Sherrod Brown is 100% wrong about the benefits of fixing the "medical loss ratio".

[grantcart]

Senator Brown made the case that the resulting bill would still be a "strong" bill.

http://www.msnbc.msn.com/id/21134540/vp/34420876#34423117

His main point is that the bill would eliminate barriers for coverage, which would be critical to many families like mine own that have not been able to access health care for 10 years.

However his main point is that it would include "85-90% medical loss ratio".

This sounds like a good deal as it is the percent that insurance companies will have to pay out on claims but it isn't.

For one thing its starting out at "85 or 90%" and will end up at 80 or 82%. Moreover it does nothing to control prices. In fact it would creat an incentive to increase prices for the Health Insurance Industry. The higher the price the greater gross margin.

Moreover I simply don't trust the insurance companies. If it was 85% they would be hiding and misallocating costs, this is very easy to do by simply shifting indirect costs to direct costs. For example auto dealerships use an "absorption factor" to shift overhead from new car sales that are not profitable to their service area.

As a management consultant we shifted costs from an indirect basis to a direct basis with ease. For example if a manufacturer had an agreement with a major retailer that would fix the gross overhead and use an "open book" system then it was in the clients interest to shift as much cost from an indirect basis to a direct basis, significantly lowering the gross overhead but increasing direct costs.

Senators like Brown may be very smart but they are about to be roasted on the medical loss ratio ceiling.

The real answer is a public option that, like medicare, operates on a real 97% medical loss ratio and let the private companies compete with that.

Quite frankly a majority of Americans would probably buy a private plan that was only 7% more, but that is not what is going to happen. A well run public option will be a good 20% cheaper than a private plan with the same basic coverage.

Getting rid of the Public Option in exchange for expanding Medicare to 55 year olds was an interesting option (over half of the health care dollars in the US are spent on 55 year olds or higher). It isn't a better solution, but if you were going to reduce the public option to a token plan, it is a plausible alternative.

Getting rid of the expanded Medicare for an agreement on "medical loss ratio" would be absolute folly.

Is it possible that those that are deciding this can be so ignorant of how costing can be manipulated?

If this is what the conference report is going to offer then it must be defeated.

Without a Public Option or a Medicare buy in with subsidies this plan will be a mandate with no cost controls. The Insurance companies will outmanouver the bureacracy at every point.

[Tom Rinaldo]

1. Thank you for spelling out the details

I knew in my gut that any proposal to force the private industry to cap administrative costs at 15% of policy premium dollors was merely an accountant full employment act. The odds of that working as intended are about the same as those for getting a federal tax code without loopholes that favor the wealthy and well connected.

[grantcart]

2. I can give you an example

They might currently cost out the price of a plan administrator answering a call at $30 for a 15 minute call.

By simply re allocating more and more costs that are now considered "overhead" to a direct basis that call might now be priced at $ 65 for the same 15 minute calls.

This is the kind of thing that lobbyists are particularly well equipped to win at. With thousands of lobbyists free to argue every little point they can easily overwhelm bureacrats and wear them down splitting hairs over and over again.

[Eric J in MN]

7. If they're required to put 90% of their premiums into care,

...then wouldn't paying an administrator more for a phone call make it more difficult for them to achieve that percentage?

[grantcart]

10. not if it is counted as part of care.

It may not have been the best example but the point is that each of those decisions on what can or cannot be called a direct care cost will now be decided by a bureacracy that is beseiged by lobbyists splitting hairs and moving everything possible into the "care" category.

[Eric J in MN]

13. I think that the concept is that 90% of premiums is the amount they have to pay claims with.

If I'm wrong and they can count anything as care, then the 90% is meaningless.

[grantcart]

14. they can count anything that the bureacracy allows

and the bureacracy will be under seige to shift every possible cost back.


Moreover, even if the 90% were achieved nothing would be done about controlling costs.

Nothing

In fact Health insurance companies would be under pressure to increase costs in order to increase profits. Every experimental treatment that was refused before will now be allowed. The more that they spend then the more they can justify higher premiums.

[grantcart]

3. ...

[Tom Rinaldo]

4. Me too n/t

[cliffordu]

12. ...

Me three

[tkmorris]

5. Nice analysis

You make an excellent point in that a fixed loss ratio will give insurance companies an incentive to raise rates, and there is no structure in any bill I have heard of to limit that.

[Tom Rinaldo]

6. grantcart won't ask so I will.. This OP needs one more "R"

This is a discussion that has been getting overlooked regarding the proposed HCR legislation.

[TreasonousBastard]

8. Ummmm, as possibly the only one on this board who is experienced in...

dealing with loss ratios, I would agree that requiring a specific loss ratio is stupid, but for different reasons.

For one thing, it's not that easy to manipulate your loss ratio. Insurance companies have been looking since forever for a magic bullet, and there just isn't one. Playing with reserves has been tried, but is already illegal in most places. Expenses can only be manipulated to a limited extent before you get into trouble with the taxman or your stockholders.

Some companies had been happily writing major line insurance at a 100-110% loss ratio to play with the money, but there's not that much return any more and that depended on a fairly long tail on paid claims. Health insurance is not property or casualty insurance and has no such long periods between claims.

Other companies wrote at an underwriting loss to live on the override commission they got from reinsurers-- they got at least 7% and maybe another commission for placing more reinsurance and if they did it right the reinsurers paid all the claims. Probably impossible for health insurers.

Acquisition costs, like agency commissions, basic underwriting and setup costs of new accounts and maintenance of older accounts, costs money. I don't know what commissions health insurers pay, but we paid 10% in the lines I worked with, with incentives and other stuff adding to the costs.

Essentially, setting specific p&e numbers just isn't a good idea unless you're a regulated utility. However, insurers are used to to state regulation of the premium rates in many lines, although there are problems with that, too.

[grantcart]

9. Thank you for your response

My experience in dealing with shifting costs (and there are legitimate reasons to move costs from an indirect to direct basis) is not in the insurance field so your input is very useful.

You say that it is "not easy to manipulate your loss ratio" without getting in trouble with the taxman or shareholders.

1) In this scenario they won't get in trouble with the taxman because after the omnibus legislation is passed then they have literally an army of lobbyists who will bombard the regulating agencies to codify each and every move. They will ply the legislators with contributions and incrementally the government regulators will end up adhereing to every little classification that the HI wants.

2) Its an interesting point about the shareholders. Not really germaine to the point in the OP but I was listening to one Republican who was reading on statistics on net profits from Health Insurers and his point was that HIC had among the lowest percentage of net profit in industry. Given the huge bonuses that the CEOs are getting at these firms it would appear that, if the Republicans' statistics were true, that the HIC were cheating their shareholders as well as their customers.


Your penultimate line is the money line:

Essentially, setting specific p&e numbers just isn't a good idea unless you're a regulated utility.


Of course if your going to be a regulated industry it would be more efficacious simply to have a public option. Regulating a single item like electricity but trying to regulate and industry with hundreds of thousands of procedures would be a nightmare.

Finally if we accept that the p & e numbers are true and that the loss ratios are valid it still does nothing about price, in fact creating a huge incentive for costs to go up so that private companies can increase their profitability.



Given your experience you should adress your own OP explaining why accepting loss ratios would not be an acceptable alternative to either the public option or medicare buy in.

[TreasonousBastard]

16. When I say it's tough to manipulate the loss ratio...

I mean it's very tough. You can't chisel on the checks you pay out, just on the reserves you set up. Regardless of legendary lobbying efforts, state regulators have been on top of fooling around with reserves and it's just bad business to play such games. Far too many insurers have been liquidated for not properly reserving claims.

Yes, investment income can be played with and costs can be thrown around there to goose the expenses one way or another, but insurers don't have heavy capital or operating outlays in inventory or plant, so you can't play with depreciation or cost shift R&D, marketing, and other such things.

Unless things have changed recently, even major companies like Hartford and Aetna have to seperately incorporate and file in each state and can't easily shift profits and losses from state to state. The holding company will reflect the aggregate P&L but each state stands on its own.

It's brought up on a regular basis, but still ignored, that Medicare's low expense ratio is illusory. It's not that low when you consider it pays no taxes, has virtually no enrollment or collection costs, and shares services with other government agencies. Private insurers can get under 5% expense ratios on some major accounts where there are a lot of employees and little individual underwriting. There just aren't that many of those, though, so overall expenses are boosted by the costs of maintaining all those small accounts. The other thing no one wants to talk about is the amount spent by private insurers on fighting fraud and reducing the prices they pay. Medicare just does what Congress orders it to and writes the checks without checking for much.

CEO salaries are a strawman everyone like to shoot at, but ultimately mean little. I agree most of them are obscenely overpaid, but the money is a drop in the bucket. It's fun to say that the pay of UHC's top management could pay for the healthcare of X number of families, but that's just not how it works in the real world.

[cliffordu]

11. Thanks for the amazing insight.

I had the feeling that they were turning from inattention to criminal negligence but I had no idea.

Wouldn't something like this allow the Congress to "See it work SOOOOO well that we think that all of Medicare should be handled this way, too..." ??


Vote them all out.

[grantcart]

15. kick your ass again

[kenny blankenship]

17. Yep. Halliburton's Iraq War scams were all based on "cost plus ten" pricing

that wasn't progressive either.