Medical Loss Ratio

It’s hard to see the forest for the trees when trying to determine what the heck is going on with health care and health care reform. The most easiest way to figure out what’s happening is to follow the money. When looking at the health insurance industry, all you have to look at what investors look at – the medical loss ratio.

Former insurance industry executive Wendell Potter explained the medical loss ratio to Bill Moyers. “It’s a measure that tells investors or anyone else how much of a premium dollar is used by the insurance company to actually pay medical claims.”

Bank in the early ’90s, Potter said, “Ninety-five cents out of every dollar … was used by the insurance companies to pay claims. Last year, it was down just slightly above 80 percent.”

For every penny an insurance company can trim from it’s medical loss ratio is a penny of profit, but we’re not talking about pennies, we’re talking about millions and millions of dollars. Just last April, Aetna stocks fell 10 percent after reporting strong profits. The problem was Aetna’s medical loss ratio was at 81.7 percent, rather than the 80.2 percent they were hoping for.

The trick to keep the medical loss ratio low, and profits up, is to pay less money in claims.

One way to do that is through a process called rescission. Rescission is when an insurance company rejects a policy because of an error in the application process. One woman testified before Congress that her policy was rejected because she failed to note on her application that she had been treated for acne. She was undergoing breast cancer treatment.

But rescission is just one way to drive down costs and increase profits. Here’s Potter explaining the industry’s tactics to keep the medical loss ratio low.

Rescission is one thing. Denying claims is another. Being, you know, really careful as they review claims, particularly for things like liver transplants, to make sure, from their point of view, that it really is medically necessary and not experimental. That’s one thing. And that was that issue in the Nataline Sarkisyan case.

But another way is to purge employer accounts, that – if a small business has an employee, for example, who suddenly has have a lot of treatment, or is in an accident. And medical bills are piling up, and this employee is filing claims with the insurance company. That’ll be noticed by the insurance company.

And when that business is up for renewal, and it typically is up, once a year, up for renewal, the underwriters will look at that. And they’ll say, “We need to jack up the rates here, because the experience was,” when I say experience, the claim experience, the number of claims filed was more than we anticipated. So we need to jack up the price. Jack up the premiums. Often they’ll do this, knowing that the employer will have no alternative but to leave. And that happens all the time.

The Washington Post ran a brief about the medical loss ratio back in April 2006. According to the story, Aetna’s medical loss ratio “increased last quarter from 74.6 to 79.4, causing a 20 percent plunge in its share price when it was announced.” Perhaps this was the company Potter was referring to when he said to Moyers: “I’ve seen a company stock price fall 20 percent in a single day, when it did not meet Wall Street’s expectations with this medical loss ratio.”

The medical loss ratio, according to the Post story, is the best indicator to investors “of a future turn in the health-insurance industry’s profit cycle.”

So it’s no surprise that insurance industry profits are going up, more people are uninsured and under-insured and the insurance industry really likes the status quo.

And as for government-run health care, such as Medicare, 97 percent of all money goes towards patient care, with only 3 percent for administration costs. Obviously there’s not a profit motive with a government health plan.

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Bill Moyers Journal: Wendell Potter on Profits Before Patients
Washington Post: Medical Loss Ratio
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