Americans Will Not Profit from Medical Loss Rules


With the passage of health care reform, Congress seems poised to expand access to health coverage. Unfortunately, by failing to address the health care system’s skyrocketing costs, the reform package could increase the number of Americans without insurance.

The bill pins its hopes for trimming costs on ill-defined mechanisms to eliminate “waste” from the system. One such mechanism requires insurers to spend a percentage of their revenues on medical claims. Called a “minimum loss ratio,” this rule has been implemented in more than 15 states.

Supporters argue that insurers’ profits and administrative costs are responsible for the rising price of health care. By requiring insurers to spend a certain amount on claims, lawmakers think they can bring down insurance costs and help consumers get their money’s worth.

The facts speak to the contrary. Minimum medical loss ratios don’t just raise insurance prices — they also undermine the ability of insurers to provide patients with the benefits they expect.

For starters, consider the data on insurers’ profits. According to Fortune magazine, health insurers claim 6 cents in profit for every dollar in revenue — good enough for 35th place on the magazine’s list of industries.

Further, insurers’ administrative costs are lower than critics claim. According to the Centers for Medicare and Medicaid Services, 86 cents of every premium dollar goes to medical care. A significant portion of the remaining 14 cents covers services that benefit patients and decrease long-term health costs, like prevention programs and investments in health information technology.

Research shows that administrative costs have nothing to do with rising insurance premiums. A 2008 Rand Corporation study of California’s medical loss ratios determined that “administrative costs and profits are not driving premium growth in California or nationwide.” The same report found that states without loss ratios spend the same percentage of premium dollars on medical care as those with such controls.

Perversely, people in states with minimum loss ratios face fewer insurance choices, less competition, and higher premiums than their counterparts in states without them, according to a 2006 PricewaterhouseCoopers study.

New Jersey, for instance, maintains minimum loss rules for individual and small-group carriers. Yet the Garden State’s premiums are among the highest in the country. The average annual premium for a skimpy policy for a 35-year old man is an astounding $4,460.

Extending minimum loss ratios nationwide — as the congressional health reform package will do — could cause health costs to spiral even further.

We can’t lower insurance costs until we bring down the cost of health care. Reformers should focus their attention on money-saving initiatives that work — not seductive shortcuts like minimum medical loss ratios.