The nugget diary currently on the Rec List asks us to consider that there may be a really important goody in the current health reform compromise that we are neglecting:
there was a possibly huge little nugget in the AP story that would equate to 'real reform' .er.. that has the insurers freaking out much more than the public option ever did.
"The deal reached Tuesday puts even more requirements on insurers by requiring that 90 percent of premium dollars be spent on medical benefits, as opposed to administrative costs, officials said."
While mandating a higher medical loss ratio is probably a good idea, I'd love to believe that this has insurers freaking out. Sadly, in the context of current reform efforts, I don't believe that.
It is not unlikely that insurers will be able to make profits as high, or higher, than they are making now.
Simple arithmetic. Bear with me for a moment. I'll use some round numbers, and keep the arithmetic to a minimum, but it's important to show how this would work.
Let's say MegaCorp Health Insurance Corp currently insures 10 million people. And the average annual premium is $10,000. If they now have a medical loss ratio of 20%, the money available after paying for health care = 20% of (10,000,000 x 10,000) = $20 billion. Let's say, to be generous, that 90% of that $20 billion pays for overhead. That leaves a pure, annual profit of $2 billion -- not out of line with a typical, large health insurance company.
So, what happens if the new law mandates that the medical loss ratio must be increased to 90%? Can MegaCorp maintain the same profit?
No problem. How?
Let's assume a generous, actual increase in medical costs of 6.25%. That means the company's payout is $85 billion rather than $80 billion.
With a mandated medical loss ratio of 90%, they would only allowed to generate $94.44 billion in premium revenue, rather than $100 billion. ($94.44 billion x .9 = $85 billion).
That leaves $9.44 billion compared to $20 billion after medical costs are paid.
If they keep the same profit of $2 billion, that leaves $7.44 billion, compared to $18 billion.
In other words about half of the post-medical care premium money is going away. How do they make that up?
Underwriting costs are going to drop dramatically. Remember, no more pre-existing conditions, no more recission. So, a bunch of underwriters are probably going to lose their jobs. A lot of the cost of gathering denial data is going to go away. (Because this affects all insurance companies equally, nobody loses a competitive edge here.)
And, the payout for medical costs is going to go up more than the actual medical inflation rate. The company is going to have to pay for more care to more people than they did in the past. That means that premium rates are going to have to rise more than they would because of actual inflation, and the 10% left after paying medical costs is going to be 10% of a larger number. Maybe, a much larger number.
The federal government is going to subsidize a lot of the cost of premiums. Guaranteed payment. Less need to advertise. Possibly less bad debt for non-payment of premiums.
Less overhead all around. But NOT lower costs of care. Exactly the opposite.
Many insurance companies are already part of vertically integrated systems that also PROVIDE care. They own hospitals. So, you betcha that hospital charges are going to rise even faster. In these integrated systems, that's simply moving money from one pocket into another. Even better -- many of the delivery arms are non-profit. That makes it even easier to shelter insurance profits from taxes!!!
But hospitals that are not integrated with insurance companies will raise rates, too. Why, even when there will be less need for cost shifting to pay for fewer uninsured? Well, because with increased government subsidies, and no competition, there will be an even greater disconnect between those getting the care and the entities that pay for care. Hospitals will see the possibility of generating greater profit, too. Yes, there will be new efforts at realigning payment incentives to pay more for quality and outcomes and less for volume. But will all the savings be passed on to consumers and taxpayers in the form of lower premiums? In the absence of any real competition, I would not hold my breath.
Remember, most markets are still going to be dominated by one or two well entrenched insurance companies. It is exceedingly unlikely that there will be any real national insurance exchange; the myriad of state insurance regulations on the one hand, and the monopoly markets that already exist on the other, will simply never allow that to happen.
I'm not a finance guy. I'm a doc. So, I'm sure that there's a lot of other creative ways that this is going to be gamed.
Finally, the insurance companies are at the table. It strains credibility to believe that they are going to allow a bill to go forward that will realistically decrease their profits.
Sorry, I'm not buying this, at least not as an effective counter to everything that is being given up.