ANALYSIS: Putting our premiums into medical care, not profits

Introduction

The recent news from the nonpartisan Kaiser Family Foundation that health insurers will have to send rebate checks totaling more than $1.3 billion to Americans this summer was especially gratifying to me. It more than justified my decision three years ago to clue members of Congress in on how insurance companies have systematically been devoting ever-increasing portions of our premium dollars to rewarding their shareholders and top executives.

Following my initial testimony in June 2009, Senator Jay Rockefeller (D-W.Va.) and other lawmakers drafted language for the health care reform bill requiring insurance firms to spend at least 80 percent of what we pay in premiums on actual medical care. Despite an intense lobbying effort by insurers, the language emerged unscathed in the final bill. That defeat for the insurance industry is turning out to be a big win for consumers.

One of the reasons I decided to testify in the first place was to explain why Americans are getting far less value for the premiums they pay than they were a few years earlier. As I told members of the Senate Commerce Committee, which Rockefeller chairs, for-profit insurers are under intense pressure from both shareholders and Wall Street financial analysts to show that the portion of their policyholders’ premiums they used to pay claims during the preceding quarter was less than the amount they paid during the same period a year earlier.

I explained that even profitable companies can see sharp declines in their stock prices within minutes if shareholders and analysts are disappointed in an obscure measure called the medical loss ratio (MLR). The MLR is the ratio between what a company actually spends on medical care and what it has left over to cover sales, marketing, underwriting and other administrative expenses, and, of course, profits. The less a company spends on care, the more is available to reward shareholders. That’s why insurers consider the money they spend on our care to be a loss.

A study by the accounting firm PricewaterHouse Coopers a few years back revealed just how successful insurance firms have been in meeting Wall Street’s demands. PwC found that the average MLR in the insurance industry fell from approximately 95 percent of spending being on medical care in 1993 to around 81 percent being spent on care 15 years later. That translates into a difference of several billion dollars in favor of insurance company shareholders and executives and at the expense of health care providers and their patients.

Part of my job when I worked in the insurance industry was to explain to the media every three months whether my company had met Wall Street’s profit and MLR expectations and if not, why not. I had to know what was influencing the MLR and what the company had done with the money it had received in premiums from individuals and employers. I could predict pretty accurately when I saw preliminary MLR figures what would happen to the company’s share price — and even the share price of competitors — when we disclosed the medical loss ratio to shareholders.

I’ll never forget when Aetna’s stock price fell more than 20 percent on the day it admitted that its first quarter 2006 MLR had increased from 77.9 percent to 79.4 percent. Investors were so alarmed that they began selling shares of other insurers, too, believing that if the MLR was going up at Aetna, it was probably going up at its competitors as well.

As I told Rockefeller and his fellow senators, insurers have engaged in a wide range of questionable practices in their constant quest to meet shareholders’ MLR expectations, from shortchanging doctors and hospitals to dumping policyholders when they get sick.

Rockefeller took the lead in making sure that going forward insurers would have to spend at least 80 percent of what individuals and small businesses pay in premiums — and 85 percent of what large employers pay — to cover their policyholders’ actual health care costs. If they don’t meet those thresholds, they will have to issue rebates.

It is because of Rockefeller’s leadership on this issue that millions of Americans will see something in their mailboxes this summer they otherwise would never have seen — a check from their insurers for overcharging them. Kaiser estimates that policyholders eligible for a rebate will get checks of about $127 on average. And as Rockefeller and Kaiser noted, many other Americans who won’t get a check have benefited. That’s because the MLR provision is serving as an incentive for insurers to seek lower premium increases than they otherwise would.

Chances are that many of the people eligible for a rebate are among those demanding that ObamaCare be repealed or struck down by the Supreme Court. Getting a check in the mail because of ObamaCare might make some of them reconsider.