The push and pull between policymakers and bad actors are a kind of arms race: the government sees a problem, writes a new law, closes loopholes, and changes how it spends money – so the bad guys figure out how to exploit the law, find new loopholes, and keep making money.
There’s nowhere where this phenomenon is more prevalent than federal health care policy, because it’s where Uncle Sam spends the most money. It’s also an industry that’s easy to exploit, because bad actors can shield their fraud and abuse behind claims that any reform will kill puppies and grandmas. That usually grabs more headlines than esoteric discussions of acronyms no one’s ever heard of.
But one of those esoteric acronyms that desperately needs reform is Medical Loss Ratio (MLR). That’s the proportion of insurance premium revenues that get spent on actual medical services rather than administrative costs, profits, overhead, marketing, and so on. Insurance companies need to report this to Uncle Sam to keep federal dollars rolling in – if the ratio of money spent on health care to revenues isn’t high enough – 80 or 85 percent based on the size of the market – those companies need to issue rebates to their enrollees.
This policy was created by the Affordable Care Act, yet another well-meaning but flawed policy that exacerbated the problem it was trying to correct.
So making sure insurance companies insure people is certainly a sound idea. From 2012 to 2024, big insurers paid approximately $13 billion in MLR rebates to consumers but these numbers don’t include the foregone rebates that vastly powerful insurers have been able to avoid with some creative accounting.
We’ve all read about how insurance companies are buying pharmacies, physician practices, or even entire hospitals. This is in direct response to the ACA’s policies, and it’s making health care worse for everyone, leaving patients to "pay twice" – first through higher premiums and then again through restricted access to care. This kind of Jack Donaghey-esque vertical integration allows insurance companies to thrive off the very policy that was designed to restrict them.
As big corporate insurers have exploited vertical integration with other providers, experts warn that related party payments and transfer pricing are eroding the effectiveness of MLR rules, allowing plans to meet numerical MLR thresholds while returning fewer dollars to consumers than intended. This happens because they:
Reclassify Profit as “Medical Spending”
When an insurer pays its own physician group or other owned practice, those funds can be labeled as “payments” to avoid counting against MLR. Attributing profits to the subsidiary allows vertically integrated insurers to circumvent the MLR cap while keeping the money.
Set Prices that Benefit “Partners” Not Patients
Subsidiaries that are not subject to MLR rules may set transfer prices above market levels. This increases reported claims spending to help keep big corporate insurers under the MLR cap while not actually helping to heal anyone.
Same-Company Purchasing under Medicare Advantage
Big corporate insurers can direct Medicare Advantage plans to pay for services from affiliated provider groups under the same company umbrella. As with above examples, this both circumvents MLR calculations and keeps health care dollars in the big corporate insurance company instead of finding the best value care elsewhere.
Administrative Reclassification
Big companies can shift administrative expenses to affiliated entities, making the insurer’s administrative costs appear lower, making it easier to appear to meet MLR requirements while keeping administrative spending high.
Insurance companies exploiting MLR rules is bad for everyone, having resulted in health care that costs more and heals less. Vertical integration between big corporate insurers and related businesses have created 5% higher health spending per enrollee, with some reports suggesting that any premium reductions for integrated products are offset by higher prices elsewhere.
Now 5% may not sound like much, but – again – health care is the biggest line item for the federal government. We have to take several important steps to correct this policy, so patients and taxpayers benefit from MLR’s original intent rather than seeing it perverted like this. We have to stop big, vertically integrated insurers from gaming the system. We need:
- Consolidated MLR reporting at the parent-company level so sleazy executives and their accountants can’t skirt the rules.
- Mandatory disclosure of subsidiary versus non-subsidiary rates to prevent opaque, margin-protecting “partner” pricing.
- Limited classification of subsidiary transactions as medical spending.
- Restrictions on insurance companies buying up – pardon me “investing in” – hospitals.
MLR rules were crafted to ensure that premium dollars fund patient care, not insurer profits. But they have made the problem worse. Republicans can fix this problem created by the Democrat’s policies under Obamacare and make sure federal health care spending actually goes to health care.
Jared Whitley has worked in the US Senate and White House. He has an MBA from Hult business school in Dubai. Recently the Top of the Rockies competition named him the best columnist in the Intermountain West.
