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.
I thought the perverse effect on insurer behavior would be obvious to all once I mentioned it. Apparently that's not true. So here are two examples of how the numbers work.
Assume a base case in which there is no legal minimum medical loss ratio and that Insurer's premium revenues are 100, medical losses are 80, operating expenses are 12, and profits are 8.
Now assume an 80% minimum medical loss ratio is imposed and that Insurer's medical losses decline from 80 to 75. In order to bring its medical loss ratio up to 80%, it will have to reduce its premium revenues to 93.75 by rebating 6.25 to policy holders. In this case, 93.75 premium revenue less 75 in medical losses less 12 in operating expenses leaves a profit of only 6.75, down 15.625% from 8 in the base case. The shareholders will frown.
On the other hand, if Insurer increases medical loss payments to just 82 and it can maintain a medical loss ratio of 80% by raising premiums to 102.5, its base case profit of 8 will soar 31.25% to 10.5 and that will make Insurer's shareholders very happy.
In the first mainstream media acknowldgement I've seen that the perverse incentive of the minimum medical loss ratio is actually causing higher health insurance premiums, the Los Angeles Times says this editorially:
The fundamental problem with the current system, though, is that insurers and healthcare providers have a shared incentive to raise premiums. Providers want insurers to pay more to offset stingy Medicare and Medicaid reimbursements. And the new federal caps on overhead mean that the easiest way for insurers to increase revenue is to promise more to doctors and hospitals, which would justify proportionally higher administrative expenses and profits.