In his testimony (pdf warning) before the Senate Committee on Commerce, Science and Transportation, former insurance exec Wendell Potter explained how medical loss ratios (MLR) are used to determine a companies profits:
The top priority of the for-profit companies is to drive up the value of their stock. Stocks fluctuate based on companies' quarterly reports, which are discussed every three months in conference calls with investors and analysts. On these calls, Wall Street investors and analysts look for two key figures: earnings per share and the medical-loss ratio, or medical-benefit ratio, as the industry now terms it. That is the ratio between what the company actually pays out in claims and what is left over to cover sales, marketing, underwriting and other administration expenses and, of course, profits.
To win favor of powerful analysts, for-profit insurers must prove that they made more money during the previous quarter than a year earlier and that the portion of the premium going to medical costs is falling. Even very profitable companies can see sharp declines in stock prices moments after admitting they've filed to trim medical costs.
In other words, for every dollar that it receives in premiums payments, an insurer will typically reimburse between 75 and 90 cents to health care providers for their services, with the remaining used to cover businesses expenses and profit.
In theory, should premiums and overhead expenses remain constant, the only way for an insurer to increase earnings is to reduce what it pays out in medical expenses. Insurers do this now by refusing to enroll people with pre-existing conditions, and/or denying claims because of them.
Such practices would be banned in the health insurance reform bill, the Affordable Health Care for America Act (H.R. 3962).
Bruce Webb noted an interesting section in H.R. 3962, and writes about it in his excellent blog Angry Bear. Sec. 102 places a cap on MLR:
That final sentence simply guts the insurance companies current business which involves widening the spread between premium dollars collected and medical care actually provided. This sentence sets a hard limit on raising premiums while managing the risk pool to exclude those actually being likely to make claims. The tighter you manage your enrollment the harder it is to actually hit your mandated MLR, and every time you raise premiums you have to demonstrate that you have increased payouts to that same degree. Or else you have to rebate the difference.
In the original House Tri-Committee Bill this language was included in Sec. 116 and a site search on that term will pull up a series of posts on this dating back to July. And I have diaried on this elsewhere, yet somehow almost everyone has simply missed the significance of this.
Sec. 102 includes this:
(a) In General- Each health insurance issuer that offers health insurance coverage in the small or large group market shall provide that for any plan year in which the coverage has a medical loss ratio below a level specified by the Secretary (but not less than 85 percent), the issuer shall provide in a manner specified by the Secretary for rebates to enrollees of the amount by which the issuer's medical loss ratio is less than the level so specified.
What this means is that in no case can an MLR fall below 85%, that is, for every 85 cents an insurer reimburses care providers, it can only collect another 15 cents in premium costs.
By capping profits, this section is meant to control the rate at which premiums increase, since insurers will be no longer be able to refuse to honor pre-existing conditions, the only way to ensure continued growth in profits is to increase premiums.
Obviously, capping MLR does nothing to limit the rate of increase in actual medical costs.
But also included in Sec. 102 is a provision that sunsets the cap:
Sunset- Subsections (a) and (b) shall not apply to health insurance coverage on and after the first date that health insurance coverage is offered through the Health Insurance Exchange.
And my question is why is this sunset provision in the bill? |
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