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Medical Loss Ratio: How Did The Healthcare Insurance Industry Do?

Stanley Feld M.D. FACP MACE

The healthcare insurance industry did great with President Obama/Kathleen Sebelius’ new regulation to apply administrative expenses to benefit expenses.

You could never tell reading the disinformation published by the traditional media. The reports were confusing and not informative.

In my last blog I reported that the healthcare insurance industry is trying to influence the regulations for expenses to be counted as benefit expenses for the healthcare industry . The benefit expenses are subtracted from the premium revenue before the 80% medical loss ratio is calculated.

The expenses the industry wanted included are;

  1. The cost of verifying the credentials of doctors in its networks.
  2. The cost of ferreting out fraud such as catching physicians over testing patients or doing unnecessary operations.
  3. The cost of programs that keep people who have diabetes out of emergency rooms.
  4. The sales commissions paid to insurance agents.
  5. Taxes paid on investments.
  6. Taxes paid on premium income.

All these expenses are administrative expenses in my view. These expenses could create a competitive advantage to an individual company. If these expenses are permitted as benefit expenses, resources available for direct medical care would decrease from eighty cents to sixty cents.

Last week Kathryn Sebelius published a fact sheet outlining the details of the new healthcare insurance regulations. The new regulations are clearly to the advantage of the healthcare insurance industry.


President Obama declared;

“Today, many insurance companies spend a substantial portion of consumers’ premium dollars on administrative costs and profits, including executive salaries, overhead, and marketing.  Thanks to the regulations , consumers will receive more value for their premium dollar because insurance companies will be required to spend 80 to 85 percent of premium dollars on medical care and health care quality improvement.   If they don’t, the insurance companies will be required to provide a rebate to their customers starting in 2012.”

We saw previously that WellPoint had a Medical Loss ratio of 83% including the six expenses as benefit expenses.

The National Association of Insurance Commissioners (NAIC) was charged to develop uniform definitions and methodologies for calculating insurance companies’ medical loss ratios. The commission was to consider input from all stakeholders. The healthcare insurance industry made 160 comments. Consumer protection groups made only 30 comments.

These regulation will make the healthcare insurance marketplace to be more transparent and make it easier for consumers to purchase plans that provide better value for their money.

This last statement is fiction according to the details in the fact sheet. The healthcare insurance industry won. There was nothing in the traditional media explaining the significance of the regulations.

I will outline the categories in the new regulations. I will describe the defects in detail in the future. President Obama has made another complicated mistake that will destroy the medical care system.

1. Establishing Greater Transparency and Accountability

This information will provide consumers with meaningful information on how their premium dollars are spent, clearly accounting for how much money goes toward actual medical care and activities to improve health care quality.

Right off the bat, the government has permitted the healthcare insurance industry to count activities it categorizes as improving healthcare quality as a benefit expense decreasing the funds available to direct medical care.

2. Ensuring Americans Receive Value for their Premium Dollar

This is an unsubstantiated statement.

3. Providing Rebates to Consumers

Insurance companies that are not meeting the medical loss ratio standard will be required to provide rebates to their consumers.

This will not happen because the healthcare insurance industry still has a high percentage of overhead as a benefit expense counte toward the medical loss ratio.

4. Insurer Reporting Requirements

Beginning in 2011, insurance companies that issue policies to individuals, small employers, and large employers will have to report the following information in each State it does business:

· Total earned premiums;

· Total reimbursement for clinical services;

· Total spending on activities to improve quality; and

· Total spending on all other non-claims costs excluding federal and State taxes and fees.

Unacceptable expenses are not defined.

5. Activities That Improve Health Care Quality

· Following NAIC recommendations, this regulation specifies a comprehensive set of “quality improving activities” that allows for future innovations and may be counted toward the 80 or 85 percent standard

There it is. The healthcare insurance industry can count bogus profit activity in the benefit expenses counted against premium dollars to be spent for healthcare. This is the place of obscene salaries.

6. Timing of Reporting and Rebates

· The first report, containing calendar year 2011 data, will be due in 2012

· Insurers will be required to make the first round of rebates to consumers by August 2012 based on their 2011 medical loss ratio. 

· Expatriate and mini-med plans that report separately will be required to report data to the Secretary on an accelerated basis.

The delay in reporting provides time for modifications of the regulations to the advantage of the healthcare industry

Treatment of Taxes in the Rebate Calculation

    • The regulation will allow insurers to deduct federal and State taxes that apply to health insurance coverage from an insurer’s premium revenue when calculating its medical loss ratio. 
    • In the case of non-profit plans, assessments they are required to pay in lieu of taxes may be deducted.

The healthcare insurance industry was able to maintain most of its non-value added expenses to its benefit expense column.

The healthcare insurance industry won. Consumers lost and were once more deceived by President Obama.

There were also multiple accommodations made to the healthcare insurance industry in the name of the consumer.

Accommodations to Ensure Continued Access to Coverage by Consumers

Accommodations to Avoid Market Destabilization

President Obama faked us out once again. The press coverage sounded as if the healthcare insurance industry would not be in a position to take advantage of consumers anymore.

I predict consumers will be very upset with the results.


The opinions expressed in the blog “Repairing The Healthcare System” are, mine and mine alone.