A big selling point for the Affordable Care Act was corralling health insurance companies to spend less on salaries and dividends and more on actual health care services. This shift to corporate management was to occur because of the imposition of the Medical Loss Ratio (MLR) rules which mandated that health insurance companies spend between 80% – 85% of premium dollars received on health care for members or quality improvements. 2011 was the first full year that the MLR was in effect and insurance companies not only met the ratios, for the most part, they succeed in cutting administrative costs and boosting profits.
A report prepared for the Commonwealth Fund entitled Insurers’ Responses to Regulation of Medical Loss Ratios (download report here -> [download id=”35″]) showed that even though consumers received over $1 billion in rebates from insurance plans that did not meet the MLR rules, health insurance companies managed to increase profits in certain segments of their business. The three segments that make up the bulk of health insurers’ business are individual and family plans (IFP), small groups less than 50 employees (SM), and large groups of 51+ employees (LG). A significant difference between the IFP segment and the SM, LG segment is that insurers can deny coverage to people with pre-existing conditions, limiting the risk of expensive medical treatment.
Individual and Family Plans
From the data that was analyzed, the IFP segment had the most internal changes on the insurer side. Even as enrollment in IFP grew in 2011, the insurers managed to cut $560 million from their operating expenses and profits. Some insurers didn’t cut enough because they had to rebate $394 million to individual policy holders because they failed to spend at 80% of revenue on health care and improvements. Overall, the efforts of the insurers enabled the MLR in the IFP segment to increase 3.3% up to an average of 84.1%.
Money on the table
Since the mandate is for the IFP is to spend 80%, the increase to 84.1% will be looked upon by some insurance managers as having left money on the table. But since 2011 was the first year that the MLR was in effect, most of the insurers probably cut a little deeper than they needed or wanted not knowing how the numbers would turn out. Look for the IFP segment to get back on track spending more on administrative costs and profits as they learn how to dial in the numbers. The bulls eye is 80% and that’s were they want to be. Of course, all this goes out the window in 2014 when they must accept everyone that applies, regardless of pre-existing conditions.
For decades, small and large groups have always been guarantee issue. In other words, no one is refused coverage regardless of condition. SM and LG plans have also been saddled with the mandates to cover more services than IFP such as maternity. In short, many of the SM and LG were already meeting many of the regulations of the ACA before 2011. The MLR for SG and LG is 85% of premium dollars returned in healthcare services and improvements.
Cutting costs feeds profits
While SG and LG plans cut costs, and some had to pay rebates, both segments saw a rise in profits between 2010 and 2011: SG increased by $225 million, LG increased by $959 million. The decrease in their administrative costs (SG of -$190 million and -$785 million) just fed into boosting their profits. The cost cutting efforts increased the SG MLR to 83.6% and 89.2% in the LG. It has always been difficult for the SG market to meet an 85% MLR because of the nature of the small groups which have fewer healthier people to spread the cost across. But even after paying out rebates, the SG market made money.
All segments, IFP, SG and LG, were preparing for increased costs as the ACA mandated preventive office visits, such as yearly physical, be covered at no cost. My belief is that even though every insured member represents the cost of the preventive office visit, very few people actually took advantage of the free service. Plan members in the SG and LG segments probably changed their healthcare interactions the least because so little really changed for these folks under the new ACA rules.
They will survive
After one year of MLR, the insurers are still in business and profitable. The initial response from insurers to meeting the MLR underscores how flexible these companies can be to altering their business practices to meet government regulations. This first year of MLR data suggests that the health insurance companies are healthy and up to the test for full implementation of the ACA in 2014.