Strategic implications: Minimum loss ratios (MLR) pose an ongoing challenge for insurers
Continuing with our “Ten strategic considerations of the Supreme Court upholding PPACA” blog series, we weigh in on minimum loss ratio (MLR) requirements.
While the minimum loss ratio requirement—the idea that 80-85 cents of every healthcare dollar should go toward medical care—sounds good, it is out of step with the financial realities many insurers face. Claims do not always move in a predictable way, meaning that medical costs can be volatile. Previously, an insurer’s lower claim cost years could help balance out the higher claim cost years. However, under the MLR rules, insurers need to pay out rebates during lower claim cost years as opposed to building up reserves for higher claim cost years. This dynamic will be amplified if the individual mandate is ineffective and adverse selection ensues.
The MLR rules, as written, also present challenges to high-deductible health plans (HDHPs), because the MLR calculation only includes plan expenses, not patient expenses. These plans give consumers greater skin in the game, thereby encouraging more judicious use of care. Expenses to administer these plans are typically higher as a percentage of premium than they are for richer benefit plans. To the extent that the MLR requirement takes these plans off the table, it could also remove a possible cost-reducing concept from the mix.
The MLR rules challenge smaller insurers, which are more susceptible to the underwriting cycle because they lack the volume to absorb down years or to spread risk across multiple business lines. The MLR rules also do not allow smaller health plans to pool large claims across states, creating a significant issue for small multi-state plans.
Efforts are afoot to tweak the MLR rules and fix these problems, but that doesn’t change the reality that this rule is hard on insurers. The difficulty is exacerbated by new rating rules. Insurers face a low ceiling and a high floor, without much room to stand up.
This Healthcare Reform Briefing Paper discusses how to manage the volatility of the underwriting cycle in light of the MLR rule. Also, we recommend reading Milliman’s Consumer-Driven Impact Study for more on HDHPs.