The facts are that just about every expert in the industry has stated that the recent health care reform package will significant drive premiums upward. There are several driving factors, mandated benefits, new compliance mandates, taxes, guarantee issue, and many others.
However the one force that will unintentionally drive premiums upward is the so called mandatory loss ratio or mandatory medical spending requirement. The mandatory loss ratio regulation is complicated but briefly it mandates that insurance have somewhere around an 85% loss ratio. On its face sounds like a good idea to limit the profits that insurance companies make, however, look further. If an insurance company is currently operating with an 80% loss ratio and therefore 20% goes toward administration cost (workers’ salaries, systems, administration, profit to shareholders) then simply passing regulation that mandates an 85% loss ratio will not necessarily make these administration cost go away or reduce them. Unless of course the insurance companies drastically change their services or become incredibly more efficient. I propose that instead that the affect of the new law will have an unintended consequence to clear the way to drive premiums upward by approximately 33% over the next few years.
Why? Consider that if every $1 in insurance premiums 80 cents goes toward medical care and 20 cents toward administration cost. With the new law insurers will be mandated to spend 85 cents on medical expenses for every $1 in insurance premium. This will drive insurance companies to increase premiums to $1.33 so that the mandated 15% will produce enough revenue to cover their original 20 cents of administrative costs. ( $1.33 x 15% = 20 cents). Remember that 20 cents was our original administrative costs but our total premium had to increase to $1.33 to accommodate the new law. Winners: The insurance industry maintains their revenue to cover their administration and profit, the medical providers receive an enormous windfall from a 41% increase in medical spending (changed from 80 cents to $1.13 to accommodate the mandated spending requirement). Losers: Employers and employees by much higher insurance premiums, and self-pay individuals paying much higher prices due to the economic pressures for an increase in demand for higher priced medical services.
Will it work exactly the way I describe above? No of course not. But is it one additional perverse governmental pressure that will send medical spending and premiums in the wrong direction? YES! You want someone in the market place driving medical spending downward. Someone that is trying to hold spending increases down. To date, the only significant force doing this has been the insurance companies, albeit, not very well. But like paying medical providers for units of medical care, where we just get more units of care, not better health outcomes, mandating spending limits of 85% is a bad idea.
Like paying for units of care, mandating upward medical spending limits will only drive medical costs and health care premiums higher.