 million families received a rebate in the summer of 2013.

But that is enough math – I want to get back to my friend’s question.

Why don’t we all just save to protect against an uncertain future- insure ourselves if you will? In keeping with this philosophy many Americans have established Medical Savings Accounts (MSAs)- something that will undoubtedly help them should a health crisis arise- certainly with the high deductible so prevalent in the health insurance market today.

But here is the unfortunate truth. It is highly unlikely that any of us- certainly not us mere mortals- could ever save enough to fend off financial ruin if a medical disaster strikes. A course of chemotherapy? A premature baby for a month in NICU? Those costs will outstrip any savings account- including an MSA- in all but a small minority of families.

So at the end of the day the vast majority of us insure ourselves- or our employees- for the sheer peace of mind it gives us (and because now the ACA makes us anyhow).

When Losing is Winning

Maybe you resent an industry betting on your health for profit. At the most basic level that is what health insurance is all about.

But are we really the losers? If we get sick our insurance company loses on our misfortune- but we win in that we do not face financial ruin at the same time we are dealing with a threat to the health of ourselves or a loved one.

What if the gamble goes the other way? If you never get any of your premium dollars back for extensive medical care your insurance company will be the “winner” – but is that really important? On this side of the equation disaster never struck- you are the lucky one. Let the investors take the money- you have your life!

Either way the swings between the losses and gains for the insurance industry are limited by the Mandated Medical Loss Ratio. The “win” your good health equates to your insurance company is limited to at most 20 cents on the dollar- the rest of your premium gets plowed back into health care and quality. Who wins now? All of us.

Want to Know More?

Remember that *? There are actually some exceptions to what policies fall under this rule- but that is beyond the scope of this letter. Let’s just say that any traditional for-profit insurance company assuming full risk for the health of the covered beneficiary is covered by the mandated MLR in the ACA. Contact your insurance carrier if you want to know if your own policy is excluded.

Want to know more? Here is a link to what has posted about the Mandated Medical Loss Ratio, and here is another link to an excellent in-depth review of the policy (and related issues) from the Henry J. Kaiser Family Foundation (2013), and one more link to an excellent summary/fact sheet also prepared by the Kaiser Foundation (2012)

What does the Insurance Industry have to say? Here is one resource from the industry (Aetna)- contact your own insurance company for more. Why does America link employment with health insurance, and why are we the only country to do so? It really is an “accident of history” involving World War II! If you want to find out more I suggest NPR’s review of that fascinating topic or the Wall Street Journal’s review of the same.

Throughout this Fontenotes I have relied extensively on an article about the history of the Public Option and the debate that waged in 2009- which was published in Health Affairs in June 2010. I highly recommend this article to anyone interested in learning more.