Why You Should Care About The 'Medical Loss Ratio'

One wonky detail of the Obama health insurance reforms could make a huge differences. Insurers now have to spend a larger percentage of money on actual health care.

Unless you are a health care wonk or a health care industry employee, you likely haven't given a ton of thought to the medical loss ratio. That is, simply stated, the percentage of health insurance company spending that actually goes to pay for the medical care delivered to people.

If you are a health care industry employee, particularly one of the executive variety, you have likely given a lot of thought to the medical loss ratio in the last several years, and especially in the past day. That's because the federal Department of Health and Human Services just issued its final rule on the topic, implementing an aspect of the Obama health care law that played little part in the public debate, but matters tremendously to insurance companies.

Under the new rules, insurers must spend at least 80 percent of the money they take in from insurance premiums (less taxes and fees) toward providing health care to their customers. If they don't spend that percentage, insurers will now be required to send rebates back to the people paying the premiums.

A thorough explanation of the rule and its effects is at Health Affairs. Over at Forbes, Rick Ungar writes that this is the actual "bomb" health insurers were worried about in the otherwise not-all-that-radical Obamacare bill.

Indeed, it is this aspect of the law that represents the true ‘death panel’ found in Obamacare—but not one that is going to lead to the death of American consumers. Rather, the medical loss ratio will, ultimately, lead to the death of large parts of the private, for-profit health insurance industry.

Why? Because there is absolutely no way for-profit health insurers are going to be able to learn how to get by and still make a profit while being forced to spend at least 80 percent of their receipts providing their customers with the coverage for which they paid. If they could, we likely would never have seen the extraordinary efforts made by these companies to avoid paying benefits to their customers at the very moment they need it the most.

Today, that bomb goes off.

Ungar's argument is simple: The insurers require profits they'd never be able to maintain when actually directing such a high percentage of premiums to patient care. But the impending individual mandate puts the force of federal law behind the requirement that every person carry health insurance, and that those who cannot afford it be helped to pay for it.

The ultimate result will be some form of universal, single-payer health coverage, Ungar argues. He says "hallelujah" to that. Something suggests there are others working under the Forbes flag who might not agree.

Insurance brokers are unhappy, The Wall Street Journal points out. That's because the cost of commissions are categorized as administrative costs, not medical losses. That means that when insurers try to cut their costs, the price they're paying on commissions and other overhead will be the place they now — by force of law — must look.