Friday, May 25, 2018

No, Your Insurer Doesn't Care if You Have High Claims. In Fact, They Like It That Way

And PPACA Cemented That Perverse Motive 

Under the Medical Loss Ratio (MLR) price control mechanism in the Patient Protection and Affordable Care Act (PPACA), health insurers in the large group market are required to spend at least 85 percent of premium revenue (80 percent for small groups and individuals) on reimbursements for clinical services and claim activity.  If they do not meet that standard on a state-by-state basis, the insurer must pay a rebate back to policyholders.  Stated alternatively, insurers are only allowed to charge 15 percent more than the actual claims of a group.

This well intentioned attempt to rein-in the exorbitant premium escalation of the last twenty years has not worked.  In fact, it's done more harm than good.  It is yet another example of how no good deed goes unpunished.  Giant government programs seeking to regulate massive businesses (or be complicit with them, frankly it doesn't matter either way) always result in economic perversions distorting the market and harming consumers.  As a result of the PPACA MLR mandate, carriers have strategically reduced spending on fraud detection, research and development, customer service training and improved systems.  Large group insurers now have 15 percent to pay their rent, keep the lights on, and pay brokers and personnel.  There is very little economic incentive to do anything more.

Kudos to the folks over at ProPublica for breaking down exactly how this hurts the insured:
Turns out, insurers don’t have to decrease spending to make money. They just have to accurately predict how much the people they insure will cost. That way they can set premiums to cover those costs — adding about 20 percent to for their administration and profit. If they’re right, they make money. If they’re wrong, they lose money. But, they aren’t too worried if they guess wrong. They can usually cover losses by raising rates the following year. 
Frank suspects he got dinged for costing Aetna too much with his surgery. The company raised the rates on his small group policy — the plan just includes him and his partner — by 18.75 percent the following year. 
The Affordable Care Act kept profit margins in check by requiring companies to use at least 80 percent of the premiums for medical care. That’s good in theory but it actually contributes to rising health care costs. If the insurance company has accurately built high costs into the premium, it can make more money. 
Here’s how: Let’s say administrative expenses eat up about 17 percent of each premium dollar and around 3 percent is profit. Making a 3 percent profit is better if the company spends more. 
It’s like if a mom told her son he could have 3 percent of a bowl of ice cream. A clever child would say, “Make it a bigger bowl.” 
Wonks call this a “perverse incentive.” 
“These insurers and providers have a symbiotic relationship,” said Wendell Potter, who left a career as a public relations executive in the insurance industry to become an author and patient advocate. “There’s not a great deal of incentive on the part of any players to bring the costs down.”
The full story is absolutely worth your time to read, here.

The MLR provision is also why no broker should be seeking to sell new business with an unscrupulous "we'll cut out commission and work for a fee" pitch.  That approach may work in the first year if you make the arrangement with the carrier and client after an initial renewal was already released.  However, the client will ultimately end up paying twice for that broker: once when the insurer re-underwrites the group with a 15 percent margin on top of claims and again when the employer has to pay its "fee" to the broker.

As we first wrote about over three years ago in Beware of Brokers Offering to Cut Commissions or Work for a Fee Under Health Reform, until the MLR rules are overturned or amended, brokers should not be working on fee agreements in the age of PPACA.  To do so simply results in client overcharges.  And any broker assurance that they can and will ensure such underwriting doesn't occur belies that they don't understand just how powerful, convoluted and nefarious the oligopoly's profit motive can be.  If they can hide the ball they will.  And they will do so with a tremendous level of complex minutia.  Employers are going to pay 15 percent more than claims in the underwriting process.  That 15 percent includes broker commission: so don't fall for the allure of "cutting out the commission" and paying the broker a fee.  To do so will ultimately result in double compensation as insured pays a fee to the broker and commission to the carrier.