On November 22nd, the Department of Health and Human Services issued rules regarding a part of the health reform law known as the medical loss ratio. The new rules require that all insurers must spend at least 80% of the premiums they collect from customers on direct medical care. Currently, some insurers spend as little as 70% of premiums on medical care, such as doctor and hospital bills and quality improvement initiatives with the rest of the money going to overhead such as administrative costs, advertising, and profit. The new rules should help some consumers see decreased insurance costs, though the insurance companies have been lobbying heavily to have as many expenses as possible classified as direct care costs. In the end, though, insurers will not be able to classify running customer service hotlines, executive pay, and other administrative costs as direct care, so they will now have much more of an incentive to spend more money on patient care and less on administration. Some subscribers might actually get a check in the mail as a rebate on their coverage if it turns out the insurer charged too much money.
This will mostly only apply to people who buy insurance individually; people who get insurance through their employer (if their employer is a large business) will likely not see any change or get any rebate, as most group insurers have a medical loss ratio of 85-90% because of improved administrative efficiency and decreased need to advertise to individuals.
Of course, when we look at Medicare our requirement of a medical loss ratio of 80% seems excessively generous; Medicare’s medical loss ratio is 98-99% because their administrative costs are so low. In other words, of the tax money we give to Medicare, only 2% at most goes to overhead. This is one of the arguments made by single payer advocates; by not having to advertise, by having streamlined enrolment, reimbursement, and funding streams, and by not having to profit from providing care or pay executives, Medicare saves lots of money.
This new ruling on the medical loss ratio doesn’t get us anywhere near the efficiencies enjoyed by Medicare, but it’s a good first step.