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The minimum medical loss ratio provision in the healthcare bills will raise healthcare prices.

The pending bills would require for-profit insurers to have medical loss ratios of at least 80% of premium revenues (Senate bill) or 85% (House bill) or rebate premiums to policy holders to achieve those ratios. This is being promoted by the Democrats as a way to rein in spiraling healthcare costs, but there is concern that insurers might evade the limits with accounting tricks and by neutering the necessary regulations. Kaiser Health News has a good summary here. The much more serious problem is that such provisions eliminate the incentive for insurers to grind down provider costs, and insurers are the only institutions in position to do that.

According to the KHN story, health insurers now pay out between 80% and 90% of premium revenues to reimburse providers for services rendered to policy holders—i.e., the "medical loss ratio." The rest of the revenue goes to the costs of running the insurance business (selling, underwriting, claims processing, general administration, executive salaries, rent, etc.) and returns to capital (interest and profit). One of the things an insurer can do now to increase profits, is to renegotiate its deals with healthcare providers to lower reimbursement rates, while keeping premiums the same; reduced reimbursements go straight to the insurer's bottom line. However, if the insurer's medical loss ratio is at the legal minimum, grinding provider prices would reduce the insurer's profits because its revenues would be reduced by rebates to policy holders. On the other hand, if the insurer in this legal situation eliminated costs of negotiating reimbursement rates, those cost savings would go to the bottom line.

It's possible that a law will set the minimum medical loss ratio so low that it won't affect insurance company behavior at all, but if the law does affect behavior it will be in the opposite direction from what healthcare consumers want. Naturally, some version of this law will pass because rising healthcare prices are wanted by everybody who can afford a Washington lobbyist. The healthcare system is broken, and so is the political system.

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Reader Comments (1)

I agree if raising premiums was an option this tactic could be a problem. However, with strict oversight of insurers allowed to enter the exchange, raising premiums in this fashion will not be permitted. I do believe that this could result in a number of insurers leaving the market, limiting competition. This I fear will hinder innovation.

January 9, 2012 | Unregistered Commenterashelhofy

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