The CBO Warns Against Driving Health Insurers' Administrative Overhead Too Low


One of the more quixotic amendments to the Senate health care bill has been Jay Rockefeller's insistence that companies get their medical loss ratio to 90% or higher--i.e., spend 10% or less on administrative costs.  I've already outlined why I think this is misguided.  A number of liberals I know think that this was merely an opening bid to secure, say, 85%.  But I doubt it will even go there.  Over the weekend, the CBO released a very strange memo indicating a hitch that I, certainly, was not expecting:  if you drive the MLR higher than 80%, the CBO is going to stick the health insurers on the federal budget:

CBO has identified MLRs in the principal segments of the insurance market above which a significant minority of insurers would be affected; if a minimum MLR were set at or below those levels, CBO would not consider purchases of private health insurance to be part of the federal budget. Compared with MLRs anticipated under current law, MLRs under the PPACA would tend to be similar in the large-group market, slightly higher in the small-group market, and noticeably higher in the individual (nongroup) market--for reasons that are discussed in CBO's November 30 analysis of the effect of Senator Reid's proposal on insurance premiums. Taking those differences into account, CBO has determined that setting minimum MLRs under the PPACA at 80 percent or lower for the individual and small-group markets or at 85 percent or lower for the large- group market would not cause CBO to consider transactions in those markets as part of the federal budget.

A proposal to require health insurers to provide rebates to their enrollees to the extent that their medical loss ratios are less than 90 percent would effectively force insurers to achieve a high medical loss ratio. Combining this requirement with the other provisions of the PPACA would greatly restrict flexibility related to the sale and purchase of health insurance. In CBO's view, this further expansion of the federal government's role in the health insurance market would make such insurance an essentially governmental program, so that all payments related to health insurance policies should be recorded as cash flows in the federal budget.

Needless to say, it is very doubtful that Congress wishes to consolidate the operations of the nation's health insurers on the financial statements of the United States government. Of course, the CBO does not actually have the power to force the Federal government to include the profits and losses of health insurers.  But it does have the power to do its own budget analysis and cost projections with such consolidated statements, which would mean, among other things, that any time you cost the insurers money, the CBO will score that as costing yourself money--i.e. as an expenditure.

In other words, I think the CBO just took away the last shred of Jay Rockefeller's legacy.

Update:  I should note, in passing, that the CBO memo also kind of indicates that these MLRs would, um, pretty much devastate large swathes of the health insurance industry, as well as potentially causing costs to spiral out of control as companies slashed the administrative overhead dedicated to controlling them.  But while this is a fine indictment of the bone-headed "Make it So!" style of progressive governance, it's rather beside the point, since the consolidation is pretty much an amendment-killer.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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