Obamacare reduces choice of health plans by giving government the power to control the Medical Loss Ratio (MLR) - the amount of dollars an insurer spends on medical care divided by the total premiums. Under Obamacare, policies that cover large businesses will have to achieve an MLR of 85 percent, while those for small businesses and individuals will have to achieve an MLR of 80 percent. This sounds simple but leaves many issues unresolved.
An important one is the treatment of taxes: Taxes are not medical care, but nor are they under health plans’ control. So, Obamacare excludes taxes from total costs used to calculate the MLR. Senator Baucus leads a group of senators who now assert that what they meant to pass was a bill that exempted some taxes from health plans’ MLR calculations, but not corporate income taxes.
If it prevails, Baucus’ flawed notion will lead to an immediate reduction of choice of health plans. Suppose two insurers of the same size compete in a region’s large-group market. They earn premiums of $1 million each. They each spend $850,000 on medical claims, thereby achieving an MLR of 85 percent. One insurer is for-profit, earning a profit of 4 percent ($40,000), and pays combined federal and state corporate income tax of 45 percent ($18,000). Its MLR automatically shrinks to 83.5 percent and Obamacare shuts it down.
Even without Baucus’ newly invented interpretation, the MLR is deadly for increasingly popular consumer-directed plans. Suppose a 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, and Obamacare shuts it down. (In fact, consumer-driven plans have lower total costs than in this simple example, because cutting out the middleman and giving more health dollars to patients to control themselves motivates them to get better value for money.)
MLRs are also irrelevant because the insured and their employers tend to choose health plans based on other criteria—likely invisible to politicians and bureaucrats. Plans with relatively low MLRs have increased market share in the last few years.
There is no doubt: Obamacare will severely reduce Americans’ choice of health plans. Fortunately, states are using a number of tools to resist Obamacare, until it is repealed. To impose its anti-choice regulations, the federal law relies on state-based “exchanges” that would choose health insurance for their citizens.
Tim Pawlenty, governor of Minnesota, has signed an executive order forbidding state bureaucrats from even applying for federal grants to set up an “exchange” to limit people’s choice of health plan. As Obamacare deploys its regulatory regime, other governors are likely to follow his lead.
Graham is the PRI director of Health Care Studies.