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June 13, 2007

High Loss Ratios Undermine the Affordability of Health Insurance

Nationwide, states are unveiling health reform proposals dealing with insurance company loss ratios. California Gov. Arnold Schwarzenegger (R) and Pennsylvania Gov. Ed Rendell (D) have both introduced reforms that require insurance companies to increase their loss ratios to 85 percent--meaning at least 85 percent of collected premiums must be used to pay direct health expenditures.

Conversely, the North Dakota legislature and Gov. John Hoeven (R) on April 13 enacted Senate Bill 2154, which actually lowers the legally allowed medical insurance loss ratio for individual and small group coverage to 55 percent and 70 percent, respectively.

Which reform will be more effective?

Loss Ratios

A loss ratio is the percentage of premiums spent on direct patient care. Loss ratios are, in effect, price controls, seeking to limit the cost of insurance by controlling one of its primary components--administrative costs.

Administrative expenses include all the costs required to conduct the business of health insurance and provide customer services to the insured. These expenses include:

* the cost of collecting premiums and crediting them to the correct accounts;

* the cost of processing medical claims accurately, including cutting and sending checks for services and providing payment explanations;

* monitoring efforts to ensure patients, especially those with chronic medical conditions, are getting appropriate care;

* customer service staff to answer questions--often 24 hours a day, seven days a week;

* agent commissions;

* costs imposed by state laws, including premium taxes, as well as fees paid to independent providers to review claims, assessments for high-risk pools, and timely claims payment requirements; and

* profit and general overhead costs.

Insurers and health plans incur significant costs in their efforts to process and monitor claims and care. Unfortunately, while those efforts surely reduce claims--thereby reducing upward pressure on premiums--critics see only the "costs," not the benefits. They are ignorant of the fact that those "costs" may actually save money.

Contributing Factors

Loss-ratio laws often refer to the individual and group health insurance markets as if they are synonymous. They aren't. Many factors--including group size, premium amount, and plan design--may affect the cost of administering a plan.

For example, agents selling health insurance to individuals will need to meet separately with each client to asses his needs. To cover their added time and costs, agents selling individual insurance will generally command higher commissions than agents selling in the group market. Selling to individuals is a very time-consuming and expensive process, but necessary for those without access to group coverage.

Other administrative expenses are associated with processes that help reduce health care costs and improve health outcomes.

Proper claims payment systems, for example, can reduce duplicate payments. Preferred provider networks provide discounts on medical services in exchange for access fees. Managed care departments work with doctors and patients to find the most cost-effective care--sometimes even if that care is more expensive in the short run.

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Posted by healthinsurance at June 13, 2007 11:03 AM