There's been news lately about California health insurance carriers sending rebates out to enrollees which is always a feel good moment since the dollars are constantly going the other way with increasing velocity.
These rebates are tied to a part of health reform dealing with the MLR or Medical Loss Ratio. The MLR, aside from getting a few more bucks in public's pocket is important for another reason in that cuts through the rhetoric of what drives health care and more importantly, health insurance costs for Californians. Let's understand the new rule for MLR rebates and then dig a little deeper to the broader impact.
So what is the MLR?
Medical loss ratio reflects the amount of each California health insurance premium dollar that goes directly to health care costs.
For example, out of each dollar, we take out all "overhead" costs such as business expense, marketing, agent commissions, profit, etc. If the the MLR for a given California carrier's individual business is 85%, this means that 85 cents on every dollar is going to doctors, prescriptions, hospitals, etc.
That money is going out the door to health care providers on behalf of the enrolled members. Obviously, the higher the MLR, the better for a carrier's members.
The major California carriers have profit margins between 2-4% so the bulk of what doesn't go out to providers is overhead or administrative cost.
Part of the health reform bill mandated that any amount above a certain MLR (80% for small group and 85% for individual/family) would go back to the enrollees in the form of rebates and some carriers have already started to issue these as they fine tune their expense structure. Although the total amount may be millions for a given carrier, it's also going out to millions of subscribers so any given person or company shouldn't expect a windfall but it does have one effect which we're fans of.
The major carriers (which we quote at www.calhealth.net ) have all hovered around 80-85% anyway for decades now.
There are, however, some questionable carriers that have much lower MLR's (down to the 60's) and this rule should hopefully make them honest or eliminate them from the marketplace. They're bad news. We applaud this effect and over all, the MLR rule should help to make the marketplace more competitive in terms of pricing if only by a small amount.
Let's infer a level deeper from the MLR calculation.
As we mentioned below, the MLR rates have remained remarkably stable with a just a few percentage point migrations over a decade plus. Let's look at a carrier who's MLR is and has been around 80% for a nice round number.
That means the carrier has spent 80 cents on every dollar directly to health care costs and providers over a decade's time.
But wait a minute...
the costs for equivalent plans (since benefits have also gone down significantly) has probably gone up 10 fold in 10 years through a combination of rate increases and benefit decreases. If you've been a California health insurance member during this time, we don't need to bring this to your attention.
It's been a source of much irritation and outcry with every rate increase/benefit decrease notification. What gives? If the carrier's MLR % has remained roughly the same, how are the rates going up so high? We all love a boogeyman but ultimately, the carriers are pass-through entities albeit at differing levels of efficiency.
What this means is simple. If a carrier paid out 85 cents for each $1 of premium 10 years ago on average, for that same person today, it is paying out $8.50 for each $10 of premium.
The key jump is the 85 cents of health care cost compared to $8.50 of health care cost on average. The utilization and cost of health care cost exploded.
We're using more of it and a more expensive per unit clip. There's no other way to view the MLR comparison with total costs. This is rather depressing since not much in the health reform bill addresses this usage and cost issue.
Ultimately, health reform is a health
insurance bill...not a health care bill. We'll
see this as the rates continue to rise going
forward until we get to the root cause of what's
driving costs. Don't hold your breath for
politicians to get there.
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