Raven Onthill in yesterday’s post made a comment about the Medical Loss Ratio (MLR) regulations that I’ve seen in a couple of places and I think it is an understanding that is wrong and needs to be discussed some more:
more-or-less guaranteed 15+% gross profit isn’t enough to keep insurers in the exchanges?
Capitalism is dead.
For small group and individual market segments, insurers have to spend at least 80% of premium revenue on either claims or qualified quality improvement activities. Large group segments have to see the insurers spend at least 85% of their premium revenue on claims or qualified quality improvement activities. Those levels were set into place by PPACA. Regulation has tied MLR requirements to Medicaid Managed Care, CHIP, and Medicare Advantage as well. There is no explicit regulation about entities spending more than the minimum percentages on claims and quality improvement efforts. There are practical limits as eventually revenue needs to at least equal costs and costs include paying claims, paying me, printing ID cards and procuring fine hookers and great blow for the C-level. The MLR requirement is a floor, not a ceiling.
Insurers have had years where the MLR for their entire book of business or certain segments is above 100%. Those are bad years. Very lean insurers can start turning profits on a blended MLR of 89% to 92% percent across multiple books of business. Average health insurers usually are break even propositions at 83% to 87% MLR.
MLR does not guarantee a profit. It caps profit, administration and hookers and blow to either 15% or 20% of premium revenue.
Let’s take a look at a couple of examples.