HEALTH REFORM: Medical Loss Ratio or Just Medical Loss?
(We are refiling this post to make the paragraph about the SEC a little clearer for our readers.)
"The American people and I are asking a serious question and one that deserves a straight answer -- why are health insurance costs going up each year?" Sen. Jay Rockefeller (D-WV) questioned in a letter (part 1 and part 2) to H. Edward Hanway, the CEO of CIGNA, yesterday. "Are they spending it to make people well when they are sick and keep them healthy? Or is the money they charge going to profits, to executive salaries, and to figuring out how to deny care to people when they really need it?"
Sen. Rockefeller explains:
One of the basic financial measures used in the health care industry is the percentage of health insurance premiums that insurers use to provide health care to their customers. This percentage is commonly known as the "medical loss ratio." For example, if an insurer uses 75 cents out of every premium dollar to pays its customers' medical claims, the company has a medical loss ratio of 75 percent. A medical loss ratio of 75 percent indicates that the insurer is using the remaining 25 cents of each premium dollar to pay expenses that do not directly benefit policyholders, such as salaries, administrative costs, advertising, agent commissions, and profits.
(Ezra Klein of the Washington Post notes that the "industry literally has a term for how much money it ‘loses' paying for health care.")
While the health insurance industry says its average medical loss ratio is 87 percent, a new analysis released by the Senate suggests otherwise.
Back in August, Rockefeller wrote to insurance companies, asking them to reveal their medical loss ratios "broken down by state and by the individual, small, and large group market segments." The goal was to be able to provide valuable information to individuals and companies who are shopping around for health insurance policies. Sen. Rockefeller writes that, "Just as a car buyer might use gas mileage to choose one car model over another, medical loss ratios are a tool that can help consumers compare various health insurance options."
The insurance giants argued that medical loss information is "proprietary" and "business sensitive." So Rockefeller asked the Senate Commerce Committee to investigate. The committee concluded, by examining premium and claims data reported to the National Association of Insurance Commissioners, that the medical loss ratio is significantly lower than the industry would have them believe.
Reed Abelson of the New York Times reports that in 2008, the for-profit average medical loss ratio was 84 percent in policies offered to large employers and 80 percent in policies offered to small businesses. In the individual market, there was an average medical loss ratio of 74 percent. Rockefeller specifically accuses CIGNA of breaking the law and inaccurately reporting information to the NAIC -- they had claimed a medical loss ratio of 93 percent.
The Senate analysis shows that the health insurance industry "provided one set of premium-benefit numbers to the public and to Congress, and presented a different one to their investors." The letter says that America's Health Insurance Plans' (AHIP) claim that the industry spends 87 cents of every premium dollar on medical care was part of an "expensive public relations effort." The publicly-traded health insurers' own financial reporting to the Securities and Exchange Commission does not come close to supporting the figure -- see page 7 of the letter to CIGNA for the individual breakdown.
The Commerce Committee revealed that the "largest for-profit insurance companies appear to be squeezing more profits for Wall Street investors by spending a lower percentage of premium dollars on patient care than other insurers." Wendell Potter, a former CIGNA senior executive, in testimony to the Commerce Committee said:
Wall Street investors and analysts look for two key figures: earnings per share and the medical loss ratio...To win the favor of powerful analysts, for-profit insurers must prove that they made more money during the previous quarter than a year earlier and that the portion of the premium going to medical costs is falling. Even very profitable companies can see sharp declines in stock prices moments after admitting they've failed to trim costs. I have seen one insurer's stock price fall 20 percent or more in a single day after executives disclosed that the company had to spend a slightly higher percentage of premiums on medical claims during the quarter than it did during a previous period. The smoking gun was the company's first-quarter medical loss ratio, which had increased from 77.9 percent to 79.4 percent a year later.
Health reform promises to extend coverage to millions more Americans, but as Rockefeller maintains, it is important that these dollars (billions of which will come from new government subsidies for low income and middle income people to get insured) actually go toward paying for medical care. We can debate the best way to lower our health care costs, but making sure that the dollars we do spend on health care actually get spent on taking care of the ill and keeping everyone else healthy is a good place to start.