Despite the title of this Forbes article, the MLR (medical loss ratio) requirement isn’t really a “bomb buried in Obamacare.” The article was written seven months ago, back when HHS finalized the guidelines in terms of what can be counted as medical expenses and what must be counted as admin costs. The MLR rules in the PPACA require that at least 80% of premium dollars (85% for large group carriers) collected must be spent on medical expenses. That means that profits, marketing, overhead expenses, administration, salaries, etc. have to total not more than 20% of the total premium that an insurance company brings in.
In the Forbes piece, Mr. Ungar states:
“… there is absolutely no way for-profit health insurers are gong to be able to learn how to get by and still make a profit while being forced to spend at least 80% of their receipts providing their customers with the coverage for which they paid.”
Except quite a few carriers were already meeting or exceeding these guidelines two years ago, before any MLR rules went into effect. The Kaiser Family Foundation looked at the MLR requirements in the PPACA and then compared them with how health insurance carriers were doing in 2010. The new MLR rules went into effect in January 2011 (nearly a full year before Mr. Ungar’s article was published – his article was just referring to the final determination of what counted as medical expenses and what counted as admin costs). You can see from the chart that 77% of carriers in the large group market and 70% of carriers in the small group market were already spending premium dollars in line with MLR guidelines prior to the rules going into effect. In the small group market things weren’t quite as good (43% of carriers – covering 48% of the population insured by individual health insurance – was meeting the MLR guidelines before they went into effect. Granted, that left quite a few carriers that needed to shape up. Some of them will, and some of them won’t. I have no doubt that we’ll see a few of the under-performing health insurance carriers (with high administrative expenses) leave the market over the next few years. But the high quality carriers – especially the ones that were already meeting the MLR guidelines back in 2010 – will have no problem continuing to spend the vast majority of premium dollars on medical expenses. So the claim that there is “absolutely no way” private health insurance companies are going to be able to “learn how to get by” under the MLR rules is clearly false.
The PPACA allows for states to be granted waivers for the MLR requirement if HHS determines that the 80% MLR requirement could destabilize the individual and/or small group market in the state. So if it appears that a large number of health insurance carriers would have to pack up and leave the state, a waiver can be granted that allows the state to gradually phase in the MLR requirements, reaching the 80% mark in 2014 rather than 2011. 17 states plus Guam have filed requests for waivers (Colorado is not one of them), but most have been denied by HHS because it was determined that enough of the individual and small group carriers would be able to meet the 80% MLR rule (or pay out rebates to insureds) and still remain profitable – ie, they were not likely to leave the market because of the MLR rules.
So basically, yes it is possible for the private health insurance industry to meet the MLR guidelines. Many carriers have been doing so since before the rule went into effect. Does the rule help to trim the fat? Absolutely. And it’s a good way to weed out (or shape up) the inefficient carriers. But for carriers that were already performing well prior to the PPACA, it doesn’t really change things too much.