By Wendell Potter on December 10, 2009

There was a time, in the early 1990s, when health insurance companies devoted more than 95 cents out of every premium dollar to paying doctors and hospitals for taking care of their members. No more.

Since President Bill Clinton's health reform plan died 15 years ago, the health insurance industry has come to be dominated by a handful of insurance companies that answer to Wall Street investors, and they have changed that basic math. Today, insurers only pay about 81 cents of each premium dollar on actual medical care. The rest is consumed by rising profits, grotesque executive salaries, huge administrative expenses, the cost of weeding out people with pre-existing conditions and claims review designed to wear out patients with denials and disapprovals of the care they need the most.

This equation is known as the medical loss ratio (MLR), an aptly named figure that is widely seen by investors as the most important gauge of an insurance company's current and future profitability. In a private health insurance industry that collected $817 billion this year, a 14 percentage point difference in the MLR represents $112 billion a year! Over 10 years, that would be more than enough to pay for health reform.

Thanks to the efforts of several senators who pushed for a minimum MLR to be included in reform legislation, the current Senate bill requires insurers to provide an annual rebate to each enrollee if non-claims costs exceed 20% in the group market and 25% in the individual market.

Sen. Al Franken (D-Minn.) is now leading a group including Sens. Jay Rockefeller (D-W. Va.) and Blanche Lincoln (D-Ark.) to introduce an amendment that would go further by requiring that 90 percent of the money consumers spend on health insurance premiums go directly to health care costs.

The senators are proposing a reform that strikes at the heart of a health insurance system that puts profits first, and it would have a profound effect. When MLRs increase, that eats into profits, and Wall Street becomes very unhappy. A case in point is Aetna, the nation's third largest publicly-traded health insurance plan. Three years ago, the company reported that its quarterly MLR had inched up from 77.9 percent to 79.4 percent in 12 months. On the day this was disclosed, Aetna's share price plunged 20 percent as investors sold off their shares, reducing the company's market value by billions of dollars.

Wall Street investors expect insurers to pay as little as possible for medical claims. As a result, the nation's health insurance industry has evolved into a cartel of huge for-profit companies that together reap billions of dollars a year at the expense of their policyholders. The seven largest firms -- UnitedHealth Group, WellPoint, Aetna, Humana, CIGNA, Health Net, and Coventry Health Care -- enroll nearly one in three Americans in their health insurance plans. This year the industry will take about $25 billion in profits for getting between American patients and their doctors, according to the industry's trade group.

And they do this by finding every excuse in the book not to pay a claim, even if it means canceling individual policies when people get sick or ridding their rolls of unprofitable small business group policies if an employee or family member falls seriously ill. They issue confusing benefit statements to members so only highly motivated and persistent challengers of their denials stand a chance of reversing an unfair decision.

And in the final analysis, when an insurance company has decided it no longer can make enough profit on a particular person or employer-sponsored group, it drives them away in a process known as "purging." In this unconscionable profit-protection maneuver, an insurer will hike premiums so high that the policyholder has no choice but to pay outlandish rates for what may be a reduced benefit package, find another insurer, or simply go without coverage. The consequences of such decisions can be deadly -- but Wall Street always has the last word when profits are the main consideration.

When Wall Street isn't calling the shots, the outcome is decidedly better for health care consumers. Government-operated plans, such as Medicare, and some organizations that provide coordinated care, consistently maintain higher medical loss ratios. Kaiser had a 90.6 percent MLR in 2007. Between 1993 and 2007, Medicare's MLR hasn't dropped below 97 percent.

The health care reform bill now being debated in the Senate must include a provision, such as that proposed by Sen. Franken, that sets a minimum medical loss ratio to keep insurers from gouging consumers and leaving patients without the care they need. Instead of being a formula to reward investors, a properly regulated medical loss ratio in combination with other cost containment measures in the legislation would be a reliable tool for keeping insurance company profits and administrative waste in check.

This blog is cross-posted in the Huffington Post.

Wendell Potter is the Senior Fellow on Health Care at the Center for Media and Democracy based in Madison, Wisconsin.

Wendell Potter

Wendell Potter is CMD's honorary Senior Fellow on Health Care (since May 2009). He writes a regular column for the Center for Public Integrity.

Comments

I'm 46 years old and have been a lifelong democrat, but the fiasco that has taken place on the health care reform front has been a travesty ! The dems are weak at best and are so worried about their re-election that they forget who gave them their power...THE PEOPLE!! The republicans are'nt much better with their lies and deceitful ways to stop change at any cost. I for one am sick and tired of these politicians doing whatever they please to suit their needs and the needs of their true constituents...WALL STREET !!! I call on anyone that reads this to turn over ANY INCUMBENT in their state that has been their for more than two terms !! We need term limits on these people. It's time for term limits. No more of these people staying in their for a lifetime and doing the bidding of big business and wall street. I call for a national referendum to let the people decide on term limits. My guess is that if we did have that referendum, the people would say TERM LIMITS !!!

I wish Al was my man in Minnesota. But I live in a state where some Dems have no iota. Of how disgusting it can be, if those without insurance see, an insurance company sports arena. While they're dying of illness because the insurer said "See ya!". But Republicans don't care-you're just a customer of a mortician. While they collect the benefits of the stocks of the insurance company riches.

I wish Al was my man in Minnesota. But I live in a state where some Dems have no iota. Of how disgusting it can be, if those without insurance see, an insurance company sports arena. While they're dying of illness because the insurer said "See ya!". But Republicans don't care-you're just a customer of a mortician. While they collect the benefits of the stocks of the insurance company riches.

To grok the scope of the health catastrophe in this country, consider the recent Pearl Harbor Memorial. 152 Pearl Harbors of Americans have perished since 9-11 -- people who would have lived if they'd had health coverage. Or had lived in Canada or England or France.

Every single day we delay, another 10 Fort Hoods of Americans needlessly die. ( http://tinyurl.com/l7cy8u ) Be shamed and shocked. This is an emergency. 365,000 needlessly dead Americans since 9-11. Grok the perspective of how hellish the toll of our blindness, deafness is. No billowing smoke, no explosions, no sinister perps. So we just let these people die and die? So Aetna's Ron Williams can make $97,000 a day?

The Medical Industrial Complex has catastrophically failed. And yet we cower and kowtow? I am ashamed. What is the depth of debt in grief from the ruined families that we're incurring as a nation? 1708 more will be dead by December 25. Merry Christmas?

I am sickened by the Democrats' (my people) cowardice. Use reconciliation to do the Public Option and do the rest separately. With no public option, it's just a fancy &/or convoluted way to give massive money to the bloodsucking Insurance Corporations. 14,000 more dead by Easter. Do unto others.

My fellow Americans we need this health care bill to pass and even though the current one is junk we need at least one bill to pass then we must put more pressure on Congress to fix the bill and finally add in the public option, but here are the facts.

There are at least four democrats and Joe Lieberman who may kill this bill so I say to all of my fellow Americans tell those in Washington who are acting like cowards that we won't accept no on this bill and if they don't pass it we won't re-elect any democrat, republican or independent that blocks passage of this bill.

Call them now. 1-202-225-3121 and visit http://www.senate.gov

http://www.house.gov.

Yes, I want the public option, but let's first get the bill passed into law then we can make them fix it next year or in the years to come.

People are dying because of the inaccessibility of health care and it's time we take action to stop this in America. We will win if we unite.

Albert

My fellow Americans we need this health care bill to pass and even though the current one is junk we need at least one bill to pass then we must put more pressure on Congress to fix the bill and finally add in the public option, but here are the facts.

There are at least four democrats and Joe Lieberman who may kill this bill so I say to all of my fellow Americans tell those in Washington who are acting like cowards that we won't accept no on this bill and if they don't pass it we won't re-elect any democrat, republican or independent that blocks passage of this bill.

Call them now. 1-202-225-3121 and visit http://www.senate.gov

http://www.house.gov.

Yes, I want the public option, but let's first get the bill passed into law then we can make them fix it next year or in the years to come.

People are dying because of the inaccessibility of health care and it's time we take action to stop this in America. We will win if we unite.

Albert

I take issue with none of the factual points in your article. But has anyone looked at the "EOB" sent by your insurance company; the document which lists your recent claims, the amount the doctor nominally charges, the amount the insurer paid, and your copay (if any)? The long and short of it is that the insurers' clout of having a large piece of the doctors' business gives them the power to negotiate a much lower rate than the individual (you or I) would pay on your own; at a savings which greatly outweighs the additional overhead the insurers charge.

For example: my most recent doctor's office visit. The doctor's nominal charge for a visit: $265. My insurer's negotiated payment in full: $150 (including my copay). So, if the insurer has an 80% medical loss ratio as described in the article, that $150 represents 80% of my total insurance premiums relating to this visit; making my total cost related to this visit $187.50 paid to my insurer, a $77.50 savings over the $265 I would have had to pay directly to the doctor had I made the same visit without insurance.

To look at it another way; had the insurance company a medical loss ratio of 90%, as would be required in the legislation discussed, but paid the doctor's nominal $265, my total costs would have been $294.44, $106.94 more than they actually were with an 80% loss ratio. Please, I can't afford that much "consumer protection". And with a limit set on how low the medical loss ratio could be, the insurer would have no incentive to negotiate lower rates with doctors to pass on to the public; quite the opposite, since their net income would be limited to 11% of the payments to doctors, be they high or low. Of course, this is no mathematical coincidence; if the savings negotiated by an insurer did not outweigh their additional overhead, there would be no financial reason to buy the insurance in the first place. In this light, medical loss ratio is seen as an obvious red herring for the consumer, as it does not reflect this savings.

It's possible to argue, as some do, that it's wrong for insurers to use their clout to demand lower rates from doctors. But by the same token, it's just as wrong for doctors to use their power to demand higher rates from individuals, who don't have the clout to bargain. For all their consternation, few if any doctors truly suffer financially as a result of insurance's reduced payment rates, by any realistic objective standards.

American doctors make quite a bit more money than Canadian doctors, for instance; not only in absolute dollars, but relative to average national income, average national industrial wage, etc. (at no loss in quality of medical treatment). So it would seem that the difference in total medical costs per capita between the two countries is hardly due to the lower medical loss ratio of private insurers (relative to the Canadian provincial health plans) adding an unnecessary amount to the cost of the actual medical treatments. Ironically, were insurers to negotiate rates of payments to doctors comparable to those customary in Canada, even if their overhead, administrative expenses, salaries, profits, etc. were unchanged their medical loss ratios would then in fact drop to unheard of lows rather than rise; meanwhile the total per capita health care costs of the American public, insurance overhead included, would be nearly cut in half. That would hardly be called an objectionable outcome.

So, despite the accuracy of the facts reported in this article, it falls short of obeying a critical rule: follow the money. All of it. Then do the math, all of it; make sure the 25 cent savings you've discovered doesn't end up costing you a dollar.

I'm afraid I had great difficulty following your argument - and in the end was unsure what you were advocating. And, I didn't see the monthly premium factored in to the analysis. But, you seemed to be directing your aim in the wrong direction.

What was being discussed was "... an amendment that would go further by requiring that 90 percent of the money consumers spend on health insurance premiums go directly to health care costs."

-- Requiring insurance companies to spend a minimum percentage of premium dollars on the healthcare of their policyholders means more premium dollars will go to pay for healthcare rather than to fatten the pockets of the already obscenely overpaid insurance executives and wall street fat-cats. Their multimillion dollar salaries + bonuses far exceed anything your average general practitioner earns - family doctors, internists and the like are underpaid which is why they are in short supply. I would much rather those who provide high quality care be better compensated, that costly but needed tests be provided, that critical life and limb saving surgeries and treatment be covered rather than go to those whose jobs it is to fatten their wallets and extract increased profits (from your premium dollars) rather than improving and providing healthcare.

I don't know where you'd rather your premium dollars go, but I want mine to go to the care providers, to treatment, to tests, and research and development.

EOB

I checked my most recent Explanation of benefit declaration from my last doctor visit. The doctor sent in a request for $125, minus my $50 copay for a balance of $75. He was re-imbursed $5 from my insurance company. This seems like an awful waste of time, as that additional $5 the doctor recieved does not even cover the cost of processing and mailing out the claim forms.Why can't the doctor give ME a discount for instant cash payment, as done in other industries. They have to mark up their services higher to get their fair share. Same goes with Hospital bills, they are artificially inflated. If like most folks, your coverage is 80/20 and you have a $10,000 hospital bill, you'll pay $2000, your insurance company may settle for even less than your 20%. You should only be on the hook for 20% of the final negotiated amount. No matter how you slice it, you're getting scammed. Insurance is nothing but a money machine, they add nothing but grief and pain in the healthcare industry. The sooner their gone, and universal single-payer coverage is available, the better off we'll all be.

EOB

RG,
Most healthcare providers are willing to negotiate with patients who are willing (or forced in the case of the uninsured) to pay cash for services. Many patients don't ask because they are unaware of that option. You are right on target with your comments about the administrative overhead of submitting bills only to receive a $5.00 check. However, your doctor agreed to those fees when he/she signed the contract in order to participate with that particular insurer. If more people would get involved with the process of their insurance coverage, and actually read their EOB's, etc.. and ask questions such as yours, I think the powers in charge would be challenged to do a better job at 'reforming' the system.
One additional comment ; If you pay cash for your visit rather than submitting through your insurance, you may end up paying less, but it won't count towards your deductible. This may or may not matter, depending on your situation. A healthy person who has a large deductible ($2500 or more), may never meet their deductible and therefore may be tempted to pay cash if that amount is less than what they will end up being charged after the insurance company applies the charges to the deductible and pays $0.00. Or, a person may choose to go to an alternate source for care, such as a Walgreens Take Care clinic, and pay $34.00, rather than going to their primary care doc and paying $150.00. It doesn't seem to make sense or be fair for people to have to pay premiums for insurance AND pay for everything out of pocket, but that is the common scenario, especially for the healthy insured. Why not go back to the indemnity days, when most policies were high deductible, catastrophic plans ? Premiums would be lower and the 'coverage' would basically be the same.
Bottom line, the insurance company does have the advantage and will continue to profit, no matter what the outcome of 'healthcare reform' is.

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