Patient Protection reform could mean higher healthcare costs

September 16, 2011

Of the endlessly debated provisions in the Patient Protection and Affordable Care Act (PPACA), the requirements for Medical Loss Ratios (MLRs) stand out for insurance companies because the requirements are designed to dictate how those companies pay their bills.

Until now, it’s been mostly unclear how those requirements will affect consumers. But a new study from the U.S. Government Accountability Office released last week sheds some light. And experts are weighing in.

First, some background: For every dollar taken in by insurance companies for health plans, those companies will now be required this year under the PPACA to spend either 80 or 85 cents – depending on the size of the plan; smaller group plans are held to the lower number – on costs related to healthcare.

In the past, insurance companies have traditionally spent less than that on healthcare costs and as much as 30 or 40 percent on administrative costs. The ratio of healthcare costs to administrative costs is called – you guessed it – the Medical Loss Ratio.

If companies do not meet the new MLR requirements under the PPACA, they are required to send their customers a refund to make up for the difference. This year is the first year that insurers will be held to the MLR requirements; the first set of insurer data is due in June 2012.

The goal of the MLR requirements is to make health insurance companies more efficient, says Dr. Timothy S. Jost, a law professor at Washington and Lee University who is a co-author of a textbook on healthcare law and a consumer representatives to the National Association of Insurance Commissioners, which helped to develop the MLR requirements.

The MLR requirements will “eliminate administrative costs, control profits and hopefully force these companies to provide better care to people,” he says.

Detractors say it will limit competition and increase overall premium costs.

Senator Tom Coburn, a Republican of Oklahoma who is also a doctor specializing in family medicine and obstetrics, wrote last week on his website that MLR requirements will “destabilize insurance markets” and that they represent “a government takeover of health care.”

The GAO study doesn’t get into that but it does say that a survey of insurance companies showed that insurers had, among other things, “decreased or planned to decrease commissions to brokers” and considered exiting individual markets.

What does this mean for health insurance buyers?

Dr. Jost concedes that fewer choices and lower fees for brokers are certainly possibilities. But he’s dubious that those results are necessarily bad.

“You could have fewer choices, sure,” he says. “But you’re going to lose your ability to choose a [health insurance] company that’s only spending 60 percent of its income on healthcare.”

He has a similar view of brokerage fees.

“If 20 percent of your insurance payment was going to the guy who sold you the policy and now that’s going to be 10 percent, I’m not sure many consumers will disapprove,” he says.

Alan N. Canton, who runs A. N. Canton Insurance Services in suburban Sacramento, says that might be true. But the result will be fewer brokers and increased risk that people will choose unnecessarily expensive healthcare plans.

For most agents, health insurance is now a “dead product,” he says – and the MLR requirements are a big part of that change.

“Thousands of agents no longer write health insurance because they can make a better living writing other projects such as annuities,” he says. “The new [commission] rates are just too low.”

Insurance buyers will suffer as a result, he says.

“Arguments can be made that health insurance brokers were disintermediated by the Internet,” he says. “But insurers know that if consumers are left to their own devices they will pay more. They’ll go to websites and not get the insurance that’s right for them at a price that’s higher than they need to pay. So carriers are saying we don’t need brokers. But that means people will pay higher prices for insurance – probably without knowing the difference.”

Reps. Mike Rogers and John Barrow have presented a bill to the House of Representatives, H.R.1206, to keep sales commissions out of health carriers’ MLR calculations. But Dr. Jost says it likely won’t help brokers.

“It doesn’t protect the agents and brokers,” he says. “All it does is increase the amount the insurers can keep. It’s up to them whether they spend that income on broker commissions or other costs.”

Commissions aside, Rajiv Sabharwal, chief solution architect in the Healthcare and Life Sciences unit at Infosys Technologies, says an additional problem with the MLA requirements is that they’re too stringent. They’ll require companies to spend their time and efforts on constant oversight of efficiency measures rather than innovation.

Health insurance companies will have two options, he says: “They can either not advance technology or they can have stagnant profits. Either way, people will likely experience substandard care.”

Ted Schwab, a partner in Oliver Wyman’s Health and Life Sciences Practice, concurs. “I think what you’re going to see is these companies becoming bloated,” he says. “The answer [for health insurance companies] is to somehow get bigger because these companies will not be able to deal with the MLR requirements without having the scale to meet the massive bureaucratic challenges the requirements necessitate.”

What will be the result?

“The days of going to small doctors is gone,” he says. “Fewer choices, bigger companies.”

6 comments

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Well that may be the story heard from health care insurance companies, but Medicare operates with administration costs as low as 4%. What is the difference? The difference is bloated management salaries, unnecessary fees, brokers and other middlemen taking money out of the system, and fraud..

That is why the government does a much more efficient job of providing health insurance through Medicare, and Medicare uses price schedules that do not allow obscene price gouging.

We have not even addressed the price gouging by hospitals, clinics and some doctors, as well as equipment and supply providers. As it is now there is no limit on the level of charges, and that allows everyone to take advantage of the system. Private insurance is a fat parasite between doctors and patients. If they refuse to do business better, then they should be replaced. The public is being held hostage and our level of health is far less than most other countries, that spend half as much.

Posted by aligatorhardt | Report as abusive

@ Aligatorhardt, You’re kidding, right?
You actually posted that the government does something with efficiency?
You make general accusations about salaries and fraud. Yes fraud exist. It exist because the government is involved in paying the bills. Anytime their dirty fingers are near a till, corruption is not far behind. Afterall, they have a neverending flow of cash at their disposal. Kick their tails to the curb and watch how fast fraud is choked out.
Salaries are none of your business. Our free enterprise system allows for a person to negotiate a wage. Because one person is more talented at that process than another is no one’s business.
By the way, give some examples of other countries with better healthcare systems. Good luck.

Posted by GARD | Report as abusive

I give you the model of efficiency of government direction … behold Solyndra!

Posted by Byanyothername | Report as abusive

I have owned a small business for 15 years and in that time our health insurance premiums have increase every year. The increases varied from 5% to 17% year over year. This year for the first time our premiums did not increase! When we questioned our insurance agent he explained the the new heath care law requiring a larger percentage of the premium being spent on “real” health care was the reason.

Posted by employer | Report as abusive

@GARD, please, spare the rhetoric and pointing finger.
Back up your argument with facts instead of the “government is evil”. I cant believe there are people who are so eager to be spoon-fed with such nonsense, without some basic fact-checking first.
You do understand what administrative cost is, I presume? Social security offers an admin cost of 1.0% or less for the last 21 years, from 1989. http://www.ssa.gov/oact/STATS/admin.html . How is that account for inefficiency?
If a truly competitive and free market represent absolute efficiency, as technology advance, we should see an increase quality at a decrease in cost (as in more efficient). However healthcare cost have so far increased at a much higher rate than the average salary. People can live without car, computer, or even a house. But not without a doctor. This is essentially the reason of, as @employer said, a year to year increase in premium from 5-17%, much larger than GDP growth.
And a better healthcare system? There are plenty. France for example? Or, even if you refuse to admit it, Cuban healthcare system is great.
Personally I think it is stupid to pay some company 40% of my healthcare cost not actually for my own health but to pay some people for some unknown reason (read: administrative expense). To actually being told that such premium is for my own benefit, is an insult on any person’s intelligence.

Posted by hereiam2005 | Report as abusive

There are great investments out there in Healthcare IT, you just have to find them,, here is one….

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Posted by michaelbass2 | Report as abusive