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.


Wendell Potter makes a number of good points, but he has thrown in with people whose objectives are to collectivize the economy, and they are just as bad as those Potter "blew the whitstle" on. Instead of having the government grab control of 1/6th of the economy as proposed by the idiotic 2700 pages of legislation know colloquially as "ObamaCare," if we had the moral courage to take ONE STEP AT A TIME, we should be able to agree on any number of BASIC elements, among them portability, intrastate competition,TORT REFORM, private carriers having "assigned risks" divided up among them for those who otherwise would not be able to get coverage, etc. Anyone who has ever seen an EOB where their carrier settled a bill (including your copay) for 22% of the "sticker price" billed (that is, with 78% "written off") knows that free markets have not worked because we don't HAVE free markets. We have providers and carriers engaged in a tug-of-war that leave patients (i.e., the party for who they are supposed to be Hippocratic oath-bound angels of mercy and financial intermediaries, respectively) out in the cold. The best cure for 2700 pages of complexity is frequently simplicity; we can solve THAT one with ONE SIMPLE LAW, the morality of which is self evident. To wit: ______________________________________________________________ The purpose of this Act is to promote free market competition in order to retard inflation of health care prices. (1) Any health care provider shall be free to set its own prices for any given service and to change such prices at will (but not more frequently than daily), AND (2) each health care provider shall be required to charge the same amount to all its patients for each particular service delivered on the same date, regardless of whether or by whom the patient’s care is insured. ________________________________________________________________ One insurance and economics professor told me that carriers "deserve" discounts for the "tremendous volume" they bring providers. I asked him what financial intermediary "deserves" anything at the expense of the principal party it serves; I asked what medical bill is not billed INDIVIDUALLY to one "customer" (the patient). No one buys 500 kidney transplants at once to get a "discount!" Under the two simple rules stated above, providers would be at liberty to set their own prices (the absence of which killed HillaryCare). They would also assume responsibility for setting their rates high enough to cover a reasonable profit and some bad debt experience, along with the cost of collections. Carriers would have to LIST their payout rates for all medical service codes in the contract BEFORE they sold the policy to an end user. Patients need to be financially responsible for any balance left over. THIS IS HOW ANY OTHER FREE MARKET WORKS WITH INSURANCE PLAYING A FINANCIAL INTERMEDIARY ROLE. While other elements (portability, etc.) are needed, they will ultimately fail to provide real reform WITHOUT these rules to rationalize pricing fairly. Further, these two rules in a truly free market would do more to contain inflation in healthcare (and make insurers competitive) than all the other elements added together. Why NOT do this? And why not do it FIRST? NOTES: A. It is immoral to allow the shell game of artificially inflated “Sticker Prices” for health care. In an industry supposedly motivated by altruism and the Hippocratic Oath, it is simply unjust to coerce people into cartels of insurance coverage (whether public or private) and systematically prevent disclosure of real prices – which is exactly what the present system does on nearly every “Explanation of Benefits” form. Whether CIGNA or AETNA pays the bill should make no more difference to either the provider or the patient than the races or religions of doctor and patient. B. The dishonest quotation of fictitious and exorbitant “Sticker Prices” with phony discounts or write-offs applied to them deprives Americans of the competitive effects of genuinely free markets, and should be banned as collusion by federal anti-trust laws. C. The call to fix prices (as in HillaryCare) or coerce employers to provide care as a fringe benefit (ObamaCare) distorts the competitive effects of an otherwise free market, and should be discouraged, if not banned outright as illegal. D. A common objection is “what about those who don’t pay anything?” The truth is, people who are taxpayers and those who are insured are paying for them NOW. Truth in pricing would use free market mechanisms to (1) identify such costs, and (2) bring competition among providers to bear in containing such costs in a way that is not done effectively now. E. Real honesty in pricing will employ free market competition to bring about more reform in health care in one year than all efforts WITHOUT such honesty can in a decade.