The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

Mandated Medical Loss Ratios’ Unintended Consequence

Posted by Alan on December 15, 2009

The health care reform package currently being negotiated in the Senate contemplates requiring health insurance companies to spend at least 90 percent of premiums on medical claims. But the Congressional Budget Office is warning lawmakers mandating such a high Medical Loss Ratio would be overreaching – unless their goal is to takeover those health insurance carriers. Which, as Megan McArdle notes on The Atlantic’s site, means the 90 percent mandated medical loss ratio would turn “the operations of the nation’s health insurers [into a part of] the financial statements of the United States government.”

Lawmakers could ignore the CBO memo, but are unlikely to do so. The credibility of the CBO is simply too high. This means the chances of a 90 percent medical loss ratio (“MLR”) requirement making it into the final health care reform bill has dropped from “well, maybe” to “not a chance” – or lower.

The CBO memorandum reasons that requiring carriers to meet a 90 percent medical loss ratio could drive carriers out of business, reduce plan offerings and take other actions limiting choice in the marketplace. The key to determining the impact of MLR requirements is to look at the percentage of health insurance carriers impacted by the requirement. “A policy that affected a majority of issuers would be likely to substantially reduce flexibility in terms of the types, prices and number of private sellers of health insurance,” the CBO memo states.

The CBO won’t say precisely when a required medical loss ratio crosses the line and becomes a government takeover of the industry. But it did give a hint, saying an MLR requirement “at 80 percent or lower for the individual and small-group markets or at 85 percent or lower for the large-group market would not cause CBO to consider transactions in those markets as part of the federal budget.”

Moving health insurance transactions isn’t what proponents of a mandated MLR had in mind when the put forward the idea. But unintended consequences are, well, just that: unintended. There are a lot of reasons why mandating medical loss ratios is bad public policy. The CBO has added another to the long list, a reason that even it’s most ardent advocates are unlikely to be able to overcome.


6 Responses to “Mandated Medical Loss Ratios’ Unintended Consequence”

  1. ringwise said

    The MLR requirement would only apply to government mandated health plans. The Congressional Budget Office has put out a memo in which it states that mandated private health plans will be included in the federal budget. This memo gives two conditions that would make the CBO consider private “health insurance an essentially governmental program”.

    Click to access 05-27-HealthInsuranceProposals.pdf

    The two conditions are government mandated health insurance and a specified high “actuarial value”. If the current bill mandates most everyone to have private health insurance and also requires all private insurance plans to have an actuarial value of say 90%, then the CBO will include this private health insurance in the Federal budget.

    “In CBO’s view, a combination of the two—a mandate and tight federal control over how that mandate can be met—is necessary and sufficient to justify recording the affected private-sector transactions in the federal budget.”

    This CBO decision is based on the most basic rule of insurance. In politics, the rule is “follow the money”. In insurance, the rule is “follow the risk”.

    The CBO considers that these two conditions put the Federal Government as the ultimate bearer of risk.

    “In CBO’s view, the budgetary treatment of a public plan would depend critically on who bore the financial risk. If the federal government stood behind the plan financially”, then the private health insurance plan is public.

    The Federal government currently bears the risk of investment banking. Soon it will bear the risk of health insurance.

  2. Al said

    Do the mandated loss ratios and other reforms in both the House and Senate bills apply to all insurance sold in the U.S. or just to the 31+ million new subsidized insured with the exchange?


    • Alan said

      Good question: I believe it would apply to all medical plans sold by a carrier in the United States, regardless of whether it’s sold through the exchange or in the general market.

  3. Allen H. said

    I had a lengthy discussion with a lobbyist on Monday. He insisted that the 90% ratio was a non-starter. At best (or worse, depending on your prospective), it will drop to perhaps 80%, if it stays in there at all.

    • Rick said

      Let’s demand a “Mandated Tax Loss Ratio”.

      I wonder what % of all our taxes paid come back to us in the form of some government service?

  4. Underwriterguy said

    Another point to ponder is what would be considered as “medical” expense in the ratio. I’m sure the politicians intend it to be the dollars paid to providers, but an argument can be made that there can be no dollars paid unless there is a claim adjudication system. Therefore shouldn’t the cost of paying the claim be included? Further, to prevent fraud and unnecessary care, claim investigation and utilization review expenses should be included. Add all this together and you could get pretty close to the desired MLR’s,especially if premium taxes and producer expenses are excluded from premium because they are pass-throughs of dollars not actually revenue to the carrier.

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