Tag Archives: Consumerism

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.

Introducing the transparent cost network

A new article in Insight offers a way to infuse more transparency into healthcare financing. Here is an excerpt:

In no other area of our economy do consumers receive services where they do not know the cost in advance and are not able to make comparisons to alternative suppliers. As a result, healthcare provider costs have remained immune from the economic forces that could control them. This immunity has contributed to greatly increasing provider costs, a major component in today’s rising healthcare costs.

The lack of price information stems from the confidential nature of negotiations between providers and payors. Providers compete with each other trying to get the highest payment from payors, and payors compete with each other trying to set the lowest payments to providers. In hopes of getting the best deal, both providers and payors want their negotiated rates to be kept confidential. Information is kept from the consumer that is necessary to make the best choices and drive an improved market.

A transparent cost network is designed to break down this limitation, giving consumers the price information they need to make informed decisions. Payors that can deliver this valuable product offering to consumers will likely gain market share for this lower-cost product.

The full article is available here.

Consumer attitudes about cost control

A recent consumer study indicates that people think insurers should be the ones to educate on health reform and take responsibility for lowering costs. Why is this? American Medical News weighed this question:

Given that the reform law mainly reforms the insurance market, it’s possible consumers believe insurers are going to be the best reference for what is changing, said Tim Lee, principal and consulting actuary in the Houston office of the consulting firm Milliman. “Nobody in any industry understands it better than people who work in the insurance industry.”

Robert Zirkelbach, spokesman for the health insurance trade group America’s Health Insurance Plans, said insurers have done what they can to help lower the cost of care, including creating disease management programs, providing incentives to take generic drugs and investing in health information technology.

Lee called the survey results about who should reduce costs “a combination of funny and surprising.”

He said there could be a couple of explanations for so many people saying insurers should take responsibility for cutting health care costs: One is that they may remember insurers’ success at cutting costs in the heyday of managed care in the 1990s, and they are willing to see some of those methods return.

Lee said consumers will require a great deal of education to remain open to changes that might keep them from seeing the doctor of their choice or create more hoops for their doctors to jump through.

“Ultimately, it’s going to be up to the doctor, the hospital and the consumer to control the cost,” he said.

But it might be giving the public too much credit to think they are ready for insurers to bring back tightly managed care, Lee said. It’s possible that consumers are considering only their own insurance premiums when it comes to health care costs: “What they may be thinking is, ‘Health care costs are manifested in my premium rate … so clearly the health insurance company must be responsible.’ “

More pharma consumerism?

We’ve seen several interesting examples of healthcare consumerism come out of the prescription drug space in recent years. The Wal-Mart $4 generic program has been well documented and is probably the most prominent example. And now the New England Journal of Medicine has floated a new idea: printing comparative effectiveness information on drug labels. Given concern in certain circles that healthcare reform will install some version of the UK’s National Institute for Health and Clinical Excellence (NICE) in the United States, the union of comparative effectiveness and consumer choice is intriguing for its simplicity.

Where is the return on investment on electronic health records for patients?

Will Fox, Principal and Consulting Actuary at Milliman; Scott Armstrong, Group Health CEO; Joe Scherger, MD, Consulting Medical Director at Lumetra; and John Hammarlund, Regional Administrator for the Centers of Medicare and Medicaid Services, all address this question.


Q: Where is the return on the investment for the patient’s pocketbook resulting from the savings involved in health care information systems and electronic health records? When can patients see some tangible, monetary benefits themselves? We’ve talked about benefits to the providers and so forth, what about the patient?

Will Fox: I think that’s a big key. How often, if ever at this point, are patients told what these things are going to cost? When they get an X-ray for back pain, do they know how much it costs?

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How do we make an investment in healthcare during a recession?

Will electronic health record adoption suffer during the recession? The question was submitted by John Darby. Will Fox, consulting actuary and principal with Milliman, fields the question.

For submitting this question, John Darby is a finalist in our question contest. Congratulations, John.


Q: How is the economic downturn affecting healthcare reform investment?

Will Fox: We are seeing more and more businesses drop insurance, which is creating a bigger burden for those that do still pay for the insurance. Because of cost shifting, the uninsured burden gets passed on to those left in private insurance. Several aspects are squeezing that. Continue reading