The Medical Loss Ratio


By Joe Campbell
July 14th, 2009

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watch [digg-reddit-me]In most industries, when a customer pays for something – and then asks to get what they paid for – it’s not considered a big deal. It’s the basic transaction that the business engages in. The health insurance industry works differently. You make regular payments so that the insurance company will pay your irregular medical bills and so that they will protect against the possibility that you will be one of the unlucky few who has some serious condition which requires extensive medical treatment. Most people aren’t – and so they just give over money regularly and receive very little in return. But a few people end up needing serious medical care. That’s the purpose of insurance – to distribute the risks and costs more evenly. This is what it was designed to do – this is why people buy it – it is what they are paying for. But the health insurance industry sees their role differently. They’re in it to make as much money as possible – not to provide a service for a fee and make a profit from this. Thus, when anyone who has duly paid for health insurance for years makes a claim for a condition that requires serious and expensive medical treatment, they try to find every possible basis to deny and revoke their coverage. It would be as if – after I had paid for a soda – the store then tried to deny me the right to open the soda and leave the store.

Obama’s attempt to reform health care is partly about reforming the way we provide care (with electronic records, comparative effectiveness studies, etc.) – but it is mainly the way in which we provide health care insurance. In this fight, there is one statistic we have not heard enough about but which critics of the current system should bring up whenever they can: the medical loss ratio. This statistic describes the percentage of dollars that a health insurance company takes in from its premiums that it uses to actually pay for medical services. For example, back in the 1990s – when the health care insurance industry was quite profitable – the figure was generally in the mid-90s. In other words, about 95% of all dollars collected in premiums were used to pay for medical services. Since then, structural changes in the health insurance industry have led it to focus more on profits – as a Wall Street mentality took hold. Since the 1990s, the medical loss ratio has dropped significantly. Today it is in the mid 70s to low 80s – meaning $20 to $30 of every $100 paid in insurance premiums is not used to provide the services paid for. These profits – and the quest to increase such profits – has led to the health insurance industry becoming more like a Wall Street financial firm – with massive bonuses to its top executives and large dividends to shareholders as they skim greater profits from a rising bubble in the field in which it operates in. Our health insurance system is run by Wall Street tycoons.

How does this affect the quality of the service that health insurance companies provide? It forces them to reduce their medical loss ratio as much as possible. Wendell Potter, a former executive at CIGNA, explains several ways:

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.

They’ll resort to things like the rescissions that we saw earlier. Or dumping, actually dumping employer groups from the rolls. So the more of my premium that goes to my health claims, pays for my medical coverage, the less money the company makes.

The health insurance industry uses any possible reason to revoke coverage that an individual has been paying for as soon as they actually need the service they have paid for – for example, they will point to some minor preexisting condition that was not disclosed when they agreed to provide the insurance as an excuse to cancel coverage. Robin Beaton of Texas had her policy revoked as her doctors were scheduling her double mastectomy for her breast cancer because she had failed to disclose to her insurance company that she had the pre existing condition of acne and a rapid heartbeat.

So – essentially, these organizations accept contracts to provide health insurance in the event someone needs it. But as soon as a significant claim is made, they try to find a reason to deny it. And the executives at these companies have refused to say that they will not continue these practices.

Our system of health insurance has created a Wall Street-run health care business. For all the worry Republicans are trying to gin up about government bureaucrats reporting to Congress or the White House being in between you and your doctor – what we have now is a system where faceless corporate bureaucrats are making medical decisions reporting to Wall Street tycoons. Like the Wall Street firms, health insurance companies have driven up prices exponentially, creating a bubble; the CEOs take enormous salaries; they are accepting money for insurance from anyone, but will look for any way out of any of their commitments if they can get away with it. In normal businesses, profits are the primary side-effect of providing a product or service; in a Wall Street style corporation, profits are the sole and only goal – with the product or service they are selling merely a means to this end. This is what our health insurance industry has become.

This is the royally fucked system we have today. This isn’t the only issue health care reform needs to address – but it is a major one.


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[Image by MacRonin47 licensed under Creative Commons.]