All QHBPs must meet the medical loss ratio established by the Commissioner who is directed by the bill to set it as high as possible; if a plan does not meet the prescribed medical loss ratio (the percentage of a plan’s total premiums that are paid out in healthcare claims), it must make a refund to subscribers that will bring the ratio back in line.

If this provision is included in a final reform bill that passes, it will be another example of the government trying to make private business operate in a certain way that will have many unintended and negative consequences. The authors of the House bill want to limit insurers’ profits, executive pay, and ensure that as much money as possible is spent on actual healthcare services. They believe that limiting profits and administrative costs will ultimately lower premiums.

They will be in for a big surprise. This provision is much more likely to raise costs than lower them. For the authors of the House bill, administrative costs bring to mind some fat cat smoking a big cigar making hundreds of millions. However, there are many facets to insurers’ administrative costs. They include costs for marketing, utilization review, quality assurance, etc. These latter two are especially important. Insurers have invested significant percentages of their premiums to reduce unnecessary utilization by requiring precertification of certain expensive elected services and refusing to pay for rendered services that they determine in retrospect were unnecessary. These initiatives have created significant conflict between patients, providers, and insurers, but have been effective. Ironically, Medicare has reaped significant benefit from these efforts without paying for similar types of administrative services. As providers changed their practice habits in response to private insurers’ efforts, these new habits often carried over to how they treated all other patients including Medicare patients.  Insurers will reduce their efforts in these areas if the medical loss ratio is set too high in order to preserve some profit margin.   

Most importantly, insurers will be financially better off if healthcare costs increase in this scenario. Profit will be a function of a government established percent of premium. Nominal profits will therefore increase as premiums increase i.e. it is better to have 5% of $2 billion than it is to have 5% of $1 billion. With the government requiring all people to have insurance and putting in mechanisms to ensure no plan suffers the consequences of adverse selection, insurers will quickly shed as much administrative cost as they can and watch their profits grow as premiums increase due to higher utilization of healthcare services.

It is very dangerous to regulate a complex industry using simple formulas to determine which company is managing its business well and which is not.

                The Unintended Consequences of Healthcare Reform – #1
                The Unintended Consequences of Healthcare Reform – #2
                The Unintended Consequences of Healthcare Reform – #3 Part 1
                The Unintended Consequences of Healthcare Reform – #3 Part 2
                The Unintended Consequences of Healthcare Reform – #4