Healthcare reform is a very large puzzle.  Talking about only one piece at a time makes it difficult to convey the big picture of our health care system problems and fixes.  The piece of the Affordable Care Act in the news recently is the exciting subject of medical loss ratios.  In the overall scheme of the reform law, this is a positive part of the legislation.

What is a medical loss ratio?  Get this – it is how much of your premium dollar is a loss to the insurance company in the form of paying for your medical benefits.  As T.R. Reid says, isn’t this backwards?  For you, the goal should be to spend as much of your premium dollar on medical benefits, and for the insurance company to have very little overhead.  The unfortunate vernacular of “medical loss” is something the health insurance industry wishes they could put back in the bottle.

Overhead for health care in this country is out of control.  It depends on what you count, but all in, it is thought to be responsible for 25 to 30% of what we spend on health care.  So of the $2.6 trillion we spend on health care in this country, at least $650 billion goes toward overhead.  Put another way, of the $7,960 we spend per person per year on health care in the United States, about $2,000 goes to overhead.  Other countries are much more efficient.

One section of the ACA moves to reduce inefficiency and cut overhead in healthcare.  Simplified billing is part of this, and we all know about the billing monster.  So why are medical loss ratios in the news?  Another part of the ACA forces insurance companies to become more efficient.  The overhead for small group and individual insurance can be atrocious – for some companies running up to 30%.  The numbers are better for large group insurance, and still way too high.  The goal of the ACA is to bring overhead down to under 20% for individual and small group coverage and under 15% for large group insurance.  Considering that other countries keep overhead in the 5 to 10% range, these goals should be easily obtainable.

One argument is what is overhead and what is a health benefit?  The NAIC lobbied for the Department of Health and Human Services to include payment of commissions to health insurance agents as a health benefit and not overhead.  I know many good health insurance agents, but they sell a product and have never shown any proclivity toward providing healthcare or health education.  Thankfully, HHS denied this request.

Seriously, if health insurance policies are standardized, why will we need agents?  We will need professionals to help patients navigate a very complicated health care system, but we won’t need specialized agents who sell policies.  The ACA provides for “Navigators” to help patients through the health care system.  Can we retrain the agents to move from a sales job to a patient service job?  We no longer have elevator operators, switchboard operators, or food safety tasters, and maybe health insurance agents should join those groups.

So what is happening?  2011 was the first year that insurance companies were required to bring down their overhead, unless they were approved for waivers.  So what happens if the companies do not meet their overhead target?  You get a rebate.  The final numbers are yet to be released, but Kaiser Family Foundation estimates that $1.3 billion will be returned back to employers and consumers.  Here is the breakdown:

  1. Individual Market - $426 million will be returned to consumers.  Approximately 215 plans will provide rebates to 3.4 million people.  This averages to almost a third of the individual market receiving rebates.  The average rebate will be $127 per person, although some states have much higher averages, such as Alaska at $305 per person.
  2. Small Group Market - $377 million is expected to be returned to employers.  146 plans covering 4.9 million employees will be affected.  This is 28% of the small group market and the average rebate will be $76 per enrollee.  Plans in Alaska will receive a whopping $517 per person average rebate.  I feel sorry for how long the people in Alaska have been overcharged due to inefficiency.
  3. Large Group Market - $541 million will be returned by 125 insurers covering 7.5 million enrollees.  As expected, the large group market is much more efficient.  This represents 19% of large group enrollees and the average rebate will be only $14 per employee.  Vermont wins distinction in this category with an average return of $386 per enrollee.

All plans have to notify their enrollees about rebates, even if they do not have to provide one.  This is a step in educating our population about cost control in health care.  However, the notice will probably come in the form of another piece of junk mail that consumers will throw in the trash.  More money out the window.  The only thing people will read from an insurance company is a check or a bill.

I wonder what would happen to efficiency if we removed health insurance from employment, and created one huge individual pool?  With so many good options on how to fix our healthcare system, wouldn’t it be great if our politicians took the route of simplifying our system instead of building on complexity just to please all the constituents – our insurance lobby in particular?  Of course, we need to answer the question first – should everyone have basic health care, and if so, how much are we willing to pay for it?

Questions, comments, or suggestions appreciated here, on Twitter @CarolynMcC, or to

I Get Money