Legislating Medical Loss Ratio Leads to Unintended Consequences

Many healthcare advocates are suggesting that placing restrictions on health insurers' medical loss ratio (MLR) would save millions in healthcare costs—money that could be better spent expanding health coverage and reducing premiums. At least 15 states have implemented MLR laws so far and others are exploring the idea.

In California, one of the more outspoken groups on the topic is the California Medical Association, which says "healthcare administration costs are one of the biggest challenges physicians and patients face." California Gov. Arnold Schwarzenegger vetoed a bill that would have set an 85% MLR on all health plans last year. The law would have been the strictest in the nation.

I wrote about the push in many states to place a floor on how much health insurers pay on direct medical care in the April edition of HealthLeaders magazine. On the surface, increasing direct medical care payments and limiting health insurers' profits and administration costs sounds like a sensible idea. Why should health insurance executives get to pocket profits or pad their reserves? Shouldn't that money go to medical care?

Well, it's not that simple.

I dislike the million-dollar salaries paid to health insurance executives just as much as the next guy, but I question whether an MLR regulation would actually affect executive pay.

While it's true that non-medical care dollars could go to padding bonuses, administration funds also cover care coordination, disease management, health information technology, and customer service. Alan Katz, blogger and past president of the California Association of Health Underwriters and National Association of Health Underwriters in Los Angeles, told me that health insurers would cut those programs if MLR restrictions were implemented in California.

Many states with MLR laws have sliding limits depending on the type of plan. For instance, individual health plans, which have more customer service, marketing, and member outreach than large group plans, have lower MLR limits than the large groups.

The differences in health plans go well beyond individual vs. large group plans too. There are smaller group plans, PPOs vs. HMOs, and non-profits vs. for-profits. Each of these types of plans are unique and may have trouble competing at the same MLR levels.

There is also the issue about reserves. If health insurers were limited on what they could put into reserves because of MLR limitations, they wouldn't be able to properly prepare for an economic downturn. For this year, that would have meant healthcare premium increases even more than 6%. Restricting MLR would also force health insurers to drop more expensive plans, such as small groups and individual plans, which would result in more uninsured.

As with most legislation and changes, there are always unintended consequences and that is surely the case with MLR restrictions. Creating sliding MLR restrictions depending on health plan type would create a fairer system than a blanket MLR, but supporters of these restrictions must also realize that creating these limitations will not bring huge savings and improve care.

Most healthcare executives who completed the 2009 HealthLeaders Media Industry Survey understand that health plan administration costs are a factor, but not the factor in rising health costs. When asked to rank the top driver of healthcare costs, government laws and mandates finished number one with health plan overhead ranking a distant fourth.

The only way to enjoy huge savings and improve patient care is by tackling direct medical costs. Health plans have been largely unsuccessful in that endeavor, but medical care is where most healthcare costs come from and is also the place for the most possible savings.

MLR restrictions are an easy target, but they don't tackle the real causes behind rising healthcare costs.