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You are here: Home / Anderson On Health Insurance / Individual Medical Loss Ratios and luck

Individual Medical Loss Ratios and luck

by David Anderson|  November 25, 20136:51 am| 11 Comments

This post is in: Anderson On Health Insurance

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The Medical Loss Ratio is the percentage of total premium revenue that an insurance company spends on medical care (and a few other minor things) for its members.  PPACA requires a large group insurance premium pools to have an MLR of 85% and small group or individual premium pools to have an 80% MLR.  The difference is because there are significant scale differences.  For instance, the things that I do are required for both small and large groups but take the same amount of time, so my costs can be spread over 5,000 people or fifteen.

Most people in most years will never come close to costing the insurance company the full individual medical loss ratio slice.  That is typical because insurance is a guaranteed small loss to avoid a possible large loss.  Most people are reasonably healthy in most years or have frequent but cheap contact with the medical system in the form of PCP visits, physical therapy, perhaps a broken bone that needs nothing more than a cast or a single incident of kidney stones.

With the exception of the years when the Kids were born, my family has never had a personal medical loss ratio above 35%.  And that is a good thing.  That means we’ve been relatively healthy and what ailments have been minor, transitory and acute.

For individuals who have health insurance through their employer, one of the minor changes of PPACA is the addition of box 12-DD to your W-2.  This is an annual report on how much your health insurance premiums cost you and your company in the previous tax year.  The idea is to get people with group sponsored health insurance aware of how much their insurance actually costs.  It is an awareness feature only.

Last year, the value in my box 12-DD was slightly more than $12,000 to cover my family.  Once we apply the systemic medical loss ratio of 85% for large group products, the average insurance company payout for families in my group would be roughly $10,000.

In 2012, we came close to but under that number.  The major expense was an uncomplicated labor and delivery for Kid #2 and the subsequent steady stream of well baby visits.  I had my annual PCP visit and Kid #1 had her well-child visit, a few shots, and a few PCP visits with day care crud.

In 2013 (knocking on wood and throwing salt over my shoulder) we’ll cost the insurance company perhaps 30% of our medical loss pay-in.  This is despite a tweaked ankle with physical therapy, two kids who collect all sorts of interesting daycare crud, regular PCP and ObGyn appointments and plenty of vaccinations for Kid #2.

A typical looking risk pool of 100 contracts might have an actual pay-out matrix like the one below:

Contracts Average MLR Cost Total Cost Group Cost % of Pool
18 1000 18000 0.02
25 2000 50000 0.05
15 3000 45000 0.05
15 5000 75000 0.08
10 7500 75000 0.08
5 10000 50000 0.05
4 15000 60000 0.06
3 25000 75000 0.08
2 50000 100000 0.1
2 125000 250000 0.25
1 200000 200000 0.2

 

Within any single risk pool there should be a residual that is not covering the particular risk pool but is devoted to covering extreme tail risk of the million dollar claim. Group costs follow the Pareto rule where 20% of the people incur about 80% of the pay-outs, and 10% incur about half.

This is the argument for the young invincibles to opt-out.  Odds are they won’t be in a high cost scenario so paying for a high cost scenario won’t benefit most of them, until a young invincible is in an auto accident or has a funny look growth under their arm pit or has a baby with significant post-birth complications.

Everyone else just looks at that chart and say that is insurance working, and hoping that they won’t be a high multiple of MLR user as that would mean they are healthy and lucky

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11Comments

  1. 1.

    Schlemizel

    November 25, 2013 at 7:04 am

    in addition to the usual stuff I have had cataracts in both eyes, a fractured pelvis and throat cancer since the turn of the century. All of that at a relatively young age when most of my cohort is healthy and in the low MLR group. I think a lot of these fine young cannibals will have a shock coming to them should real life pay them a visit. I knew form an early age the perils of healthcare expenses but too many of these kids are stuck in the ‘it can’t happen to me’ camp.

  2. 2.

    WereBear

    November 25, 2013 at 7:15 am

    Statistically a Young Invincible opts out and is making a sensible economic decision. Individually it’s a disaster, and it seems people do get that.

    Besides, family pressure hasn’t been talked about, but has to be there. If Young Invincible, heaven forbid, has a car accident, the entire family’s net worth, if they are lucky enough to have any, is in danger.

  3. 3.

    RSR

    November 25, 2013 at 8:21 am

    Love how the costs of providing the service your product is designed to provide is call ‘loss.’ with all the negative baggage that term carries.

    If I tried to lower my food loss ratio (grocery bill) then my kids might not be getting the healthy meals they need and deserve.

    The ratio should really be called the Medical Expense Ratio or Medical Care Ratio.

  4. 4.

    Kylroy

    November 25, 2013 at 8:57 am

    @RSR: It’s an insurance term, carried over from lines of insurance that are actually *insurance*. And most of those (home, business, life) existed for centuries before health insurance.

    When the event that causes a payout is a fire or hurricane or auto accident instead of a pregnancy, “loss” seems a totally appropriate name.

  5. 5.

    SP

    November 25, 2013 at 9:27 am

    Based on charged amount we’re well over 100% this year, with two kids going to the ER and another being admitted for five days, but the claims summary website makes you go to each individual claim to see the actual amount they paid so it would be some work to figure out the amount they actually paid.
    Some of the differences between charged (ie what I would have been billed without insurance) and what claim was allowed are staggering, even knowing that there’s a huge difference. For example, we had an ER visit for a kid with a large cut on his nose he got at school, no stitches required, just glued the cut closed. We were there for about two hours, mostly because they made us wait until someone could see us. Charged amount: $2609. Insurance allowed amount: $503 (of which $200 was copay). How can they justify claiming it costs $2600 to have a doctor look at a kid’s nose and apply some glue? Then discount that over 80% on a routine basis?
    Another, room and board for the 5 day stay, charged $27800, allowed $14100 (50% discount), $500 of which was copay. (Actually, just based on that, I know for sure that even the discounted rates put us well over 100% MLR.)

  6. 6.

    ericblair

    November 25, 2013 at 9:57 am

    @WereBear:

    Statistically a Young Invincible opts out and is making a sensible economic decision. Individually it’s a disaster, and it seems people do get that.

    Collectively it’s a disaster, too. One of the big problems with libertarian deregulation Utopia is the ability for a random schmuck (or major investment bank, for that matter) to write checks his ass can’t cash. Some dipshit decides to go without car or home or health insurance, and something bad actually happens, said dipshit can involuntarily rack up hundreds of thousands of dollars of expenses that he can’t possibly pay back ever. You need some sort of mandatory system to make sure that the other people and organizations involved are made whole, otherwise the system falls to pieces. You can either make people save up an enormous amount of money in individual emergency accounts, with the attendant economic disaster as vast amounts of cash get pulled out of the economy, or you can use an insurance model to get the same protection without an economic disaster.

  7. 7.

    Avery Greynold

    November 25, 2013 at 11:22 am

    Only insure the loss you can’t afford, but insure those well. My father singlehandedly drove a small health care insurance pool out of business, but preserved my inheritance. On the other hand, by only driving older cars I never buy collision insurance. It is illogical that I also get uninsured motorist coverage, but prevents me carrying a lifelong grudge should someone total my POS car.

  8. 8.

    The Raven on the Hill

    November 25, 2013 at 1:38 pm

    …was Kid #2 born in a hospital?

  9. 9.

    Joel

    November 25, 2013 at 2:40 pm

    Another way to look at this is in the form of auto insurance, where the risk pools are age-reversed (especially since the very old drivers are covered by medicare and excluded from the insurance pool).

  10. 10.

    StringOnAStick

    November 25, 2013 at 2:47 pm

    @SP: SP, the ‘discounting’ you are seeing on those bills is what the hospital Chargemaster rate is compared to what your insurance company negotiated to pay for each service prior to selling you your policy. If you had been uninsured, that full Chargemaster rate would be what you ended up owing, and what the bill collectors will call you about in the middle of the night. Eventually that bad debt is paid for by all of us via higher charges.

    I applaud the fact that the employer cost of health insurance is now shown on everyone’s W-2 form. People who aren’t writing a check each month often don’t realize what their health insurance costs, and I strongly suspect that many don’t know how much cost difference there was between employer provided coverage and individual coverage. My subversive side likes that this tax form box will easily transition into being the spot where we can all look at what our individual contribution is to a national single payer system someday.

  11. 11.

    Pseudonymous Bosch

    November 25, 2013 at 7:15 pm

    I just checked — there’s no box 12-DD on my 2012 W2s. And I did have a very nice plan — CareFirst PPO, providers and pharmacists commented on it when we used it. That said, assuming we were in your neighborhood in cost, we probably made up for a few bucks of others’ shortfalls with a hospitalization (juvenile diabetes in one child;) a continuing Latent Autoimmune Diabetes of Adulthood (a mild/slow variant of adult onset Type I DM,) asthma and a few other issues in the adult household members.

    I would very much like to know what that cost my employer and me so I could compare to the $16.5K price of the platinum CareFirst PPO I found on the exchange. I changed jobs and now have a crappy high deductible HSA plan (from another BCBS entity) and would dump that in a heartbeat for the higher cost plan.

    The informational change requiring box 12-dd is another thing about the ACA I really like (the prohibition on the exclusion of pre-existing conditions from coverage is a particular favorite of mine since my child was diagnosed with T1DM.)

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