Friday, August 28, 2009

Health care re-form VIII (More nonsense)


"Insurance companies earn enormous returns for their chairmen and shareholders, becoming successful by insuring only healthy people while rescinding coverage once a person becomes ill... Meanwhile, medical loss ratios, an indicator of how much revenue insurance companies spend on care versus how much they keep as profits, have dropped precipitously in the last decade. That is, as more and more people have become uninsured or discovered that they don't have enough insurance to cover their medical expenses, insurers have grown richer...." Howard Dean, in "The Real Debate About Health Care."

Hmm, listening to the health care reform debate (more accurately characterized as the health insurance reform debate, see here) it often sounds like the root cause of the problem are the insurance companies, more specifically their focus on generating big profits to over-pay their executives and to fatten the pockets of their investors. Brandished as prima facie evidence of this are the "outrageous" profits generated by the for-profit insurance companies and the huge paychecks of their executives, both presumably on the backs of the long-suffering insured (for example, see the AFL/CIO and Daily Kos links below). Well, actually it turns out that the health insurance companies are not generating huge profit margins, in fact they rank 86th in profitability by industry, averaging an anemic return below 3.5%!

Well then surely, as pointed out by Howard Dean above, the medical loss ratios prove the malfeasance and perfidy of the health insurance companies. After all, if the medical loss ratio is the percentage of spend on health care provision i.e. claims over the total health premiums actually collected, then a higher medical loss ratio (more of the premiums spent on providing care i.e. claims) must be "good" while a lower medical loss ratio (less of the premiums being spent on providing health care and more being spent on administrative expenses and profits) must be "bad!"

Turns out it is not so simple, and Howard Dean (as have others) is a) using the medical loss ratio for a purpose for which it was not intended, and b) additionally indulging in a gross simplification of something rather more complex! Remember, the characterization is: high medical loss ratio, good; and lower medical loss ratio, bad!

First, the way this (medical loss ratios) is accounted for is not completely uniform and there are also differences in definitions, so the medical loss ratio has a fair amount of "wiggle" in it, that makes it not completely uniform to use for comparisons. However, putting this issue aside, let us look at a number of scenarios:
  • Services provided: The medical loss ratio is sensitive to the different insurance plans being offered. For example, an insurance company that relied mainly on capitation would be expected to have lower administrative expenses than one that is primarily fee-for-service, and thus a higher medical loss ratio. However, this difference in ratios does not translate into the insurer with the higher ratio being "better," and also may have no correlation to the quality of the services being rendered... The fact of the matter is that most insurers offer a wide range of plans of all types, so will have different ratios for the various plans. Looking at averages or overall numbers does not mean much without understanding the accompanying distribution.
  • Markets served: Some insurers market mainly to large companies, others may concentrate on small business and the self-employed. The administrative expenses can vary greatly as a result. For example, an insurer that needs a larger sales force to sell many more contracts to large numbers of self-employed and small businesses in multiple markets is likely to have comparatively larger sales costs (which fall in administrative costs) than one that has contracts with a much smaller number of very large firms. Thus the two would have much different medical loss ratios, but it would be a stretch to say that the one with the higher ratio was intrinsically "better. Additionally, as above, there may be no correlation between the ratio and the quality of the health care services rendered...
  • Geography: Some insurance companies operate in multiple states, others do not. This too will affect the ratio (e.g. how a multi-state presence insurer allocates the central administrative expense across the various states), while the level of claims will be effected by variations in cost of living and other cost inputs...
  • Vertical integration: Some insurance companies are pure plays (i.e. all they do is insurance), while others are part of vertically integrated enterprises, where one entity may offer insurance plans while also owning and managing physician practices, and perhaps even hospitals. The former (pure plays) most likely will have a higher medical loss ratio than the latter (vertically integrated), due to lower administrative costs depending upon how the latter allocate their greater administrative costs among the various business lines of the enterprise (health plan, physician office, hospitals, etc.)
OK, so the bottom line is that "high medical loss ratio good, lower medical loss ratio bad" is about as useful a bleat as Animal Farm's "Four legs good, two legs bad!" And in fact the bankruptcy of turning this into some sort of mantra is made evident by the fact that if the health insurance industry were to do more of what Howard Dean and the administration would like them to do then their medical loss ratios would actually decrease (at least initially), something that he would have you believe (at least per the above) is bad! How so? Well, if insurance companies focus much more on and do a much better job of managing people's health and co-morbidities, then by definition their administrative costs would increase (expenses related to all the people doing this work) while their paid claims for care would decrease! In fact, this blogger's understanding is that this (reducing health care costs) actually is the ultimate goals of all the current health care reform efforts!

Note that the Health Affairs article sums it up as follows: After stating that "The medical loss ratio has achieved in recent years a remarkable amount of publicity and even notoriety..." they say that "... this obscure statistic is losing whatever meaning it one held...," and "the medical loss ratio never was and never will be an indicator of clinical quality..." before concluding that "The medical loss ratio is an accounting monstrosity that enthralls the unsophisticated observer and distorts the policy discourse."

The bigger bottom line is that the politicians either don't seem to understand how insurance works, or else they do but don't believe it is useful to educate the public on this topic. Many people seem to believe that the insurance companies should take in money via premiums and turn around and pay most if not all of it out in claims. Never mind that the pooled premiums are also invested to generate a return (something that has taken a big hit with the decline of the financial markets), the insurance companies need to create significant reserves so as to be able to pay claims (due to in- and out-flow timing issues, etc.), etc. It requires spending time to understand how insurance works, what actuaries do, and so much more. Much easier to demagogue, and vilify the insurance companies!

Use And Abuse Of The Medical Loss Ratio To Measure Health Plan Performance

Health Insurance Industry Gets the Profits, Patients Get the Shaft (AFL/CIO)
Health Insurance Profit Statistics (Daily Kos)

How Private Insurance Works: A Primer (Kaiser)
How insurance works and why private insurance costs more than universal government insurance

Previous entries on hospitals & health care:
Health care re-form VII (Nonsense) - Aug 26th, 2009
Health care re-form VI (Effectiveness) - Aug 15th, 2009
Health care re-form V (The sales job) - Aug 14th, 2009
Health care re-form IV (What is it?) - Aug 13th, 2009
Health care re-form III (Why we spend more) - Aug 8th, 2009
Health care re-form II (P4P) - Aug 4th, 2009
Health care re-form I (Issues) - Aug 4th, 2009
So? - Jul 27th, 2009
Random chart... - Jul 12th, 2009
Random charts... - May 22nd, 2009
Random chart... - May 9th, 2009
Wyeth v. Levine - Mar 22nd, 2009
Financial crisis & hospitals - III - Mar 22nd, 2009
Random chart... - Feb 1st, 2009
Financial crisis & hospitals - II - Jan 27th, 2009
Random chart... - Jan 26th, 2009
Hospitals' financial update - Dec 25th, 2008
Good for the goose - Dec 11th, 2008
Studies of interest - IV - Nov 16th, 2008
Studies of interest - II - Nov 16th, 2008
Financial crisis & hospitals - I - Nov 14th, 2008

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