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.