A while back, we took my good (blog-)friend David Williams to task for his characterization of the role of agents in the field of health insurance. Recently, David forayed once more into the general area, writing about the ObamaTax MLR (Medical Loss Ratio) rules:
"I’d like to see us learn from implementation of the law and make improvements along the way. Unfortunately many opponents take the opposite view –and would still rather repeal the whole law or resist implementation ... In the spirit of improving the law, I’d like to see a modification to the minimum medical loss ratio rules for health plans ... After all, if medical costs are contained “too much” then the plan has to pay a rebate."
He then offers this suggestion:
"[L]et plans with a strong track record of cost containment escape the MLR, at least partially."
I'm very fortunate to have access to some of the best brains in the blogosphere [ed: can't you just call them co-bloggers?]. While I do have my own take on David's post, I turned to them for in-depth analysis.
I was not disappointed:
Patrick noticed that David is using the same talking points we heard in 2010 by the WH and Congressional D’s such as “negotiating hard with providers, introducing better network designs, and improving payment methodologies.” All of these things are being done and none of it has to do with MLR. So I’m really not sure why he thinks that lowering something he already hates will help keep rates in check.
In fact, Patrick writes, one of David's old blog posts from early in 2012 was titled “I don’t really want my $127 medical loss ratio rebate” His argument then was that MLR creates a perverse incentive for insurers to hit the required levels by not doing what they are paid to do. He states that this would be done by eliminating cost containment measures.
Um no, cost containment measures create competition. Lowering the 80% MLR and increasing the 20% for administration would potentially drive costs down. Last time I took an economics course I was taught that lowering the 80% would be more valuable than lowering the 20%. Especially when the largest variable is the 80%.
Patrick was also unimpressed with David's example of undercutting the market by either raising premiums by less than the market rate or CPI:
The average profit margin in the health insurance industry is around 4%. If MLR requires a company to spend 80% on claims and 20% on everything else then the 4% is already budgeted into the 100%. So next year the “average market rate increase” is 5%. Insurance Company A’s loss ratio was on target at 80% and made their margin of 4%. This year some unknown government entity says that because Insurance Company A undercut the market and offered at 3% increase they have the ability to reduce their MLR requirement by an extra 5%.
Here are the best case and worst case scenarios:
Best case: The loss ratio is 70%. Insurance Company A must rebate 5% to consumers and makes a profit of 9%. Rates for next year go up by the “average market increase”. Why? Because the company under this design is able to keep a higher profit and still must rebate consumers. Net result = price of insurance to the consumer still goes up.
Worst case: The loss ratio comes in at 85%. They lose 1% (which is what they would have lost under the original deal of 80%). End result here is that Insurance Company A will receive reinsurance pool funds to offset their losses and will still increase their rates to the consumers.
Win-win Not the outcome David's expecting.
"I’d like to see us learn from implementation of the law and make improvements along the way. Unfortunately many opponents take the opposite view –and would still rather repeal the whole law or resist implementation ... In the spirit of improving the law, I’d like to see a modification to the minimum medical loss ratio rules for health plans ... After all, if medical costs are contained “too much” then the plan has to pay a rebate."
He then offers this suggestion:
"[L]et plans with a strong track record of cost containment escape the MLR, at least partially."
I'm very fortunate to have access to some of the best brains in the blogosphere [ed: can't you just call them co-bloggers?]. While I do have my own take on David's post, I turned to them for in-depth analysis.
I was not disappointed:
Patrick noticed that David is using the same talking points we heard in 2010 by the WH and Congressional D’s such as “negotiating hard with providers, introducing better network designs, and improving payment methodologies.” All of these things are being done and none of it has to do with MLR. So I’m really not sure why he thinks that lowering something he already hates will help keep rates in check.
In fact, Patrick writes, one of David's old blog posts from early in 2012 was titled “I don’t really want my $127 medical loss ratio rebate” His argument then was that MLR creates a perverse incentive for insurers to hit the required levels by not doing what they are paid to do. He states that this would be done by eliminating cost containment measures.
Um no, cost containment measures create competition. Lowering the 80% MLR and increasing the 20% for administration would potentially drive costs down. Last time I took an economics course I was taught that lowering the 80% would be more valuable than lowering the 20%. Especially when the largest variable is the 80%.
Patrick was also unimpressed with David's example of undercutting the market by either raising premiums by less than the market rate or CPI:
The average profit margin in the health insurance industry is around 4%. If MLR requires a company to spend 80% on claims and 20% on everything else then the 4% is already budgeted into the 100%. So next year the “average market rate increase” is 5%. Insurance Company A’s loss ratio was on target at 80% and made their margin of 4%. This year some unknown government entity says that because Insurance Company A undercut the market and offered at 3% increase they have the ability to reduce their MLR requirement by an extra 5%.
Here are the best case and worst case scenarios:
Best case: The loss ratio is 70%. Insurance Company A must rebate 5% to consumers and makes a profit of 9%. Rates for next year go up by the “average market increase”. Why? Because the company under this design is able to keep a higher profit and still must rebate consumers. Net result = price of insurance to the consumer still goes up.
Worst case: The loss ratio comes in at 85%. They lose 1% (which is what they would have lost under the original deal of 80%). End result here is that Insurance Company A will receive reinsurance pool funds to offset their losses and will still increase their rates to the consumers.
Nate focused on David's aversion to repeal, wondering why people can't seem to understand that, sometimes, the best way to improve something is to scrap it and start over. The counter to a call for repeal is to always claim that the person wants to do nothing but scrap it. This is simply not true; scraping a terrible bill that doesn’t work is the first step to taking actions that will work.
As Nate observes, if you take a wrong turn in the country the first step is to turn around and go back to where you made the mistake.
Nate makes another great point by noting that the MLR rules as they stand have been met by all the carriers, yet costs didn’t drop, leading a rational person to conclude that carrier spending of premium was never the issue and isn’t going to solve anything. What would work is MLR for hospitals: make them spend 80% of their revenue on care and not executive or doctor compensation, or charity galas, or other extravagant lifestyle expenses.
Carrier loss ratio is also the wrong place to focus for another reason, one which David seems to have completely missed: the large (and growing) population of folks in self funded plans, which have much lower MLRs to start with.
Finally, Bob cuts right to the chase, calling David out on his assertion that MLR reduces incentives to restrict access. Bob wants to know how David can categorically state this, as he gives no evidence to back it up. And, Bob notes, it doesn't measure or prove value in any way.
Bob also echoes Patrick's take-down of David's claim that "we really should want plans to contain costs: by negotiating hard with providers, by introducing better network designs, and improving payment methodologies. Plans should be rewarded financially for doing this."
Sounds like big government, says Bob: Contain costs by paying providers less.
The problem is that "improving payment methodologies" is nothing more than "pay for results." That doesn't work in health insurance for so many reasons. Principle one is, in this scenario providers will only take on the "easy" cases and those with terminal illness or no hope for improvement are passed over.
Oh, my: David's post itself is only 321 words, and we're already at three times that. So I'll just add one more thought:
David nonchalantly tosses in the idea that carriers who meet their cost containment targets would be allowed to partially "escape" (interesting word choice, no?) MLR. Does he not see the inherent problem in that? As we've all already seen, ObamaWaivers of any stripe are used as political "chits" to reward one business entity over others. How does one compete against the Federal behemoth?
Better luck next time, my friend.
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