Health Plans: How Much Is Enough?

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As more states consider requirements for payers' expenditures on direct medical care, many insurers reject the idea that the medical loss ratio equals a plan's quality.

Unintended consequences are often the ying to a new policy's beneficial yang. This is evident in many pieces of healthcare legislation, such as Medicare Advantage's higher spending or the added costs of Massachusetts' healthcare reforms.

Health insurers say another case in point is medical loss ratio provisions, which are in at least 15 states and were attempted in California last year. MLR laws require insurers to comply with a specific medical loss ratio level, meaning they have to spend a certain percentage of their revenues on direct medical care. A California bill vetoed by Gov. Arnold Schwarzenegger last year included an 85% medical loss ratio for health plans, which would have forced insurers to spend at least that level of their revenues on medical care. The law would have been the strictest MLR rule in the country; in fact, the only state that is remotely close is Minnesota, which has requirements that are between 68% and 82% depending upon plan type.

Reducing the middle man
The California Medical Association, which backs the MLR requirement, has been outspoken about the need to limit health plan profit and maximizing direct medical care dollars.

David Ford, associate director of medical and regulatory policy at the California Medical Association, says "overburdensome" healthcare administration costs are one of the biggest challenges physicians and patients face. This "proliferation of the middle man" creates billions annually on health plan administration and profit, he says.

"What we're really hoping to do is squeeze the dollars out of administration and squeeze the dollars out of profits [and put that money into direct medical care]," says Ford.

Ford says California's seven largest health plans have lost members since 2002, but have seen their profits rise from $726 million in 2002 to $4.3 billion in 2007.

Countering CMA's claims, health insurance leaders say MLR requirements do not improve medical care or reduce costs. MLR is not a fair way to gauge a plan's quality, says Elizabeth Hall, vice president of public policy at health insurer WellPoint.

"Medical loss ratios are metrics that bear little relationship to the quality of a health insurance product and should not be used by consumers as an indicator of value or access to care," she says. In fact, states that have implemented MLR limits have not seen their costs decrease, and healthcare costs are similar to the states without the requirement, according to a California HealthCare Foundation issue brief from November 2008.

Administration definition
Before policymakers can even tackle the issue of MLR, they have to first consider: What is an administration cost?

Administration costs are nonmedical care programs that can include disease management, care coordination, health information technology, and customer service. Limiting MLR would force health insurers to cut those types of services and improvements, according to Alan Katz, blogger and past president of the California Association of Health Underwriters and National Association of Health Underwriters in Los Angeles. The right MLR level depends on the plan type: individual/small group vs. large group, PPOs vs. HMOs, and for-profits vs. nonprofits. If policymakers create MLR limits, health insurers say they need to take into account the plan differences. Keeping a PPO to an 85% MLR, for example, is easier than individual or small group plans that require greater marketing and customer services.

Unintended consequences
Katz says limiting MLR can have disastrous effects—especially in difficult economic times. If California had the 85% MLR over the past year, health insurers would have needed to increase premiums by a larger margin, lay off employees, and drop costly plans, creating more uninsured. Instead, insurers were able to use their reserves to offset the sputtering economy, says Katz.

Rather than focus on health insurance administration costs, Katz suggests tackling quality medical care and reducing inefficiencies. Any attempt to legislate MLR is "misdirected reform" and will fail because it ignores the real cost driver, he says.

"I personally believe that reformers should be spending their attention on how do we get rid of waste and misspending in the medical system . . . [and] get everyone focused on the value of care delivered," says Katz.

Les Masterson

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