The Obamacare provision that terrifies insurers

July 18, 2013

President Obama is set to speak this morning about how the health-care law is cutting premiums for millions of Americans. His remarks will focus on a small Affordable Care Act provision known to health wonks as the "medical loss ratio." Rolls right off the tongue, right?

(Flickr)
(Flickr)

Maybe not. But the medical loss ratio (described as the "80/20 rule" by the White House) is arguably one of the most effective tools the White House has to hold down premium costs. And it's the provision that the White House is homing in on, in arguing that the health-care law will make health care cheaper for American families.

The medical loss ratio is a term that comes from the health insurance industry. It's literally meant to describe how much money insurance plans lose by providing medical care to their subscribers. A low medical loss ratio is great for health plan investors: If a plan spends less on medical care, like doctor visits and surgeries, that leaves more space for profits.

Of course, there's a limit on how low a health plan could go with their medical loss ratio, or MLR in health wonk parlance. A health plan that put 10 percent of subscribers' premiums toward medical care, stashing away the rest, would most likely have trouble convincing people that its a great product.

Up through 2010, there was a lot of variation in health plan MLRs. Some states regulated the issue; others let insurers decide. In the individual market, some health plans would spend as little as 60 percent on medical costs.

Enter the Affordable Care Act. The federal law, starting in 2011, began requiring all plans to spend at least 80 percent of subscriber premium dollars on medical care and related "quality improvement activities" (more on that bit in a moment). That leaves 20 percent of premiums for the health plan to cover administrative costs and return to investors in profits.

Health insurance plans launched an aggressive lobbying push after the health law passed, to squeeze as much of their spending as possible into the 80 percent. There were hours-long meetings of state insurance regulators, who were tasked with deciding what counted as a medical cost or "quality improvement activity" on the subject. They huddled in hotel conference room, debating whether anything from a nurses' hotline to a program to reduce errors counts as "quality improvement."

For health plans, these regulations were incredibly important. Anything that didn't count as a medical cost would need to fall into the 20 percent of the premium that could be spent on administration and profit. It was common at these regulatory meetings to bump into Wall Street analysts, trying to get even the faintest sense of where state regulators would land on these issues.

Final rules did include nurses' hotlines and quality reporting programs as part of the 80 percent. Programs to detect fraud, however, didn't make the cut. Those are part of the 20 percent that will count as administrative costs.

When health insurers' don't meet these standards, they are required to send a rebate check to their subscribers, making up the difference. And that's what President Obama is talking about today, the 8.5 million U.S. families receiving rebate checks from their health insurance plans this summer. That's a decrease from the 12.1 million families who received rebates last summer.

The health law has a number of tools aimed at reducing the cost of health care. There is the direct competition in the marketplaces, which the White House expects will drive down premiums. There are experiments to reimburse doctors based on the value of the care they provide rather than the volume.

It's hard to know, though, how well those will work: The research on competition and health prices is incredibly mixed. Moving into a value-based health system is incredibly hard.

The medical loss ratio, in that context, is relatively easy: It's a firm requirement for insurers to spend more on medical care and less on administrative cost. It should be no surprise, then, that this is the provision that terrifies insurers.

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Neil Irwin | July 18, 2013