Friday, April 08, 2011

Words Have Meaning

Insurance companies are in business to make a profit.  They do not, by and large, exist primarily to pay claims.  Yes, there are mutual companies and co-ops that have a closer relationship with clients because clients are members and owners.  However, commercial insurance companies make money by investing premiums, not by paying claims - a financial industry, and not a service industry.

If you have any questions about that, you need to understand the phrase "medical loss ratios."  You can find a technical definition here (scroll down to it), but essentially it’s the portion of premiums received that an insurer pays out for medical care; and the rest is presumed to be administrative expenses.  So, what they pay out for claims isn’t something they’re happy about.  It’s a “loss.”  If they were oriented to service and not to financial gain, wouldn’t it be something like “customer service ratios;” or perhaps “care provision ratios?”  Businesses committed to serving would, I think, want to take credit for service to customers, or for care provided.  No business wants to take a loss.

Now, commercial insurance is a for-profit industry.  Making a profit isn’t a crime.  By and large, it isn’t a sin (well, that’s perhaps the subject for a longer discussion, but for the moment stay with me).  So, if the proportion of premiums paid out was 100%, there would be no profit.  More to the point, there certainly are appropriate administrative expenses.  Without decent administration, claims wouldn’t get paid; and some payments would be wrong or inappropriate.

There’s also room for discussion about what constitutes “medical care.”  Some things are obvious: reimbursements for a physician visit, or nursing care in the hospital, or for the antibiotic prescription.  Others are clearly not, or at least are clearly not covered in the contract, such as over the counter cough drops or a massage.  Sure, they help us feel better, but we don’t expect them to be covered by insurance.  But, what about alternative care, like homeopathy; or cosmetic care, like some surgeries or weight loss plans?  Some folks find them useful.  Some of the procedures will benefit a small group of patients, but for most they will be matters of vanity.  So, should insurers pay for them?  Should they pay for the few who will benefit, while not paying for those for whom the procedures are strictly cosmetic?  The devil can be in the details, and details matter, if we want our insurers to be good stewards (which is to say, if we want our premiums to be used as well as possible, and stay as low as possible).

This is a particularly hot topic, because the Affordable Care Act now sets requirements for administrative costs and medical loss ratios.  That is, there are requirements that insurers pay at least 80% of premiums received for medical care. (You can get details here; and you can learn a bit about a recent study on the subject here.).  So, beginning this year there are limits on what they can spend on administrative costs; and beginning next year insurers have to report annually what their expenses are.  The law also allows the Department of Health and Human Services to grant waivers to states to allow more time for the insurers they oversee to meet the standard.  Health insurance plans are overseen by each state, and some states already have limits on administrative costs.  However, the Affordable Care Act mandates consistency across the country.  So, insurers won’t benefit by moving from one state to another, or canceling coverage in a state, to seek a better ratio of expenses to “medical loss.”

But, I still think it clarifies things to know they talk about “medical loss ratios.”  Folks, we pay good money for health insurance, and to cover those who can’t get insurance – in premiums, taxes, and the incremental price increases to cover unreimbursed care.  No, it’s not a crime to make a profit, nor (usually) even a sin.  However, while they’re focused on profits, we, the customers and clients, are focused on being served.  It seems pretty reasonable to me that we as a society set some standards about how much of our money gets spent on service, even if it means a little less profit for the company.

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