No one who understands this business believes a health insurance company should deliver only 65 or 70 cents worth of care for every dollar collected. But the architects of the Patient Protection and Affordable Care Act (PPACA) can point to moments over the past decades when the medical loss ratios (MLRs) of some profitable insurers dipped that low. The market took two enrollment periods to correct, and many of those same plans were underwater three years later.
The MLR itself naturally becomes the accounting target for everyone who believes that health insurers are denying people not just reimbursement, but treatment, life and hope. Had PPACA's 80% and 85% MLR rule been applied to 2010, insurers would have refunded approximately $2 billion collectively. The rule essentially assumes that:
Health insurance markets do not work;
Most of these "markets" are controlled by cabals of large, price-fixing insurers;
Employers are dupes who cannot price discriminate, nor negotiate, and are simply happy to pass along excessive premiums to employees;
Agents and brokers actually benefit from prices kept artificially high by this market failure; and
Health insurers can and will gouge customers and get away with it forever.
The overarching goal of PPACA is to flatten and broaden coverage, reallocating funds from the insured to the uninsured, based on the hard reality that this reallocation occurs anyway, through the grossly inefficient mechanisms of provider mark-ups and cross-subsidies. Because the MLR calculations govern the largest countable pots of money in the healthcare system, they seem like an obvious tool for re-engineering—especially given how politically easy it is to go after "excessive" insurer profits.
In reality, the $2 billion refund would amount to less than one-quarter of 1% of what all enrollees spent on health insurance in 2010. So how will the imposition of the MLR refund rule radically reshape the pricing and distribution of health insurance—soon to be a $1 trillion marketplace or 500 times the size of that 2010 refund?
The industry—which engaged in much of the PPACA debate in good faith—is understandably hyperventilating about the effects of a rule loaded with populist symbolism, if not actual financial firepower. They react to what is yet another cumbersome and barely material compliance ritual—one fraught with huge public-relations risks.
In terms of innovation for the industry, consider where almost all the venture capital in healthcare has fled: consumer health, provider IT, health 2.0, and provider consolidation, with almost nothing going toward new and better forms of health insurance. Much of this venture capital originates with the large insurers themselves, in a desperate search for revenue diversification ahead of PPACA and MLR deadlines.
Forget about the emergence of bold new players who can significantly change the health insurance game. The MLR rule is a profit-regulation mechanism, plain and simple. Like all other forms of price controls, this one will drive away innovators and capital and send all of today's players into a dogfight for total profit growth (versus profit margin growth) through consolidation.
If the federal government wants to convert health insurers into profit-regulated public utilities—with a capital base and innovation culture to match—that may be precisely what it gets.
J.D. Kleinke is a medical economist, author and MHE editorial advisor. He was appointed a resident Fellow at the American Enterprise Institute earlier this month.