Forcing health insurers to do what’s right

Introduction

The first time I blew the whistle on health insurance companies was during a Senate Commerce Committee hearing in June 2009. Last Wednesday, almost five years later, I appeared before that committee again to give a progress report on how Americans have been benefiting since Congress enacted reforms in 2010 that changed the way insurance companies operate.

Among the practices I brought to the panel’s attention back in 2009 were those insurers engaged in to meet the profit expectations of shareholders and Wall Street financial analysts.

I explained that one of the ways insurers kept Wall Street happy was to spend as small a percentage of our premium dollars as possible on actual medical care.

I told them that analysts and investors pay close attention to an obscure mathematical equation called the medical loss ratio (MLR for short), which measures the percentage of premium revenue insurers pay out in claims.

“I saw an insurer’s stock price fall 20 percent in a single day after executives disclosed that the company had to spend a slightly higher percentage of premiums on medical claims during the previous three months than it did during the same period a year earlier,” I testified back then. “The smoking gun was the company’s first-quarter medical loss ratio, which had increased to 79.4 percent from 77.9 percent a year earlier.”

The chairman of the committee, Sen. Jay Rockefeller, (D-W.Va.), then decided to explore the issue further. After examining years of reports filed by insurance companies, the committee found that, as Rockefeller said Wednesday, “many of the policies health insurance companies were selling to families and businesses were just not a good value” because of their low medical loss ratios.

At Rockefeller’s insistence, the Affordable Care Act included a provision that requires insurance companies to spend at least 80 percent of our premiums on medical care and no more than 20 percent on overhead, including executive salaries and profits. That single provision — which went into effect in 2011 — has saved consumers billions of dollars in just two years.

As I explained to the committee last Wednesday, consumers benefit from the minimum MLR requirement in two significant ways. First, insurers are now operating more cost-efficiently to stay in compliance with the law. As a result, many policyholders are paying lower premiums than they would have been charged otherwise. Second, if an insurer fails to comply and spends less than 80 percent on medical care — or 85 percent in the large group market — it has to issue rebates to its policyholders.

Individuals and families who are can’t get coverage through an employer have seen the greatest benefit. According to the Kaiser Family Foundation, the average MLR in the individual market increased from 78 percent in 2010 to 83 percent in 2012. Researchers at the Foundation estimated that had it not been for the MLR requirements in the ACA, premiums in the individual market would have been $856 million higher in 2011 and $1.9 billion higher in 2012.

During my two decades in the insurance industry, my colleagues and I never tired of saying that steps needed to be taken to remove costs from the U.S. health care system. Although the industry spent considerable time and resources lobbying against the MLR requirements — and later to try to shape the regulations pertaining to the requirements — the 80/20 rule, as it is often called, has done what the industry said was needed. During the first two years that the rule has been in effect, according to a report published earlier this month by the Commonwealth Fund, at least $3 billion in costs were removed from our health care system, and American consumers were the beneficiary.

Approximately half of those savings were in the form of rebates: $1.1 billion in 2011 and $513 million in 2012. Insurers sent out fewer rebate checks in 2012 than in 2011 because most of them quickly implemented the changes necessary to stay in compliance with the law.

Among those changes: reduced overhead. The Commonwealth Fund’s researchers calculated that $1.75 billion in overhead was eliminated during the first two years alone. Most of those savings came in 2012 as health insurers continued to reduce their administrative and sales costs, such as brokers’ fees, without increasing their profit margins.

The MLR requirements ensure that consumers can now have greater confidence in knowing that most of what they pay in premiums will be used to pay for medical care or improve the quality of that care. The requirements have had a positive impact on the pocketbooks of millions of consumers, and will continue to help ensure that Americans can realize fuller value of their health insurance payments.