Health plans and medical loss ratios: no solace in government programs

Six of the 7 largest publicly-traded health insurers had profits increasing 10% or more in 2007. However, for many of these plans, medical loss ratios went up, too.

The February 25th issue of American Medical News explores this fiscal phenomenon. American Medical News is the weekly newspaper targeted to physicians. AMNews's mission is to keep doctors apprised of the latest information they need to know for practicing the business of medicine.

The story is potentially potent for doctors because Wall Street analysts are focusing in on medical loss ratios -- that is, the cost of health services provided by an insurance company as a percentage of premium revenues. If Wall Street's institutional investors perceive that insurance companies are allocating too high a proportion of premiums to medical costs (that means spending on enrollees), the analysts will put pressure on insurers to raise premiums or cut costs -- that is, services to patients and reimbursements to providers.

In the past year, the major health plans looked at government-funded health programs like Medicare Part D, Medicare Advantage, Medicaid and Tricare as a way to counterbalance declines in employer-sponsored commercial business. Employers have been working very hard to stem premium increases and manage medical trend.

But government programs are hitting their own economic-limiting wall, much like employer-sponsored health care has. Thus, analysts are eyeing the medical loss ratios right now as a potential long-term problem for the health insurance sector.

[As an aside -- listen up you health analysts! -- note that the medical loss ratio concept isn't reflective of quality of a plan or clinical inputs or outcomes. A decade-old article from Health Affairs by James Robinson pointed this out, and it's well-worth visiting (or revisiting as may be your case). Eleven years ago, Robinson wrote, "The most important users of health plan information in coming years will be individual consumers and organized purchasers of health benefit programs." Take note of Robinson's opinion about the statistic: "The medical loss ratio is an accounting monstrosity that enthralls the unsophisticated observer and distorts the policy discourse."]

Health Populi's Hot Points: In the American economy, top-down, we've got dwindling resources for government-sponsored programs. In the private sector, employers are cutting jobs, leaving fewer workers to insure in the commercial side of health insurance's business. Two reports published at the end of 2007 indicated erosion in employer-sponsored health insurance: the Economic Policy Institute report, noting a 4 percentage point drop in employer-provided insurance; and, a brief from the Employee Benefit Research Institute, comparing the 2007 health benefits landscape to the one in 1996.

The growth area, in the immediate term, is with private individual health insurance. In the longer term, it's providing for aging Boomers and a growing cohort of Medicare enrollees. Both of these health plan challenges, while large in scope, will require new models for health plans. We should look at this as an opportunity to do the new-new.