The Medical Loss Ratio (MLR) is a simple ratio. It is the sum of money spent on claims by an insurance company plus the sum of money spent on a few quality improvement and medical management programs divided by the sum of money collected as premiums. Under Obamacare, large groups are required to have an MLR of at least 85%. Small groups and individual policies as a pool have to have an MLR of at least 80%. If the MLR is below these thresholds, the insurance companies must send rebates. The MLR is calculated over the course of a year as January tends to have lower claims pay-outs than November because more people are still paying deductible in January than November.
Before Obamacare, there was no national MLR requirement. Insurance companies could pay out as much or as little as they could get away with. States could regulate MLRs and the regulated MLRs were often 50% to 80% of premium dollars had to go to actually pay claims.
In several cases where BusinessWeek was able to obtain benefits ratios from colleges or universities, the percentage was well below 70%.
At Palm Beach Community College, the benefits ratio for the spring semester of 2008 was 42.6%, according to reports provided to the school by UnitedHealthcare.
In previous semesters the benefits ratios dipped as low as 10.2% and 13.8%. This means the college’s plan has been a veritable gold mine for UnitedHealthcare. At the University of South Florida in Tampa, which offers a plan from American Fidelity Assurance, the ratio this academic year is 35%, down from 71% and 61% the previous two years, respectively.
So what is the change?
The requirement under Obamacare is that health insurance companies must actually spend a very large proportion of their premium dollars on actually paying claims for healthcare. No state had stricter requirements for MLR than Obamacare. This is a consumer protection piece. Junk insurance and more importantly half decent benefit packages that are overpriced is no longer practical to sell.
As a practical matter, most of the integrated payer-providers, co-ops and larger non-profits tended to be close to regulated MLR levels in 2012. The big difference has been moving the for-profits pay-out rates much higher. It is changing the business model from looking for reasons post-facto to deny claims towards better medical management and efficiency as there is no longer an ability for a company to spend 30% of revenues on bureaucrats looking to say no.
Let’s take an example. Let’s imagine that Mayhew Insurance is in the large group market. There are 40,000 members in the large group market and we charge an average of $500 per member per month (all numbers are hypothetical and used only for illustration and easy math). That means Mayhew Insurance collects $20 million in premiums per month. Pre-PPACA, we might only pay, on average $15 million dollars in claims per month. That would be an MLR of 75%. 25% of the premiums would go to interest expenses, profit, salaries, rent, hookers and blow. Quite a few people have jobs where their mission is to say no for comparatively specious reasons.
Under PPACA, for the same premium pool, we either have to pay out $17 million or more in claims per month, reduce premiums to $17.65 million dollars per month or still collect $20 million in premiums but send out $2.35 million dollars in MLR rebates per month. It is cheaper to increase the pay-out than send out rebates. Mayhew Insurance can move some of the specious No’s to quality improvement and medical management roles, but the plan to have a gold-plated fountain in the lobby has been reconsidered.