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 …
Revisiting MLRPost + Comments (15)
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.