To save those looking it up: medical loss ratio is the fraction of premiums an insurer spends on actual healthcare expenses. 10% means 90 cents of every dollar paid in premium goes to admin/profit/etc.
I wonder how MLRs interact with subsidies, backroom deals and manufacturer rebates - if an payer can inflate their MLR by double paying for a medication - but then they get a rebate back for half the cost they paid will MLR tracking catch that?
Payers often get incentivized to promote certain drugs via manufacturer kickbacks and I wonder if this system is also used to run around MLR requirements.
So that encourages greater payouts more or less synced with greater premiums in order to increase year over year real profits.
And given that the payouts are very nearly a function of how hard the insurance company can negotiate, they can simply choose to call off the negotiations when they reach their target amount.
Only up to a point, they still accept or recheck claims arbitrarily to get closer to their targets. Worse they have incentives to decrease efficiency by increasing paperwork etc.
Private medical insurance in the US is a horridly inefficient system. Separating the claims process from insurance companies hands might help, but their incentives are never going to line up with consumers.
Not internal paperwork. Think in terms of industry wide collusion not a single insurance company. If lobbing or an industry group can drive up healthcare costs via say paperwork or regulations then every health insurance company is “forced” to raise premiums and as the maximum profit per premium ratio is fixed that also increases the total possible industry wide profit.
Of course insurance companies are also in competition so they have individual incentives to keep premiums cost competitive.
I think even in terms of industry-wide collusion, the push of an MLR cap would be to decrease (money spent on) paperwork.
With R = revenue, P = profit, A = administrative expenses, and M = medical expenses, we have:
R = P + A + M
which we can rearrange a little bit to get
P = R - M - A
From the point of view of an individual company, clearly increasing our own expenses means less profit:
P₂ = R - M - (A + δ) = P - δ
But, as you say, if we force everyone to do likewise the situation is better because we can raise prices to raise revenue:
P₃ = (R + δ) - M - (A + δ) = P
This holds whether or not we have an MLR, but in either case assumes that demand is sufficiently inelastic that we can raise prices enough to make δ more revenue (it won't be a matter of simply raising prices by δ/(number of customers) because some customers may chose to purchase less insurance), and at best it puts is right back where we started.
Does the MLR cap have an impact?
MLR = M / R
MLR₃ = M / (R + δ)
MLR₃ < MLR
By raising our revenues to compensate for the additional expense, we find ourselves with a lower MLR. If we are not near the cap this has no effect; focusing on the other case we are forced to do something to raise the MLR. Where does that come from? Recall our present situation:
P = (R + δ) - M - (A + δ)
We can lower P or A, but our whole question here is whether we can raise P by raising (everyone's) A so doing the former defeats our purpose and the later contradicts our assumption. We are stuck raising M and further raising R (if market conditions allow it). In a sufficiently inelastic market this is possible, but I really don't see the case where we've forced some extra slop that allows us to raise profit.
Of course if I believe that my company is better able to handle the new paperwork than my competitors, that could help - but if the whole industry believes that's the case then most of them are wrong, and in any event I believe this incentive is weakened not strengthened by the MLR cap.
If paperwork keeps new entrants out of the market, that is something current participants can probably agree on, but that's true in any case and I don't see how the MLR cap makes it stronger.
I don't think this analysis changes if we pull executive compensation out of "administrative expenses" and treat it as something we're maximizing in addition to (or instead of) profit.
Don’t forget a regulation that says Profit <= some percentage of Medical Expenses. In effect you have a normal demand curve but company’s can’t raise prices past some limit. Assuming profit maximization occurs below that limit it has no effect. However, insurance is unusually inelastic in part because much of it is subsidized.
So while thinking in terms of total administrative costs seems reasonable there are two different numbers here, administrative costs for the insurance companies and administrative costs for the healthcare industry and that matters.
So again, assuming it’s the regulation not market forces limiting profits increasing Ma directly increases profits. Up to some limit rather than P < (Mm + Ma) * X% it’s P = (Mm + Ma) * X%. Thus creating incentives to increase Ma.
Ah, yes, administrative costs within the medical organizations are presumably paid by passing those costs on to (payers including) insurance companies as "medical costs" and that is presumably counted in the M in the MLR (I could imagine a system that avoids it - at, ironically, the cost of some more paperwork - but I don't expect it's what we do).
It is true that the MLR cap does nothing to motivate insurance companies to avoid increasing hospital paperwork. I don't see that it produces incentive to create it - yes, increasing payments to hospitals increases allowable profit, but in order to make that profit you need sufficient revenues and customers aren't paying because they want hospitals to do paperwork. I'm of a mind that (at the margin) increasing legitimate (or nearly legitimate) medical spending is typically pretty easy so there is no need to find alternative ways of paying hospitals more; if I'm mistaken about that then you raise an important point that probably deserves attention (if it hasn't got it in some way I'm unaware of).
Only to a degree because policies basically always have an upper limit on coverage.
If the payouts are dropping because there's a massive reduction in claims, then there's a pretty decent chance that paying the policy maximum on each claim still won't be enough.
Plus, profits don't come directly from the premiums anyway. They come from the investments the insurer makes with the premiums. So sure, they can try to convince policy holders to increase coverage which allows them to charge a higher premium, or they can work on their loss modeling and investment strategy to better predict their actual loss ratio (which means they can have less money in reserve and more money in investments) or get better returns on the investments. And those 2 are usually a better use of resources since increasing coverage means an individual conversation with each policy holder. That's a lot of human-hours compared to the modeling and investing.
> So sure, they can try to convince policy holders to increase coverage which allows them to charge a higher premium
Or they just stone wall and increase premiums anywhere they can until they hit targets. Like at a previous job I had at a 250 employee company where premiums went up $150/m one year because the previous year had two families had a kid get (very different kinds of) cancer out of the blue. You'd think that shopping around would've helped in that case, but the word got out somehow to the other insurance companies and they were giving us similar quotes.
The power relationship is very very tilted in the insurance company's favor and they can more or less dictate terms.
> Like at a previous job I had at a 250 employee company where premiums went up $150/m one year because the previous year had two families had a kid get (very different kinds of) cancer out of the blue.
It's bad enough that I've heard office gossips complain about other employees leveraging their healthcare turning into higher premiums the year after. Like, as evil as complaining their coworker's kid got cancer.
When employees go through big health events it's hard to keep it under wraps in a work environment... especially in this "race to the bottom" society we happen to live in. You can bang on about privacy all you want, but people talk.
I guess I'm shocked it happened in an office of ~250 as I've always seen it happen at much smaller places.
>It's bad enough that I've heard office gossips complain about other employees leveraging their healthcare turning into higher premiums the year after. Like, as evil as complaining their coworker's kid got cancer.
That is how it would have to work if the employer wants to restrict the risk pool to the company's employees. After all, money has to come from somewhere.
But employers are welcome to participate in healthcare.gov plans where the risk pool is much larger (across the whole state), and where individuals in the company cannot be solely blamed for increases in healthcare costs:
It's bad enough that I've heard office gossips complain about other employees leveraging their healthcare turning into higher premiums the year after. Like, as evil as complaining their coworker's kid got cancer.
>You'd think that shopping around would've helped in that case, but the word got out somehow to the other insurance companies and they were giving us similar quotes.
Employers are welcome to purchase healthcare.gov plans that are not allowed to price based on pre existing conditions:
> Employers are welcome to purchase healthcare.gov plans that are not allowed to price based on pre existing conditions:
Which are stupid expensive for anyone much above the poverty level.
> If an employer wants to self insure and restrict their risk pool to only their employees, then they have to pay for it
A 250 person company wasn't self insuring or restricting their risk pool to only their employees. They wouldn't be negotiating premiums with an insurance company if they were self insuring.
If they were not restricting their risk pool, then how would a couple kids with cancer affect the company's premiums? The costs would be distributed across a much larger population.
When I was shopping around for health insurance for my businesses, the premiums were the same as what they would have been individually on healthcare.gov. Kaiser has a good report showing the costs are not that different based on firm size:
The cost of healthcare is pretty predictable, and spread over a sufficient population converges to the same numbers. Only option I can think of is people were thinking that the employer reduced their portion of healthcare they were subsidizing, and so people thought premiums were going up since the size of the portion they were expected to pay went up? Most people do not really know to look at box 12 code DD of their W-2 to know what is happening with their healthcare insurance premiums.
Because the premiums even for the larger risk pool can be negotiated with the insurance company. And if you suck at negotiating (like our HR), then you can accept at face value the arguments the insurance company makes about how much you're costing them, and how they'll just drop you if you don't accept higher premiums.
And I'm going to guess that your businesses had very, very few employees? To the point of not being worth negotiating with from the insurance company's perspective?
And Kaiser isn't run like most insurance companies.
Kaiser is short for Kaiser Family Foundation, which compiles nice reports about healthcare in the US. Using their reports does not have anything to do with Kaiser the company. Although their insurance side is similar to any other health insurer.
>And I'm going to guess that your businesses had very, very few employees? To the point of not being worth negotiating with from the insurance company's perspective?
Yes, but that was my point about businesses being able to just buy the health insurance plans available on healthcare.gov. Earlier you mentioned the healthcare.gov plans were:
>Which are stupid expensive for anyone much above the poverty level.
But the data does not support that. Average annual employer sponsored insurance is $7,675 for single PPO coverage in 2019:
So employers can probably save money going to the healthcare.gov plans, albeit with higher out of pocket maximums probably. But at least a couple kids with cancer would not throw off the premiums.
The Affordable Care Act (Obamacare) eliminated lifetime coverage limits. There are also limits of the minimum medical loss ratio.
Unlike property and life insurers, medical insurers generate very little income from investments. Premium revenue comes in at about the same rate as claims are paid out. They don't have large reserves to invest. And most large employers are self insured anyway, so the ”insurance" company just acts as a claims administrator.
