Power to Corrupt in ObamaCare Fine Print

Warning: this may look like boring, accounting stuff.  But you should resist the temptation to click away.  This could be the most explosive paragraph in the thousand page bill.ObamaCare


(a) IN GENERAL.—A qualified health benefits plan (QHBP) shall meet a medical loss ratio as defined by the Commissioner.  For any plan year in which the qualified health benefits plan does not meet such medical loss ratio, QHBP offering entity shall provide in a manner specified by the Commissioner for rebates to enrollees of payment sufficient to meet such loss ratio.

In insurance language:

  • “Medical loss” is all the payments made by the insurance company for medical services for it’s customers, or “enrollees.”
  • The “medical loss ratio” is the portion of total premiums collected from customers that was paid out for medical services, or  “medical loss.”

If the company collected $100 million in premiums during the year and paid out $90 million for medical services, it’s medical loss ratio would be 90%.  Loss ratios range from as high as 98% to as low as 45%.

The authors of ObamaCare want you to believe in the dumbed down simplistic notion that a company with a “low” ratio is cheating it’s customers by squandering money on administration or even “waste” or  excessive profit, while a company with a “high” ratio benefits its customers by paying out almost all it collects in premiums for medical services.  In reality, much of the differences in loss ratio from company to company results from differences in accounting methods and business models.

First, one undeniable Fact:

Operating insurance companies, health clinics, physicians’ offices, and hospitals all require significant administrative functions and expense, from management, to maintaining supplies, to equipment maintenance, to IT, to payroll.

Health plan business models could be arrayed on a spectrum.  At one end are the indemnity insurers, that do not participate in any management of hospitals or medical practices.  All they do is pay the bills submitted by hospitals for services to their customers.   Hospital management and administrative costs are included in but not itemized in those bills.  Thus this type of health plan will appear to be paying less in administrative costs, will have a higher medical loss ratio, and will look “good” in this simplistic, politically contrived measure.

At the other end of the spectrum is the staff-model HMO, such as Kaiser Permanente.  Kaiser provides virtually all medical services in hospitals and clinics it owns, by doctors and staff who are Kaiser employees.  Thus every administrative function, from marketing policies, to collecting premiums, to payroll, to record keeping is paid for directly by Kaiser.  Kaiser’s administrative costs appear to be higher, and it’s medical loss ratio appears to be lower, even though it could be spending less on administration than an indemnity insurer.

Between the two extremes, Kaiser and an Indemnity insurer, are numerous, hybrid, health plan models.  The loss ratio of each model depends in large part on how many of the administrative expenses are paid directly by the insurer and how many are buried in fees for medical services.

No business model is automatically “better” than all the others.  They are all complex and all require active management and cost control to deliver maximum value to customers.  The medical loss ratio is not a measure of quality or value for premium dollars paid by customers, because no two companies have exactly the same business model and accounting structure.

Under ObamaCare “the Commissioner” will have the absolute power to dictate an ideal loss ratio, applied to all companies and all business models.  If a health plan’s ratio falls below the Commissioner’s arbitrary level, that health plan will have to refund the difference in cash to it’s customers.  This will immediately drive some companies out of business, not because they provide less value to their customers, but because of differences in accounting and business models.

The Power to Corrupt

The next paragraph in the legislation says the Secretary of HHS, a Presidential Appointee, will come up with a formula for computing the medical loss ratio.  All health plans will be compelled to apply this formula to compute their ratios.  Since  this is fundamentally a political exercise, the formula can and will be rigged to favor some health plans and force others out of business.  Insurance companies will be forced to seek political favor from the President to ensure they are not punished by the formula.

The Bottom Line

This seemingly minor, technical provision is designed to give unlimited discretion to the President and his appointees to politically assist some  health plans while forcing others out of business.  We can only guess what the President will demand in exchange for allowing a company to continue in business.

4 Comments so far

  1. […] with Holder and Obama, this time involving the intimidation case against the Black Panthers. Power to Corrupt in ObamaCare Fine Print – libertyworks.com 07/30/2009 Warning: this may look like boring, accounting stuff.  But you […]

  2. Cheri Douglas on July 31st, 2009

    The real bottom line problem here is that this is among the many provisions that provide real incentive to healthcare organizations to lower the amount and quality of care given to patients, in order to make the government formula work out to their benefit. When you start cutting, you do not wish to cut those people you must work with everyday in the office. How much easier it will be to improve the bottom line by denying procedures to a few faceless patients and their families. They won’t go shop for healthcare somewhere else. There won’t be a “somewhere else”. They will just have to suck it up and play the hand Obamacare has dealt them.

  3. aaa again on July 31st, 2009

    I was unaware of the large spreads in “reported” med loss ratios. But upon reflection, yes, this is an obvious data interpretation issue. Thank you for highlighting it.

    I wish I could beleive that the proponents of Obama care didn’t know what they were doing here. But I can’t……..

    Its the Chicago way.

  4. thousand flowers blooming on July 31st, 2009

    Twisting, spinning, distorting, contorting. Trying to make a good idea to keep insurance companies honest look nefarious.

    These insurance companies deserve all the regulation they get. They’ve been ripping us off forever. This is just a way to keep them from blowing all the money on CEO bonuses, and CEO airplanes and CEO vacations.

    Instead of hiring a hundred lawyers and accountants to find ways to keep from helping you when you get sick, they have to pay for your doctor.

    Really bad stuff to Republicans.