Consumers, Health Care Reform, and the "Medical-Loss Ratio" - A Key Provision You Should Be Watching Closely
June 28, 2017
While your congressional representatives are back at home this week, take some time to educate yourself about the proposed changes to the Affordable Care Act ("ACA") and think about how these changes might affect your bottom line. One thing to consider is a proposed change to the medical-loss ratio [subscription required] The proposed change would allow states to waive the ACA's medical-loss ratio requirement (which I explain in detail below) for employer-sponsored health care plans. Understanding how the medical-loss ratio works will help you decide whether you think this change is a good idea.
There was a time when we didn't have to concern ourselves with the rules and regulations governing our health care insurance. Most of American workers receive their health care through employer-sponsored plans ("ESP" for short), and we left it to our employers to negotiate the best terms and rates for us. If you were like me, you probably were oblivious to the laws governing your insurance, because your ESP did basically what you needed it to do. Maybe you didn't even know how much your premiums were, because you didn't pay much attention to how much was deducted from your paycheck or how much your employer was kicking in.
But at some point we all had to start paying attention. Health care costs were (and still are) climbing each year, and the increases started getter bigger and bigger. By the early 2000's, the acceleration of costs for medical care and prescription drugs had caused even the most generous of employers to start cutting health care benefits and increasing employee contributions, either through higher premiums deducted from salaries, higher deductibles and out-of-pocket expenses, or a combination of both. And forget about affording individual coverage if you weren't in an ESP. The marketplace for affordable individual coverage all but disappeared.
The Affordable Care Act was passed in 2010, just 7 years ago, but it made major changes in the structure of the plans that health insurance companies sold us. Many of you are familiar with some of provisions that affect a plan's coverage, such as the elimination of lifetime limits on coverage, and the restriction against denying coverage for pre-existing conditions. You may also be familiar with some of the provisions regarding the kind of benefits you receive, such as guaranteeing coverage for minors on their parent's plan through age 26, or eliminating co-pays for preventative care.
One of the most important provisions, however, you have probably never heard of but should: the medical-loss ratio. The ACA requires that health insurers spend a certain amount of the revenues they get from your premium payments providing you with health care. The medical-loss ratio reduces the amount of money that insurers can spend on overhead, administrative costs, and profits. For ESP's, the medical-loss ratio is 85% of your premiums; for individual and small-business plans, it is 80%. If the insurer does not spend that amount for costs associated with actual health care in a given year, they are required to provide you with a refund for the difference. If you have an ESP and are entitled to a rebate, the rebates are paid to your employer. If you have an individual plan and are entitled to a rebate, you get a check directly from your insurer. For example, in 2015, I had a plan through the ACA exchange. In 2016, I received a rebate check from the insurer for about $50 for my 2015 coverage because the insurer had not spent the required minimum amount for my insurance pool on health care costs.
Why is the medical-loss ratio important for consumers to understand? First, this provision is one of the many ways that the ACA seeks to control rising health care costs. Without a cap on administrative costs and profits, insurers have little incentive to take the lead on lowering health care costs overall. As we have seen, insurers stayed profitable before the ACA despite out-of-control cost increases by raising premiums, restricting coverage, reducing benefits, and placing yearly and lifetime caps on total payments, leaving us pre-ACA with expensive policies that didn't cover very much. In the past, the primary way insurers dealt with rising costs was by finding new and creative ways not to pay for the costs incurred, instead of partnering with health care providers to find ways to drive down the costs of providing health care. The medical-loss ratio motivates health care insurers to do two very important things: (1) keep down the costs of administering policies in order to increase profits; and (2) find ways to stem the tide of increasing health care costs. The medical-loss ratio and other provisions of the ACA require insurers to carefully calculate and predict how much they will be paying each year to health care providers to protect their profit margin. The best way to have predictability is to work with health care providers to keep down costs.
Second, by capping administrative costs and profits, the ACA treats health care similar to how other industries in our economy are regulated such as gas, electricity, water, heating oil, and telephone service. In other words, the ACA treats health care as an essential service, and because it is essential, certain regulations are necessary to ensure that it is accessible to all Americans. Because health insurance is still a private, for-profit industry, the only way to ensure access is through governmental regulations meant to control costs.
I am sure that many health insurers would love the opportunity to do away with the medical-loss ratio. After all, for-profit companies want to be able to make as much profit as possible off of their products and services with as little governmental interference as possible. But when your service is essential to the health and well-being of the nation, maybe a rule that provides a reasonable profit but caps costs is necessary, at least until the factors causing our run-away health care costs are addressed and controlled. The other choice is a state-run, "single payor" health care system. Ultimately, the choice is up to you, as a voter and a consumer. Can you afford not to pay attention?