The California Medical Association has released its annual ranking of the state’s health plans. No, the ranking does not measure health plans by the degree to which their reimbursement policies hew to medically recognized standards of care, which I believe most laymen would consider a public service.
Instead, they’ve measured health plans by the medical loss ratio (MLR): the percentage of premium dollars spent on medical care, as opposed to administrative costs. Currently, this is an accounting measure that California health plans report to the state, but which has no regulatory implications. The CMA supports a bill, SB-1440, that would mandate an MLR of at least 85 percent.
While this sounds patient-friendly, it is not. I addressed the fallacy of regulating the MLR in my January paper on the California Health Care Deforminator, ABX1 1, the Schwarzenegger-Nuñez bill that also included an 85% MLR.
Put simply, the MLR is an accounting measure, not a measure of quality or efficiency. For some plans, the MLR is quite impossible to interpret, especially those that serve government programs. For example, Molina Healthcare of California is a Medicaid managed-care plan that reported an MLR of 167.26 for 2006. Obviously, there is no real way for a health plan to spend two-thirds more on medical costs than it earns!
According to Professor James C. Robinson of the University of California, Berkeley, “the Medical Loss Ratio is an accounting monstrosity that enthralls the unsophisticated observer and distorts the health policy discourse.” There are a number of reasons for this “monstrosity,” according to Professor Robinson. Many health insurers compete in markets across the country, allocating overheads across state lines, which makes accounting conventions even more arbitrary.
Narrow networks obviously have fewer administrative costs than broader networks, but patients appear to value broader networks nevertheless. Also, integrated managed-care organizations, such as Kaiser Permanente, can have much higher MLRs because they move administrative costs to the provider side of their organizations. PPOs have higher administrative costs because they cannot do this.
Regulating the MLR is also deadly for consumer-directed plans, which are becoming increasingly popular. Let’s assume a scenario where a consumer-directed health policy incurs exactly the same costs as a traditional policy. (In fact, this is unlikely, because total costs of consumer-directed plans are significantly lower than for traditional ones, as patients have better incentives to control costs. ) The traditional policy costs $4,000 and spends $3,400 on patient care, for an MLR of 85.00. With the consumer-directed policy, the patient controls $800 more of the medical spending than with the traditional policy (through a higher deductible), and his premium goes down by $800. In this case the MLR goes down to 81.25 ($2,600/$3,200). There is no real difference, but the accounting looks worse.
The CMA’s report also rails against the “profits” of the for-profit health plans, blaming high MLRs on capitalism. (To drive the point home, the report gratuitously announces the total remuneration of senior executives at health plans that are listed on the stock market. I wonder when the CMA will publish remunerations of the highest paid doctors in the state?)
But of the three health plans with the “worst” MLRs, which the CMA chose to single out in its press release, one is a not-for-profit. Of the two plans that it singled out for the “best” MLRs, one is for-profit. There is no consistent relationship between a health plan’s taxable status and its MLR.
Somehow, the CMA believes that if the law compelled all health plans to magically adhere to an 85% MLR, that money would go to patient care. But it would not: capital would flee the state, fewer medical procedures would get done, and more Californians would become dependent on the state for health care.
Indeed, if the CMA thinks a high MLR is so bad, you’d think it would jump at the chance to replace all health plans with one that has no profits: Medi-Cal, the state’s Medicaid program. Well, they’re actually not too enthusiastic about that health plan either, since Gov. Schwarzenegger proposed cutting payments to doctors by 10% to help solve the state’s budget deficit.
Organized medicine must focus on restoring physicans’ right to practice medicine – not imposing a government accountants’ right to practice it for them.
