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Yes, They’re Gaming The Medical Loss Ratio

The AP reports the obvious about health insurance companies shifting their costs to reclassify administrative expenses as medical care. They got tipped off by a Senate Commerce Committee report, but they could have read FDL News two weeks ago.

Under the healthcare law passed in March, insurers must adjust their spending habits to meet new requirements. For example, large group plans must spend at least 85 cents of every premium dollar paid to them on actual medical care as opposed to administrative costs, while individual and small group plans must spend 80 cents.

Wall Street closely watches such spending levels, known as medical-loss ratios, or MLRs, as a sign of potential profits. Major health insurance stock indexes fell after the report.

“The insurance industry is beginning to consider the financial impact of the new federally required (medical) loss ratio requirements, including questionable changes in their accounting practices,” the Democratic-led Senate Committee on Commerce, Science and Transportation said in a statement.

For example, WellPoint Inc “has already ‘reclassified’ more than half a billion dollars of administrative expenses as medical expenses,” it said.

The Commerce Committee Report makes for some interesting reading, and surely Jay Rockefeller can hold some oversight hearings, but ultimately the decision on implementation and defining what fits and what does not fit the MLR rests with the Health and Human Services Secretary and the National Association of Insurance Commissioners. Also, the report shows that insurers will have the opportunity to classify virtually anything under MLR:

A crucial issue in the implementation of this provision is clarifying which expenditures insurance companies will be able to consider medical expenses and which expenditures they will have to treat as administrative. While NAIC accounting rules define “medical loss” as the value of medical claims an insurer has actually paid (“incurred claims”), plus the amount of money the insurer sets aside to pay future claims (“contract reserves”), the new law will potentially allow insurers to classify a broader set of expenditures as medical.

Under the new law, insurers will be able to consider expenditures on “activities that improve health care quality” as medical expenses for the purpose of calculating medical loss ratios. For example, if an insurer spends 78% of its small group premiums paying claims and 2% on quality-improving activities, it will have met the law’s 80% minimum medical loss ratio requirement. The law instructs the National Association of Insurance Commissioners, subject to the certification of the Secretary of Health and Human Services, to establish uniform definitions of “activities that improve health care quality” and “non-claims costs.”

There’s just a lot of room for gaming here. And meanwhile, every dollar that can be classified under MLR means that another dollar of profit is protected. Just today we learned that UnitedHealth CEO Stephen Hemsley make $101 million dollars last year, including some stock options.

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David Dayen

David Dayen