Mandated Medical Loss Ratios’ Unintended Consequence

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.

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Unintended Consequences: A Looming Example

The law of unintended consequences is like gravity: it’s pervasive and unavoidable. Take ERISA. It was passed for the right reasons: to protect the health and pension benefits of American workers. Over the years, however, it has resulted in some unintended consequences which makes it difficult for states to experiment with certain health care reform models. For California, this may lead to a situation that has dire consequences for among the most in need  of help — lower income workers.

First some background: ERISA preempts some state laws relating to pensions and health benefit plans in part to enable national companies to have uniform programs in place across their entire workforce. As a result, when Maryland tried to enact a “pure” pay-or-play plan, one which would only have impacted WalMart, it was overturned in 2006 by the Fourth Circuit Court of Appeals on ERISA grounds. Just this year a federal district court in New York used similar reasoning to turn down a Sulfolk County ordinance.( For those wanting to learn more about ERISA and its impact on state health care reform, a good place to start is on the California Healthcare Foundation’s health care reform site.)

In part because of ERISA, the Governor’s current proposal pretty much leaves the group marketplace alone. For example, it does not (and under ERISA, probably could not) impose a minimum benefit package on health plans provided by employers.

Then things get complicated. The Administration wants to create a pool to provide low- and middle-income families (those with incomes up to about $50,000 for a family of four) with subsidized coverage. ERISA, however, requires a firewall to isolate the pool from the group group marketplace. Another provision of the plan (again, inspired in large part by ERISA) results in workers offered coverage under an employer plan ineligible for state subsidies.

Taken together the result will be that some low-income employees will be offered health care coverage by their companies requiring higher cost sharing than they would pay if they could participate in the purchasing pool. But being offered work-based coverage makes them ineligible to participate. It’s a Catch 22. It’s unintended, but it’s a consequence.

There are ways to mitigate this harm. For example, employers could be permitted and encouraged to pay more of the premium for lower-wage workers than for those earning more. To the extent existing laws or regulations hinder this approach in the small group market, changes to those obstacles should be made. Every creative solution to help help those who find themselves trapped by this dynamic should be explored.

Regardless of whatever mitigation emerges, however, this unfortunate situation highlights the reality of any legislation. The Governor’s proposal, with some modification, would benefit millions of Californians. Some, however, would fall through the unintended fissures every law creates. Yes, every law. This particular problem confronts the Governor’s efforts. Those with more far reaching solutions should not be smug however. Whenever anyone says their solution solves every problem, that it’s cost free yet delivers more, they’re simply ignoring the law of unintended consequences. As a wise man once said, we rarely solve problems, we just replace them with new ones.