By Ronald E. Bachman
Under the table, over the top and in need of bipartisan repeal is a little-understood mandate in the new federal health care law called the Minimum Loss Ratio (MLR). Rejected by vote in the Senate Finance Committee version of health reform, this competition-crushing mandate crept into the new law when a new Senate bill was developed bypassing the normal process.
The recent regulations on the mandate from the Department of Health & Human Services follow recommendations made by the National Association of Insurance Commissioners. The association relied heavily on a technical study by Milliman, a nationally recognized actuarial company. Unfortunately, the association’s recommendations ignored the most important aspects of the Milliman study that would have recognized the uniqueness of Consumer-Driven Health Care (CDHC) plans.
The Minimum Loss Ratio is an attempt to maximize the portion of insurance premiums paid for medical care. The calculation, made on a state-by-state basis, is used to determine if a rebate is required to enrollees from insurers as a partial refund of premiums.
A rebate is generated if insurance provider payments fall below 85 percent (80 percent for plans covering small businesses and individuals) of premiums. Viewed another way, rebates are generated if plan expenses exceed 15 percent of the premium (20 percent for plans covering small businesses and individuals). The mandate is an attempt to control premiums by limiting administrative expenses and minimizing risk premiums (profit). However, it also will inhibit the growth of competition from new companies and investments in new products and services.
Every plan has fixed administrative costs (computer systems, property rent/lease/mortgage, utilities, customer service, etc.). These costs are incurred regardless of whether the insurance company sells higher-premium Preferred Provider Organization (PPO) plans, lower-premium Consumer-Driven Health Care plans, or a mix of plans.
With CDHC and higher-deductible plans, insurers must process claims submitted to account for deductible accumulations. With more volatile claims experience, CDHC plans and high-deductible plans have higher risk charges.
There are two reasons for CDHC volatility:
- Selection bias. Individuals with chronic poor health and/or known diseases tend to seek high-premium plans with low deductibles. Healthier individuals tend to choose higher-deductible plans.
- Accidental claims. Higher-deductible plans are designed to provide protection against large claims, many of which are the result of unexpected illnesses (e.g. cancer, heart disease) or accidental injuries. Unexpected claims have a greater degree of volatility and cost uncertainty.
Because of this, CDHC plan expenses are a higher percentage of premiums than other plans. The regulations acknowledge this with an adjustment factor to recognize higher-deductible plan designs. Contrary to the Milliman study, however, the new Minimum Loss Ratio regulations zero out the higher-deductible adjustment on plans sold by insurers with more than 75,000 members.
This has several unintended consequences:
1. The mandate encourages consolidation over increased competition. Only large national companies have sufficient revenue to spread their fixed costs.
2. The legislation particularly discriminates against plans sold to younger people. The new federal law requires that purchasers under age 30 cannot be charged less than 33 percent of those at older ages; traditional pricing would allow young adults to be charged only 20 percent of that.
3. The new federal law requires insurers to establish a “single risk pool,” without allowing lower renewal premiums for plans that encourage lower claims through behavior change and increased personal responsibility. All plans in the pool must have similar or equal renewal rate increases.
4. An employer can avoid the Minimum Loss Ratio mandates, single risk pool pricing, price restrictions by age and other factors by implementing a self-insured arrangement. This avoids the laws added insurance taxes and has the advantages of holding reserves, eliminating state premium taxes and avoiding state mandates.
5. National carriers are likely to aggressively promote self-insurance, while carriers will shift to providing more profitable services such as enrollment, billing and claims processing.
For consumers, the mandate could mean limited choices in plans and access to brokers, higher premiums, purchasing separately services that were previously covered by insurance. There may be a movement to eliminate out-of-network benefits, while some carriers have already announced the elimination of commissions for groups above 100 lives. Consumers may see access to physicians limited because the mandate encourages a move to capitation arrangements with providers.
Unless the mandate is changed, the unintended consequences will be a reduced ability to find affordable Consumer-Driven Health Care options. Rather than fix the flaws, it would be a good-faith move by the federal government to grant a two-year waiver to all states while congressional bipartisanship is given a chance to make rational changes and make the Minimum Loss Ratio requirement one of the aspects of ObamaCare to repeal.
Ronald E. Bachman FSA, MAAA, is President and CEO of Healthcare Visions, Inc. and a Senior Fellow at the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. He is also a Senior Fellow at the Center for Health Transformation, the Wye River Group on Health and the National Center for Policy Analysis. Nothing written here is to be construed as necessarily reflecting the views of the Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.
© Georgia Public Policy Foundation (February 11, 2011). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.
By Ronald E. Bachman
Under the table, over the top and in need of bipartisan repeal is a little-understood mandate in the new federal health care law called the Minimum Loss Ratio (MLR). Rejected by vote in the Senate Finance Committee version of health reform, this competition-crushing mandate crept into the new law when a new Senate bill was developed bypassing the normal process.
The recent regulations on the mandate from the Department of Health & Human Services follow recommendations made by the National Association of Insurance Commissioners. The association relied heavily on a technical study by Milliman, a nationally recognized actuarial company. Unfortunately, the association’s recommendations ignored the most important aspects of the Milliman study that would have recognized the uniqueness of Consumer-Driven Health Care (CDHC) plans.
The Minimum Loss Ratio is an attempt to maximize the portion of insurance premiums paid for medical care. The calculation, made on a state-by-state basis, is used to determine if a rebate is required to enrollees from insurers as a partial refund of premiums.
A rebate is generated if insurance provider payments fall below 85 percent (80 percent for plans covering small businesses and individuals) of premiums. Viewed another way, rebates are generated if plan expenses exceed 15 percent of the premium (20 percent for plans covering small businesses and individuals). The mandate is an attempt to control premiums by limiting administrative expenses and minimizing risk premiums (profit). However, it also will inhibit the growth of competition from new companies and investments in new products and services.
Every plan has fixed administrative costs (computer systems, property rent/lease/mortgage, utilities, customer service, etc.). These costs are incurred regardless of whether the insurance company sells higher-premium Preferred Provider Organization (PPO) plans, lower-premium Consumer-Driven Health Care plans, or a mix of plans.
With CDHC and higher-deductible plans, insurers must process claims submitted to account for deductible accumulations. With more volatile claims experience, CDHC plans and high-deductible plans have higher risk charges.
There are two reasons for CDHC volatility:
- Selection bias. Individuals with chronic poor health and/or known diseases tend to seek high-premium plans with low deductibles. Healthier individuals tend to choose higher-deductible plans.
- Accidental claims. Higher-deductible plans are designed to provide protection against large claims, many of which are the result of unexpected illnesses (e.g. cancer, heart disease) or accidental injuries. Unexpected claims have a greater degree of volatility and cost uncertainty.
Because of this, CDHC plan expenses are a higher percentage of premiums than other plans. The regulations acknowledge this with an adjustment factor to recognize higher-deductible plan designs. Contrary to the Milliman study, however, the new Minimum Loss Ratio regulations zero out the higher-deductible adjustment on plans sold by insurers with more than 75,000 members.
This has several unintended consequences:
1. The mandate encourages consolidation over increased competition. Only large national companies have sufficient revenue to spread their fixed costs.
2. The legislation particularly discriminates against plans sold to younger people. The new federal law requires that purchasers under age 30 cannot be charged less than 33 percent of those at older ages; traditional pricing would allow young adults to be charged only 20 percent of that.
3. The new federal law requires insurers to establish a “single risk pool,” without allowing lower renewal premiums for plans that encourage lower claims through behavior change and increased personal responsibility. All plans in the pool must have similar or equal renewal rate increases.
4. An employer can avoid the Minimum Loss Ratio mandates, single risk pool pricing, price restrictions by age and other factors by implementing a self-insured arrangement. This avoids the laws added insurance taxes and has the advantages of holding reserves, eliminating state premium taxes and avoiding state mandates.
5. National carriers are likely to aggressively promote self-insurance, while carriers will shift to providing more profitable services such as enrollment, billing and claims processing.
For consumers, the mandate could mean limited choices in plans and access to brokers, higher premiums, purchasing separately services that were previously covered by insurance. There may be a movement to eliminate out-of-network benefits, while some carriers have already announced the elimination of commissions for groups above 100 lives. Consumers may see access to physicians limited because the mandate encourages a move to capitation arrangements with providers.
Unless the mandate is changed, the unintended consequences will be a reduced ability to find affordable Consumer-Driven Health Care options. Rather than fix the flaws, it would be a good-faith move by the federal government to grant a two-year waiver to all states while congressional bipartisanship is given a chance to make rational changes and make the Minimum Loss Ratio requirement one of the aspects of ObamaCare to repeal.
Ronald E. Bachman FSA, MAAA, is President and CEO of Healthcare Visions, Inc. and a Senior Fellow at the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. He is also a Senior Fellow at the Center for Health Transformation, the Wye River Group on Health and the National Center for Policy Analysis. Nothing written here is to be construed as necessarily reflecting the views of the Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.
© Georgia Public Policy Foundation (February 11, 2011). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.
