The medical loss ratio is a part of the Affordable Care Act. By now, you have probably become aware that the Affordable Care Act is a series of health reform laws that are designed to improve health care, and health insurance, for consumers. The medical loss ratio is also a wonderful thing for consumers.
The medical loss ratio is a law that requires health insurance companies to spend a specific percentage of the money they get from premiums on medical claims, or activities that will improve the health of their customers. For most insurers, the amount is 80%. However, really large insurers have to hit 85%.
There are many reasons for consumers to love the medical loss ratio. If your health insurance company fails to spend 80% of the money it took in from premiums, (or 85%, for insurers of large groups), then it has to send out rebates to its customers for the amount that it was supposed to have spent on medical care (but didn’t actually spend).
What could be nicer than a check that comes from your insurer, instead of a bill? The rebate could also be in the form of a discount on your next premium payment, or a credit to your “account”.
Obviously, insurers are not going to want to have to send out rebates. Those rebates would be a very clear sign that the insurer is not spending the amount it is supposed to on the medical care of its customers. The only way the insurers can avoid having to send rebates is if they do what they are supposed to do, and actually spend the right amount of money on things that help customers to be healthy.
Another good reason to love the medical loss ratio is because it requires insurers to spend a large portion of their profits on things that are good for consumers. That 80%, (or 85%) cannot be spent on the salaries of the employees who work for the insurance company, or on the fees they owe brokers, or on other “administrative costs”, or on marketing. All that sort of stuff, (that isn’t medical care), has to be paid for out of the remaining 20% of the insurers profits from premium payments.
In other words, the medical loss ratio forces health insurance companies to spend the majority of the money from premiums on actual medical care (or on things that will improve the health of the customers). Personally, I think it is a good thing that insurers have to actually spend money on what they said they were going to when they sold a person a health insurance policy.
Many health insurance companies have already been hitting the 80% mark required by the medical loss ratio, and they are surviving just fine. Most of those companies are going to remain in business. There is some fear that insurers will leave the market, because they don’t want to comply with the medical loss ratio. Personally, I wouldn’t want to buy health insurance from a company that isn’t interested in paying for the medical care if its customers.
Image by Jim Mead on Flickr