One of the many provisions of the Patient Protection and Affordable Care is the requirement for disclosure of the medical loss ratio.

Boring? OK!  Instructive?  Perhaps.

Helpful?  The jury is out.  Efficient policy?  No.

What is Medical Loss Ratio?

What is loss ratio? A medical loss ratio is the percentage of premium income that is paid for medical expenses. It is a quirk of the insurance industry world view that the money that they pay to claimants is called a loss.  But what is insurance?  It’s money you pay to protect you against an unexpected “loss”, death, fire, auto collision, lawsuits, etc.  So claim expenses are loss expenses.  The percentage of claim expenses to premium income is loss ratio.

In the traditional world of indemnity health insurance, defining medical loss ratio was pretty straightforward.  Claim expense was clearly delineated from marketing expenses, underwriting expenses, account management, financial management expenses and other administrative expenses.

But how do you make that distinction in the managed care world?  To take the extreme example, what part of a staff model HMO can be considered medical expense?  Managing the staff of doctors?  Paying the heating bill on medical facilities?  Art work for physician office waiting rooms?

Is there a gold standard Medical Loss Ratio?

The desire for a standardized medical loss ratio is motivated by a need for useful consumer and purchaser information.  But loss ratio is first and foremost an accounting statistic.

It is designed to reflect the financial health of the insurer.  There is a fundamental contradiction in its use by these two stakeholder groups.  Customers are inclined to see more value in a high medical loss ratio while investors favor a lower loss ratio.

What does the Medical Loss Ratio number mean?

Alone, a high medical loss ratio could mean that plan is very efficient, doesn’t make excessive profits, doesn’t have excessive marketing expenses.  It could also mean that they are not doing a very good job of claim adjudication, or medical management, or their underwriting department did not accurately forecast claim expenses – i.e. they are in financial trouble.

A low medical loss ratio could mean the company is making excessive profits and has a bloated bureaucracy.  Or it could mean that they are doing a good job of medical management and managing medical trend.

This is not an academic exercise.  The PPACA has provisions that Plans that do not meet some acceptable medical loss threshold will need to rebate money to its customers.

The definition of Medical Loss Ratio is not crystal clear.

Why else would the Departments of Health & Human Services, Labor, and Treasury issue a joint Request for Information asking for comments on how to define a medical loss ratio?

What are the gray areas? The law states that expenses related to improving quality of care are to be included with the “loss” or claims expense.

That may well mean that a managed care organization can include as claim expenses, expenses for wellness education.  But if an insurer only contracts with firms to provide discounted wellness services to participants, are those related expenses marketing expenses or medical management expense?

Why does Medical Loss Ratio matter?

One of the key talking points during the debate around health care was the relatively high administrative expenses that are paid in the American health care system.

Measuring and reporting those expenses, no matter how much administrative expense is put into the effort to develop a meaningful comparative standard, will do very little to lower total administrative costs.  Not even Alan Katz makes that argument.

Will it reduce the number of provider contracts that a physician office or hospital has to navigate?

Will it reduce the number of benefit design options that patients and doctors have to contend with?

Will it reduce health plan turnover rates – the percentage of enrollees who change Plans because of their own election because the plan sponsor has hired a new vendor?

Tackle the problem directly.

In order to begin to lower administrative costs, plan designs need to be standardized and the number of options reduced.  The  way that CMS regulates Medicare Supplement plans can be a model approach.

To lower administrative costs, provider contracts need to be standardized so that any one physician or hospital receives the same payment without regard to who the insurer or patient is.

To lower administrative costs, plans need to focus less on stealing customers from one another and focus on building a long term relationships with their existing customers.

A single payer health care system could do that.