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WellPoint Already Planning to Game the Medical Loss Ratio

We’ve been talking about how the insurance industry will try to take every advantage they can get from the new health care regulations, and here’s another one.

If the medical loss ratio, the percentage of premiums that must go toward medical treatment instead of overhead and profit, were closely administered, it could go a long way to providing legitimate insurance. However, the definition of “medical loss” is malleable, especially in the hands of experienced industry number-crunchers who can make just about anything seem like treatment instead of overhead. We’re already seeing WellPoint reclassify their costs to get under the medical loss ratio requirements in the Affordable Care Act.

Consumer Reports is calling for an investigation into WellPoint in light of an electronic message the company sent “to investors describing how it would simply re-label administrative costs as ‘medical care’ in response to the new health reform law.”

In the March 17th message, WellPoint — the nation’s largest insurance company — announced that it has reclassified some of its administrative costs as medical spending in order to increase its medical loss ratio (MLR, a techinical terms which measures how much insurers spend on administrative spending v claims). The ratio is closely monitored by Wall Street investors and the new health reform law “requires that insurers spend at least 80% of customers’ premiums on medical care in the individual insurance market, and 85% in the employer/group market.” Here is how WellPoint put it:

“WellPoint’s (WLP) medical cost ratio should rise and its overhead-expense ratio decline this year as the insurer reclassifies various types of costs. Disease management, medical management and a nurse hotline, for example, ‘are being reclassified because they represent additional benefits provided to our members,’ representative says. They’ll now be part of the medical cost ratio, the percentage of premium revenue used to pay members’ health-care costs. These are claims-related costs incurred to improve member health and medical outcomes, WLP says. Accounting rules allow the changes, which better align MCR with anticipated health reform guidelines, Stifel Nicolaus says.”

If everything’s a benefit, then spending on actual hospitalization goes down, needless to say.

When I asked Al Franken last year about enforcing the medical loss ratio, his staff said that his oversight on the HELP Committee as well as overseeing the implementation stage would help prevent gaming of the system. That’s not really an answer to the question of stopping this re-classification. Sunshine on the process could help rouse the newly powerful HHS Department into action, but insurers basically have a fiduciary duty to hide profits and classify as many normal overhead expenses as “medical loss” as possible. More on possible gaming in the above-linked article and here. You need air-tight rules to counteract this, and you’d be investing a lot of faith in the rulemakers to believe that they will do so.

WellPoint is perhaps the sleaziest insurer of them all, with a lot of their business in the individual and small-group markets. They’re something of an innovator in these accounting games and clever ways to deny benefits. They’ll lead, not follow, in this gaming of the MLR.

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David Dayen

David Dayen