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Medical Loss Ratios and Extreme Couponing

Recent articles have been celebratory:  “Millions of consumers and small businesses will receive an estimated $1.3 billion in rebates from their health plans this summer under a provision of the health care law that effectively limits what insurers can charge for administration and profits!” (AP).

A great deal has been written lately about employers receiving rebates from health insurance carriers as a result of the Medical Loss Ratio (MLR) provisions of PPACA (the Patient Protection and Affordable Care Act or “Obamacare”).  Now that PPACA has been upheld by the Supreme Court, MLR is one area of the law that needs to be subjected to greater scrutiny.

If you’re a little fuzzy as to exactly what these MLR provisions are, you’re not alone.  Here is the most succinct explanation I can offer:  Under the MLR provisions, health insurance companies must spend 80% of the premiums received in the individual and small group markets and 85% of premium in the large group market on clinical services and activities that improve quality.  The remainder can be spent on administration, profit and “other” expenses.  (A small group is defined as having up to 100 employees; however, states can set this at 50 until 2016.)

While the phrase “activities that improve quality” is a bit ambiguous, it is now clear that the kinds of programs offered by insurance companies to assist members in accessing quality care and navigating the healthcare system such as case management and disease management are generally considered to be “activities that improve quality” and, as such, are part of the 80% or 85%.  This is certainly a very good thing; however, it’s not sufficient to fix the unintended consequence that the MLR provision will cause insurance companies to scale back on the very programs that are most effective in reducing healthcare claims.

Here’s the best analogy I can come-up with to make this point (granted, it’s not perfect, but it may get you thinking differently about this issue):

Let’s say I hire an entrepreneurial woman (I’ll call her Betty) to do my grocery shopping for me.  The deal is that Betty will charge me 20% of my total grocery bill as her fee.  The first time Betty goes to the store for me, she spends $200 and I gladly pay her $40 fee.  

The next week, Betty comes back and tells me with great excitement that she has become an “extreme coupon user” and this week, for the same groceries she bought last week, she managed to get my bill down to a minuscule $10!  

“Wow!”, I exclaim, “That’s fantastic!  Here’s your $2 fee.”

Now, how motivated will Betty be to spend time reducing my grocery bill next time when all of her hard work on my behalf actually results in significantly less money for her?  Even if I were to pay Betty an extra $5 for the time she spent couponing, she’d still be out $33 for the same work she’d done the week before.  Because Betty has a lot of fixed costs for things like her actual time shopping, gas getting to and from the grocery store, etc., she simply can’t afford to reduce my total bill very much under our current deal.

The MLR calculation represents a similar dilemma for health insurance companies.  Even though their specific quality-improvement activities (those that lead to reduced healthcare claims) will be considered part of the 80%, like my additional $5 contribution to Betty, any reduction in claims below the cost of the quality-improvement activities just doesn’t make financial sense for them.

Now, I told you the analogy isn’t perfect and some will argue that if these quality-improvement activities are successful, the insurance company will need less claims processors and less overhead to administer the healthplans…and they may even grow their marketshare.  Those are valid points.  But the last thirty years of medical management and wellness programs have done little to slow the rapid pace of health insurance cost increases in the US.  And in the end, especially with Americans getting unhealthier by the day, there will always be a significant demand for healthcare so the cost will never approach anything close to $0 and administering health insurance will always be an expensive proposition.

Like Betty, health insurance carriers under MLR aren’t financially motivated to invest in programs that deliver a significant return on investment (ROI).  So, employers and their advisors will need to be far more engaged in:

  1. Ensuring that existing medical management program are performing optimally, and
  2. Helping employees improve their health status.

As a result, specialized resources to oversee and supplement health insurance carrier activities will become increasingly important in the era of MLR.

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