Tuesday, March 29, 2011

Yes Or No Or It Depends To The Medical Loss Ratio (MLR)?

Does every person in imminent danger of being massacred by an oppressive regime warrant U.S. intervention?  Should every person in the U.S. own a home?  Should every teenager attend college?  Should every person buy health insurance?  Does every husband chased from a home by a knife-wielding spouse probably have something they did to deserve it?

The Disease Management Care Blog spouse agrees that the answer to almost all of those questions is "it depends."  A one-size-fits-all "yes" or "no" answer involving whole countries or millions of Americans risks the extremes of a) prolonged foreign entanglements versus isolationism, b) Fannie Mae-powered housing bubbles versus putting the hope of home ownership out of reach for millions, c) loan defaults and "for-profit" colleges, versus putting higher education out of reach for millions and, d) the twisted pretzel logic of a "penalty" designed to protect the private insurance market versus a death spiral.

Which brings the DMCB to the topic of the  Affordable Care Act's minimum medical loss ratio (MLR) rule (information from CMS here).  Readers will recall the idea was to make sure that 80 to 85% of every insurance dollar is spent on health care.  Now that the rule is kicking in, authors Jean Abraham and Pinar Karaca-Mandic, in a study published in the American Journal of Managed Care report on potential impact on the individual insurance market.  Using data from the National Association of Insurance Commissioners (NAIC), they show that about a third of the 6.7 million persons nationwide is in an insurance plan that is failing to meet the rule.  This is bad news for regulators, who may have surmised that the number of vulnerable individuals was about 3 or 4 million.

Unfortunately, our political class, working in the intrusive glare of a polarized 24 hour news cycle, tend to yield to the temptation of easy "yes" or "no" policymaking.  Unwilling to let markets sort out all the complexities and thanks to the twin toxicities of dogma and playing to a political base, the MLR rule was passed with the apparent assumption that waivers would be granted few if any times.

The AJMC authors point out that insurers can respond by reducing administrative costs, reducing profits, increasing fee schedules, reducing premiums or exiting the market.  Unfortunately, individual plans have higher administrative costs (there are fewer economies of scale), lower profits (individuals are more likely to have high claims expense) and are therefore poorer risks. That leaves the threat of market exits, which prompted CMS to grant a waiver to all of Maine's health insurers, with New Hampshire under active consideration and possibly four more states to follow.  And thanks to the insights from AJMC report, it appears the pressure on CMS to grant even more waivers is likely to grow.

Is every health insurer with a less than an 80% MLR abusing its beneficiaries, being administratively top heavy or deserving to be put out of business?  The complexity of the issue, the numbers of persons involved and the law of unintended consequences is making the answer to that question also "it depends."  The DMCB wishes the good folks at CMS a hearty "good luck" in sorting all that out.


Roger Collier said...

Jan --

Another interpretation of the results reported in the AJMC is that at least a third of the population is getting really terrible value for money in paying for medical coverage. I'm far from enthusiastic about the ACA's MLR provisions (as I've written in my own blog and elsewhere), but when you add provider administrative costs to insurer administration and profit, the unfortunate third is -- on the average -- getting less than 50 cents worth of medical care for every dollar they pay in insurance. And that seems like something worth addressing.

Jaan Sidorov said...

Roger makes a good point, but the purpose of health insurance is not to pay for medical coverage. The purpose of health insurance is to transfer the risk of having to obtain medical care. Managing that risk carries a cost that no one seems to like, including the insurers. Why else are the health insurers so interested in getting out of that business?


Roger Collier said...

Jaan --

I don't see insurers rushing to get out of the business, although some have threatened to do so unless their states get waivers from HHS. While I take your point about the costs of risk transfer, maybe what the AJMC article shows is that, like other purchases of the "cheapest available," the lowest priced, limited benefits, insurance products can be poor value.

Looking again at your post, though, it's possible you may be overly pessimistic about regulators' reactions to the study findings. The AJMC estimate of 2.2 million enrollee years in plans failing the 80 percent threshold is actually less than participants guessed at the RWJ meeting you cited. (However, the AJMC study looked only at enrollment reported to NAIC, whereas the universe considered at the RWJ meeting was based on CPS data.) And, one more complicating factor supported by both the AJMC article and the RWJ estimates: many individual plans are only just below the threshold and might reasonably be expected to take steps to meet the ACA percentage provision.