Monday, March 29, 2010

pp 34-36

Every year health insurers have to report to the Secretary what percentage of their revenues go toward reimbursement for health care, health care improvements, and all other costs not including taxes and regulatory fees. The Secretary will post them online. The Secretary and NAIC will come up with standard definitions for these reports.

From now until 2014, if an insurance company increases their spending by more than 20-25% per year spends more than 20-25% per year on stuff other than claims and taxes, then they have to give a rebate to the people who bought the plan. The more they increase spending in these areas (not on healthcare), the more they have to refund.
States can make the percentage smaller (it's 20% for group plans, 25% for individual plans).

Hospitals have to publish what their standard charges are for services each year.


Steve said...

The law reduces the amount companies can spend on overhead/profit. Prior to the law, insurance companies were required to spend around 60-65% on claims. That's now 75-80%.

This will result in the exact opposite of it's intended purpose: cutting insurance costs. The government has just added hundreds of regulations to the industry. The industry will require hundreds of new personnel to analyze and interpret the regulations and determine how they will adapt their business in order to comply. That's an increase in overhead.

In order to make up for the increase in overhead and the slashing of the margins they'll be forced to raise premiums.

I don't know how any business in this country could continue to operate by cutting operating income (overhead and profit) by 33% without drastically increasing rates or severely cutting customer service.

-Dustin said...

I agree that by adding additional regulations, you're going to increase overhead in order for a company to navigate said regulations. I'm trying to do exactly that, and it's pretty hard. That's an argument you can make for any reform this size.

But looking at the regulation dujour on pp.34-36, how can you increase rates to make up for a decreased PROPORTION of those rates going to overhead? You can't. (See example to follow) They only way to do that is to become more efficient, and spending more of the individual premium dollar on reimbursements and preventative care.

That last phrase, though, does catch my ear. "...severely cutting customer service." I absolutely agree with you there, that the 20-25% pays for an actual person to handle your claims carefully, and to manage your appeals well. This regulation could definitely lead to shitty customer service.

So here's my example: My company collects $1,000 in premiums every year, currently pays $625 in claims and wellness programs, and covers my overhead and profit with $375. Now I'm forced to pay 77.5% in premiums, leaving 22.5% to cover employees and profit. In order to collect my $375, I have to charge $1,667 a year instead of $1,000...

BUT I also have to pay out $1,292. Well, there are only $625 worth of claims here, so what do I do with the extra $667? I simply can't increase rates to cover a change in proportion, I have to become more efficient. Probably fire some of my employees, lower my profit percentage, make some adjustment in my organization to deliver a higher proportion of the collections with lower overhead.

-Dustin said...
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Steve said...

There's a good one... the government adding regulations to an industry and the end result will be companies function more efficiently?

If you look at the profit margins for the health insurance industry (hospitals too) they already rank far below many other industries such as restaurants, cell phone providers, electric utilities, software manufacturers, and auto parts; somewhere in the neighborhood of 3-4%.

Even if they operated in a “break-even” scenario, with the new regulations they’d still be required to cut their overhead by billions.

It isn’t a realistic goal without either significantly increasing costs of premiums and the costs of services or reducing services offered.

In reality what will happen is insurance companies will spend hundreds of millions on consultants and attorneys in order to “re-classify” what is a service to the consumer and what is truly overhead and profit (and don’t forget about taxes).

Either way, premiums are going up.

-Dustin said...
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Steve said...

I'm not sure I follow your question.

You summarized the section you read as "From now until 2014, if an insurance company increases their spending by more than 20-25% per year on stuff other than claims and taxes, then they have to give a rebate to the people who bought the plan."

Things other than claims and taxes are overhead and profit. Thus my comments.

As for citing the 60-65% figure if you search for "medical loss ratio" you'll see where each state sets it's requirements. The largest ratio I've come across on the state level for group insurance is 75%. However, they're as low as 50%. The new federal law found in the text of pp34-36 increases that to 75-80% (depending on the type of policy).

-Dustin said...

After some discussion, Steve helped me clear up my incorrect interpretation of the section (forcing me to re-read the law). I was under the impression that this section limited the amount that overhead and profit could be EXPANDED year to year, when in reality it IS a limitation on the absolute percentage as he said in his first post.

I'm going to delete the now-irrelevant comments and re-word my summary.

Anyone got a good summary or chart on medical loss ratio limits from state-to-state?

By the way, taxes and fees are excluded from the calculation in the law, where I believe a medical loss ratio does not include the taxes. This is probably insignificant though, but I don't know what insurance companies pay in taxes. [i.e. if you spend 5% on taxes and 20% on overhead and profit, 75% on reimbursements, your medical loss ratio will be 75%, but your Sec.2718(a)(3) qualified expenses are 20%, not 25%].

-Dustin said...

So I agree with Steve on a couple of things: 1. that adding any regulations this complex to an industry will take time, effort, and money to decode for the companies, (but let's try and avoid analyzing the bill as a whole until I've read the bill as a whole) and 2. that one good way to cut back on overhead to meet this regulation is to provide crappier customer service.

Steve, I'm still questioning the idea that raising the premiums will get a company clear of this regulation, all because of the word "proportion". If a company spends more on overhead/profit than it is allowed to under this law and they decide to increase premiums to make up for it, they will be increasing the amount they have to pay out as well, in order to hit the percentage.

Going back to the example I pulled out of my... Right now, you've got a workforce, rent, buildings, computer systems, and 3-4% profit margin you have to pay, and it all costs $375 per year. You've got an existing medical loss ratio of 62.5%, so you're collecting $1,000 in premiums. AFTER the law comes into effect, you still want to pay your $375 worth of utilities, but you now have to charge $1,667 in premiums to get to 72.5% and comply.
1. Won't you then have to pay out an additional $667 in claims? If not, what do you do with that money?
2. Won't going from $625 worth of reimbursements and $1,000 worth of billing to $1292 worth of claims and $1,667 worth of billing increase your overhead?

I see the whole thing as a kind cycle, or quagmire, that the only way out of is to somehow use fewer dollars that you keep to process more payouts.

-Dustin said...

Minimum medical loss ratios

I would guess anything showing a 70%+ medical loss ratio would be likely to meet the new requirements, due to the state tax and regulatory fee exemption on P.34 line 19 that I mentioned earlier.