The unintended consequences of medical loss ratio regulations
Over at Cato at Liberty, Michael F. Cannon has an article entitled Obamacare’s ‘Medical Loss Ratio’ Regs Encourage Fraud, Unnecessary Medical Services. By way of a brief summary, Mr. Cannon is pointing out an unintended consequence, namely the fact that capping the amount of money insurers are allowed to spend on “administrative” expenses in the name of cost savings to consumers is far more likely to increase costs to consumers.
Consider the following: an insurer spends a freely-chosen amount of money on “administrative” expenses, which include tracking down and recovering from those who perpetrate fraud on the system. Despite the fact that more than 15/20% (the cap amount) of the cost of a typical consumer’s insurance policy – let’s say it’s 30% – goes toward non-medical related expenses, the consumer pays less than they would if non-medical expenses were capped. How could that be so?
Consider the alternative. Where the artifical ceiling on payments to prevent and rectify medical fraud interferes with the insurer’s ability to actually do so, the resulting costs of fraud must be borne by the company. However, every company determines its cost structure in relation to its expenses. Therefore, when fraud costs rise due to the artificial limitation on insurers’ ability to effectively deal with fraud, it is in fact the customer who will bear the cost, in the form of higher premiums. If the cost of fraud is higher than the difference between the 15/20% cap on non-medical expenses and our hypothetical 30% figure representing the free-market amount, it’s the customer who loses out.
Note also the possibility of unnecessary medical procedures being undertaken to goose the medical-related costs in order for the company to both maintain the proper government-imposed ratio and effectively deal with fraud. In this case, costs to consumers will go up twice – first in the form of unnecessary medical tests being far more common throughout the risk pool, and second in the form of an end-run around the administrative expense caps.
How any of this is supposed to reduce premium costs to consumers is beyond me.
Unfortunately, customers will not be allowed to cost-shop medical insurers based on loss ratio vs. premium cost. That lack of consumer choice, after all, is a “benefit” of imposing an artificial limit.
This may be of no interest to you if you are planning on gaming the regulations to receive a “free lunch” in health care. However, for those of us who work hard, earn an honest living, and expect the rules of the game to be fair, this makes no sense whatsoever. Why allow unrestricted medical fraud to impose costs on honest customers? Perhaps nobody thought that restricting fraud would be a good thing? Or perhaps no one in Washington believes that, maybe – just maybe – health insurance companies know the business of health insurance better than arrogant bureaucrats.
(By the way, I appreciate the reference to the “fatal conceit” of ObamaCare in Cannon’s article. This, of course, is a hat tip to F.A. Hayek.)