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.
Mayhew Insurance has a $10 million dollars of annual premiums in the individual market. The minimum allowed MLR is 80%. If Mayhew Insurance sends out $8.35 million in claims plus $150,000 in qualified quality improvement the segment MLR is 85%. We’re most likely profitable for the year and will just tweak pricing to account for trend and provider payment mix changes.
Next year Mayhew Insurance still writes $10 million dollars in premiums. We thought we were going to have eleven high cost catastrophic claims when we priced the product. We only got eight of those claims for the year. We also saw our members use lower cost providers as the reference pricing project that has been the bane of your author’s existence is paying off big time. We sent out $7.5 million in net claims payments and had $200,000 in qualified quality improvement activities. Our initial MLR is 77%. We are now getting hit with the MLR rebate requirement. We need to send refund checks to the policy holders in the amount to get $7.7 million to get our new lower net premium denominator to give us an 80% revised MLR. We’re still profitable. The C-level may decide if they want to keep the same pricing assumptions for next year and pay back the MLR rebates or lower prices for next year and attract more member months.
In the third year, we still get $10 million in initial premiums. We had some bad luck. A hemophiliac got into a knife fight and bled for three months. Mayhew Insurance sends out $11 million in net claim revenue, spends $100,000 on quality improvement efforts and downgrades the executive bonus structure to crack instead of powder. The MLR is 110%. We don’t have to send out rebate checks as we met the minimum required MLR. We are also losing a boatload of money and there are numerous uncomfortable meetings where sociopaths and cynical bastards pitch plans for corrective strategies.
If the pricing is accurate (enough) and the membership projections are solid (enough) MLR comes into play to limit total profits and other cash flows. If the pricing or membership projections blow chunks, MLR is the 97th concern of the insurer as the MLR is significantly above either the profitability point (even with significant cuts and accounting shenanigans) or total revenue.
As a policy matter, MLR is important in low competition regions as that is where social surplus is easily extracted for more hookers and better blow.
gene108
Thanks Richard for the entertaining summary.
Question: For employer based coverage, if insurance companies contract rate payments to providers, are increased payments year after year built into these contracts?
For example, the insurance provider pays $50 for a visit to the family doctor in 2016. Will they pay $55 in 2017 as part of their contract?
What I am trying to wrap my head around are the rate increases our group plan gets, year after year, of a minimum of 5% to 10% per year based on what I am told is “trend”, i.e. it just costs more to pay providers.
It does not fully make sense, if insurers are setting the price.
D58826
Hmmm Richard you may have been right about why Aetna pulled of of Obamacare. It was blackmail to get a merger approved according to Huffington post article.
Robert
@gene108:
Insurers are negotiating the price with a number of players, including individual doctors as well as big hospital chains. Richard has some pretty good stuff about this in the archives. The key is that there is little if any inventive or control for those players to control costs and in US medicine there is often an interventionist mindset that means they want to do something even if that something has little medical value.
Shantanu Saha
The capitalists are pissed off because they can no longer pass their hookers and blow off as a business expense.
But capitalists do not leave money on the table for long. I suspect that Aetna will come back into the market next year after realizing new “synergies” something something…
StringOnAStick
I’ve always suspected that Richard Mayhew was a pseudonym, and this article confirmed that. It warms my heart to see someone on the inside of Big Insurance who is both willing to show us where they are trying to bury the bodies, and has an opinion on the morality of aspects of the business model. Thanks Richard, whoever you really are!
Richard Mayhew
@StringOnAStick: I always thought I was clear that I write under a pen name.
But thank you
Scamp Dog
@Richard Mayhew: For a while, I had the impression that you were a guy named Richard who worked at Mayhew Insurance (there is a company by that name). Then I recall seeing a comment you made about the name coming from the name of a character in a novel. Am I remembering this correctly?
Richard Mayhew
@Scamp Dog: Yep, Neil Gaiman’s Neverwhere —- when I first had the chance to write here, I had just finished re-reading it and the main character, an analyst for a finance company in London had been sucked into a netherworld that no one ever saw, so I decided that was a quirky enough name that I could use.
Raven Onthill
Guy, that was the “more-or-less” part. Yes, sometimes a company can have a bad year. A decently-managed firm, though, will work hard to achieve that 15-20%, and in most years succeed.
It ought to be enough.
Richard Mayhew
@Raven Onthill: that 15% or 20% is no more and often less…that is the distinction I am not seeing in your statement
StringOnAStick
@Richard Mayhew: I pretty much always figured you used a pseudonym, and I’ve always appreciated your inside information. I know more about health insurance than I ever expected to know, and it is all because of your excellent work here. Plus: “hookers and blow” tells me you’ve got nerves of steel to keep letting us see the inside and underside of the industry.
Raven Onthill
@Richard Mayhew: How often does less actually happen? I’ve been assuming that, with a large pool of insureds, companies usually hit the target, but the market is fragmented, so perhaps I’ve got that wrong.
And then, of course, there’s Aetna.
Richard Haggart
I enjoy your informative posts. Would adopting a multi-year average rule for MLR be an effective way to address volatility in insurer margins? For example, allowing a carrier to “bank” excess earnings up to 2x the MLR for any two of the last 5 years? (that’s imply an example not a suggestion of what would be reasonable or optimal)
Richard Mayhew
That could make sense. I think it would require an act of Congress but it would be a sensible tweak in a technical update bill.
bob hertz
you mention a hypothetical hemophilia claim that skewed results. Charles Gaba mentioned a real claim in Iowa that is costing the insurer $1 million a month for some genetic disorder.
I thought that companies would buy some kind of reinsurance for such huge claims. Please explain.
Also, this does show the downside of the ACA regulation that bans annual and lifetime limits. I personally am in favor of such limits, if they are coupled with mandatory assigment. In other words, let the policy have an annual limit of $250,000. When the limit is reached, ban hospitals from sending any bills to the patient.
Also of course place price control on drugs, since in my reading most huge claims involve huge drug costs.