Medical-loss ratio requirements a bad idea

Now, don't get me wrong, I'm actually very sympathetic to legislators who are considering rules that would require managed care companies to spend a minimum of premium dollars on care rather than tilting the mix toward administration (and sky-high executive salaries). As you'll see in this week's newsletter issue, about 15 states are considering setting a "floor" on this kind of spending, known by the industry as their medical-loss ratio. (Bear in mind that this reminds us how insurance companies think--that every dollar they spend on care, though paid for by consumers of course, is a "loss"--a difference in thinking that is inevitable, but still unfortunate.)

The thing is, unfortunately, that setting a minimum number of bucks health insurance companies must spend on medical care is likely to create a host of problems--and may actually make things worse.

The first, and most obvious thing to anyone who has, say, paid taxes, is that with MLR requirements in place, health plans will find a million ways to game the system, says Joe Paduda, managing consultant with managed care consulting firm Health Strategy Associates. For one thing, if you require them to prove they've spent X percent of premium dollars on medical care, health plans will quickly begin to reclassify administrative activities such as medical management as care. (Heck, one could argue that they'd more or less have to try and do this to be responsible with their money, particularly if they're public companies.)

Worse, if you tell a health plan that they have to spend a certain amount--and they still want to make a good profit--they're much more likely to reject sick patients for individual and small-group policies, Paduda argues. That would actually make the broader societal problem legislators are trying to solve--access to the right care for all--worse rather than better.

So, are the health plans being unfairly abused by angry legislators? Not really. The truth is, Paduda says, managed care companies have brought this upon themselves. "Health plans don't manage care any more, and they're terrible at controlling costs," says Paduda, who's not gentle on the industry despite having done a stint in it himself.

Rather than focus on dollars spent per se, Paduda recommends that regulators focus on providing incentives for doctors who practice evidence-based medicine and reducing costs for the 5 percent of people who generate 50 percent of insurance costs. - Anne