Health Law and Regulation

Healthcare Reform’s MLR Requirements Could Cost Insurers More Than Expected

Compliance with medical loss ratio (MLR) requirements in the new health reform law could cost the nation’s health insurers far more than most analysts expected, according to a new study by Weiss Ratings. The study found that companies already complying in 2009 had average net profit margins of only .7 percent, while those not yet complying had average net margins of 6.3 percent, or nine times more.

Starting next year, MLR requirements in Patient’s Bill of Rights will require individual and small group insurers to spend at least 80 percent — and large group insurers to spend at least 85 percent — of their premium dollars on medical care and on efforts to improve the quality of care. In addition, other provisions of the law, including requirements to cover certain groups with pre-existing conditions, are also expected to drive medical expenses higher.

To gauge the impact of the reform on the industry’s earnings, the study covered 543 health insurers, distinguishing between two groups: 226 “not-yet-compliant” companies — those that spent less than 85 percent of their premiums on medical expenses in 2009, and 317 “already-compliant” companies — those that already spent 85 percent or more of their premiums on medical expenses in 2009.

The study found that:

• Including income from both their insurance underwriting operations and from their investments, the “already-compliant” companies earned a total of $1.74 billion (an average of $5.5 million each). In contrast, the “not-yet-compliant” companies earned far more — $7.68 billion (an average of $34 million each). As cited above, their net margins were .7 percent and 6.3 percent, respectively.
• Underwriting income, the difference between premiums collected and medical claims paid, is naturally the income category primarily responsible for the sharp differences. Thus, as a group, the “already-compliant” companies lost $372 million on their insurance operations, with an average underwriting margin of a negative .2 percent. Meanwhile, the “not-yet-compliant” companies earned $6.11 billion with an average underwriting margin of 5 percent.
• The overall size of the insurer was also a factor because larger companies tend to have more investment income, making it possible for them to afford higher medical expenses per premium dollar. However, the contrast between the two groups was still great despite size differences:
• Among smaller health insurers (with less than $1 billion in assets), “already-compliant” companies had an average net profit margin of only .6 percent; while “not-yet-compliant” companies boasted an average of 4.5 percent (7.5 times more).
• Among larger health insurers (with $1 billion or more in assets), the “already-compliant” group had net margins of .9 percent and the “not yet compliant” had an average net margin of 9.9 percent (11 times more).

Source: Weiss Ratings, August 11, 2010

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