The Insurance Industry's Lethal Bottom Line -- and a Solution From Sens. Franken and Rockefeller

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.


A Government run emergency adjudication board would be put into place that would have vast powers to act on a "stat" basis to reverse unjustified claims denials or delays and the yanking of coverage for the very sick. In addition, if the percentage of board overrides in a given period for a company reaches a certain level, a "trigger" would be pulled in which the Government would be allowed to petition the courts to have the offending company placed into receivership with the risk of investor equity being wiped out. With this threat in mind, the nature of investor pressure on company management would be quickly be changed! The state insurance regulatory bodies have been asleep at the switch with respect to banning last minute yanking of coverage. There is a model that can be used for crafting this ban. With life insurance, in all states except for one, there is a two-year (one in the one state) in which insurance company can yank a policy if there is material error or omission on the application. After the constestability period has passed, the policy cannot be yank except in the case of proven serious fraud. The same model could be used with individual health insurance. in which the policy cannot be canceled after the constestability period. It was the association of state insurance regulators that devised the alphabet collection of standardized Medicare supplement insurance products, which did much to clean up the sorry state of that business then. Why can't the same be done with health insurance?

I think you've gone a long way toward redemption from the work you did against the public interest as PR exec for CIGNA. It is remarkable how, even with a public who are much more educated about this issue than they were in the past, and even with films like Michael Moore's Sicko, and even with an ex-insider such as yourself testifying to congress just how corrupt and murderous the system has become, the forces of greed and corruption still hold sway over our political process. I fear that, unless all political campaigns are publicly funded, we will continue to rush headlong into corporate serfdom. Thanks for the work you've done this year. For what it's worth, I can't think of what else you COULD have done... the end result was predetermined. By the way, I would say that your assertion that Obama was outwitted by the industry is not really accurate; he has been shilling for PhRMA & AHIP from the moment he was inaugurated. Glenn Greenwald's perceptive Dec. 16 <a href="">article</a> at Salon illustrates the true White House stance toward the "stakeholders" (campaigndonors):

Democrat=Republican<=Corporatist They are OWNED by the Big Banks and Big Business (both Globalized to the point they have no national allegiance). Democrat voters have been duped as much as Republicans. Single Payor should be our goal but the Corporatists won't let us get there.

I recently resigned from my independent "consulting" job as a medical consultant performing UR (utilization review) for a very large insurance company. My task was to decide if a medical diagnostic and or treatment request should be prospectively approved, denied, or modified based on the claim history and the use of clinical guidelines. It became clear to me that my role (and that of my peers was not so independent) and too many of those who made these decisions without ever seeing the claimant used these guides as they were mandates and or standards of care. These decisions were then dictating care not delivered. This process and a statement from my "superior" re: the "% of my approvals" after more than 6 years led to my decision to resign and attempt to blow the whistle. With health care reform, "evidence based medicine" in the form of guidelines will be used as a manner to decide what should be considered "medically necessary" and may be used in their literal "black and white" language, rather than as a "guide" and in consideration of the individual case in it's totality in context. The 2009 ARRA has appropriated $1.2B from the DHHS to arrive at "comparative effectiveness research" which will produce more these guidelines for future use( i.e., recall mammogram controversy) when deciding what medical testing and care is "necessary"...... Too often, these guides are not applicable to the case based on the many variables these guides do not take into account. Thus, a provider and their patient need to make an informed and consented upon decision after reviewing these guides in context to the specific case. It's important that any legislation includes the appropriate use of any guides and should never be used solely as a means to deny care of any type.

I greatly admire Mr. Potter for his guts in coming forward, and for his contribution to returning the health care debate to some level of sanity. I do have a comment about his statement on MSNBC to the effect that it can be hard to get good numbers on medical loss ratios and the ability of insurers to fudge the numbers with accounting tricks. They may certainly try to do that, but if Congress enacts proper standards, it should be possible for even the most naive regulator to find the correct number. I was able to get a back-of-the-envelope number simply by using publicly available Census Bureau tables. Although the data available to me was out of date -- from 2006 -- I was able to confirm the general belief that MLR averages 80% or less. In 2006, according to the Census Bureau, total personal income was a little under eleven trillion dollars. After taxes, they had $9.63 trillion to spend. During the same year, total national expenditures on health care were 2.11 trillion dollars -- an amazing 22% of net personal income. Now, although $2.11 trillion was spent on health care, only $1.97 trillion was spent on actual health care goods and services. The difference, about 140 billion dollars, is presumably the “net cost” incurred by non-health care providers (i.e., insurance companies, HMOs and similar gatekeepers). That figure includes any income not directly spent for health care, such as advertising, marketing, sales commissions, premium taxes, additions to reserves, and profit. In 2006, $723.4 billion was spent on health insurance premiums. Deducting the $140 billion leaves $583.4 billion spent on health care providers, which works out to a loss ratio of 80.6 percent. Since the providers spent some of that money on their own advertising and marketing, and their profits, the actual amount spent on direct health care is probably quite a bit less. If the providers spent 90% of their income on health care, that would result in a real MLR of 72.5%. I was a math major in college, but I'm a lawyer, not a statistician. The lesson is that if I could derive these numbers in half an hour using public information, regulators getting detailed figures from each company could easily do a more accurate job. The key is not to add, but to subtract!

MLR information is readily available from health insurance companies' financial statements filed with the SEC. The low percentage of premium income incurred for medical losses can be explained, in part, by the high percentage of premiums for administrative expenses incurred (i.e., executive salaries and other operating costs) and profits realized by health insurance companies. An analysis of the major companies' financials demonstrates that those "costs" are far in excess of similar expenses incurred by Medicare and the healthcare systems of other industrial countries. It all boils down to excessive operating costs and profits.

Wendell: You are in a unique position and I get the feeling you are treading on egg shells. There is more you can do and I believe you have more insight to share. At the very least you could find out times and places for "Health Fairs" around the country that lead to your epiphany about health insurance and place this information on your blog for all people that might need this information. That would be a big help to us that do not have health insurance. Thanks for what you can do. Merry Christmas and Happy New Year!

I, too, think he seems restrained, overly-cautious, muted, centrist, etc. Makes me skeptical. Bottari's great, however!

The pressure to make exorbitant profits is resulting in long, expensive and sometimes fruitless fights for individual insurance policy holders. I'm in the process of fighting Blue Cross Blue Shield of Arizona to cover my c-section to deliver my daughter in August of 2010. Due to a change in the BCBSAZ defined "complications of pregnancy" as of October 1, 2008 my cesarean section isn't being covered because BCBSAZ no longer considers "fetal distress" as a complication of pregnancy. Something has to be done to insure that patients and their health care providers can make the best health care decisions and not worry about financial ruin due to insurance policy technicalities. You can read more about Lily's story online at