State rule can’t control health care costs

February 15, 2010

State regulators, including Insurance Commissioner (and gubernatorial candidate) Steve Poizner, are hyping their deal with Anthem Blue Cross to postpone a big planned health insurance rate increase until at least May 1. But the controversy over the rate hike might in the end demonstrate how little power state officials have to control health care inflation. And the tool Poizner is using — the so-called medical loss ratio — is not only weak but might be counter-productive.

The medical loss ratio rule, in California, requires health plans to spend at least 70 percent of every premium dollar on medical care. A similar rule that’s being considered as part of federal health reform would peg the ratio at 85 percent. Many consumer advocates support these measures because they see them as putting more of the premium dollar into care and less into administration, marketing and profits. That may be true, if you police the definitions tightly enough. But it’s not clear that these rules also limit the growth in health care costs.

All that insurers have to do to meet the 70 percent requirement is increase the amount they pay for doctor visits, drugs, hospital stays and lab tests. They still pocket their percentage as profit on those higher costs. In fact, the higher their costs, the higher their profit. If their total costs are $1 billion, they get to keep $300 million for administrative costs and profits. If their costs rise to $1.5 billion, they get to keep $450 million for their own purposes. The more they pay out, in other words, the more they stand to make.

Many policy makers don’t seem to understand this relationship. US Health and Human Services Secretary Kathleen Sebelius said last week that it was “difficult to understand” how premium increases of the size Anthem was proposing can be justified when the firm’s parent company reported a $4.75 billion profit in the last quarter of 2009. But since the higher their costs are, the more they get to keep in profits, it ought to be very easy to understand.

Free-marketers might say the insurers shouldn’t have to justify their rates at all. And in a competitive market, they wouldn’t be free to raise those rates, because competitors would undercut them for the business. But those who support regulation might want to re-examine rules that require insurers to spend a certain amount of their premium on medical care. Those rules may not be accomplishing their desired effect, and could actually be making matters worse. Here is an AP story on the decision.

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5 Responses to State rule can’t control health care costs

  1. jonflash

    February 15, 2010 at 11:38 pm

    Government has already intervened too much in the health care system so as to make true free-market style competition almost impossible.

    If we are really going to bring down costs of health care, we need to figure out how to make the patient the consumer, so that the individual consumers of health care are aware of the costs and are discriminating what services they get and where they get them.

    Under the current system it seems like no one really has an incentive to even figure out the costs.

  2. mweinberg

    February 16, 2010 at 8:58 am

    I agree that there are many ways in which bringing transparency to the healthcare marketplace would be a very good thing, particularly as it relates to measures of high value care.

    However, this is an area in which one should be very careful before making any blanket ideological statements about the power of the market or the government.

    The provision of most medical services, particularly those that drive the vast majority of medical costs, is very much unlike, for example, optional and standardized laser eye surgery . When talking about health costs and how to control them, keep in mind that we are talking, for the most part about care for people like disabled seniors with multiple chronic conditions such as diabetes and congestive heart failure. This is not a situation in which the conditions for market competition are in place, nor for a number of reasons would we want them to be.

    I hope that this new blog, which already has a wealth of thoughtful content, will be a forum for people to engage thoughtfully about these issues.

  3. Frederick Pilot

    February 16, 2010 at 8:15 pm

    This is an excellent story that illustrates the ratchet/pass through effect of rising medical treatment costs. This effect will continue with or without an individual mandate.

    The individual market is facing an unsustainable situation. Passing on rising medical costs to policyholders can only go on for so long before otherwise good medical risks flee unaffordable premiums, shrinking the risk pool through what might be described as adverse deselection. The market may be rapidly nearing a tipping point portending a death spiral.

  4. richard10516

    February 16, 2010 at 10:15 pm

    All the convoluted policy proposals for health care deal with how to finance coverage and not actual costs. I have yet to see anyone explain why I can fly to India and get bypass surgery for about a quarter of what I’d pay in the US, travel costs included. Government health care has already done to medical costs what fannie mae / freddie mac did to real estate prices; price doesn’t matter with no money down.

  5. Pingback: Minimum medical loss ratio, individual mandate won’t corral rising premiums « Health Insurance Crisis

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