Obamacare Puts New Limits On The Health Care Industry

The Affordable Care Act, also known as Obamacare, is a sweeping and wide ranging piece of legislation aimed at reshaping the American health insurance industry. In an effort to reduce costs of health insurance premiums, one area targeted for reform is the Medical Loss Ratios(MLRs) of insurance providers.

Medical Loss Ratios

A loss ratio is the amount an insurance company has to pay out in claims compared to the amount of premiums it collects. If an insurance company collected $100 in premiums and paid out $70, it would have a loss ratio of 70%. In other words, the more a company pays out, the higher its loss ratio. Typically money not paid out in claims goes to administrative costs, advertising cots and profits.

In the health insurance industry, medical loss ratios generally range from 60% to 110%. An MLR over 100% indicates the company is losing money. In an attempt to put a lid on costs in the health insurance industry, the Affordable Care Act of 2010 put in place minimums for medical loss ratios. In 2011 the law went into effect, placing a floor of 85% on large group plans and a floor of 80% on small group and individual plans.

Large group plans are typically sold to large employers or organizations. Small group plans and individual plans are sold to relatively more people and small businesses then large group plans. Due to this, insurance companies were allowed a lower MLR for individual and small group plans to account for the higher marketing cost.

Potential Effects of the Change

In a report by the Government Accountability Office, 64% of insurers in 2010 were found to met the new minimums before they even went into effect. However, just 43% of insurers in the individual health insurancemarket were able to meet this minimum. Many companies in this sector rely on insurance agents to help consumers sort through the complex details of the wide assortment of health plans available.  Sites like http://www.how-to-buy-health-insurance.com/, will likely become more popular as one on one agents can no longer operate profitably

Because of this, the government was lobbied to include broker commissions as part of overall medical costs, rather then as administrative costs in order to make it easier for companies to achieve an acceptable medical loss ratio. If money spent on broker commissions could be counted as a medical cost, rather then an administrative cost, meeting the 80% MLR while still using brokers might be achievable. However, this request was declined. Counting commissions as medical costs would likely lead to many more administrative and advertising costs also being counted as medical costs, undermining the goal to reduce the overall amount of money spend on premiums.

Critics and Supporters

Critics of the bill predict many companies will exit the private insurance market, as it will be too expensive to market to so many individual consumers. This will result in a lack of competition that may drive up premiums. Also, many insurance agents will be driven out of the business, leaving consumers on their own to decide what plans to purchase.

Other critics worry that insurance companies will further cut customer service from their overhead costs in order to protect their profits. If an insurance provider goes over the new loss ratios, they are required by law to refund that amount to their customers, an amount that would come directly out of their yearly profits.

Supporters counter that the new MLR standards will lower premiums, forcing insurance companies to spend much more of consumer's premiums on actual health care, instead of advertising and overhead. Inefficient providers, or those that rely too heavily on advertising will be forced out. By putting a cap on profits and overhead costs, more money will flow back to consumers.

The debate is now over, and the new MLR levels are law. Only time will tell what effects this new part of the Affordable Care Act will have.