Health insurance should benefit the patient, not the shareholder

Image: Montgomery County Planning Commission (Flickr / Creative Commons)

Image: Montgomery County Planning Commission (Flickr / Creative Commons)

As I listened intently on the conference call line, I heard the medical officers from the other insurance companies discussing how to take advantage of our collaborative quality improvement efforts to improve their medical loss ratio (MLR)—basically, how could we structure the prevention messages we were working on so that any costs to the health plan could be included in their numerator. I was a bit lost: what does MLR mean? Why it was a loss? And, while I understand simple math, I had no idea what the “numerator” meant in this conversation. New to the insurance world, I believe all the work of the insurance company should be to benefit the member, the one paying premiums. (I work for a non-profit, member-governed health insurance cooperative, which may impact my views.)

Medical Loss Ratio: the term used for the proportion of your premiums that actually goes to pay for health care. Premiums that pay for you to go to the doctor, get an x-ray, pay the surgeon, or cover medications are all considered a “medical loss” to the insurance company.

If it doesn’t sound right, it’s because it isn’t. Your hard earned premiums, pooled with others in your community to assure that everyone has health care, is considered a loss. Historically, insurance companies worked diligently to decrease their medical loss ratio. That is, they did all they could to not pay for health care. The rest of the premium goes towards expenses that are not directly paying for health care: administrative costs, salaries, profits, and dividends.

How does one calculate the medical loss ratio? Numerator over denominator:

Numerator: This is the total for all incurred claims and expenditures for activities that improve health care quality. This includes the money the insurance company pays to providers for medical services and quality improvement programs like diabetes education and preventing re-hospitalization. And, I came to find out, the collaborative messaging we were discussing on the conference call.

Denominator: The total amount of pooled premiums minus taxes and regulatory fees.

During the 1990s, insurance companies slowly decreased their medical loss ratio, partly by paying for less and less, and partly by charging more and more. In 2005, Aetna posted the best MLR in their history at 76.9%. That means the company lost 76.9 cents on every dollar they collected in premiums.

In other words, they only spent about 77 cents of every dollar on health care for their members.

In 2004 and 2005, their combined profit was $4 billion, and their shareholders received a total of $12.50 per share. They hid their greed by calling it the medical loss ratio, not the sickness profit ratio. But that’s what it is: Pay for less health care, make more profit.

The Affordable Care Act caps the profits of health insurance companies by requiring a medical loss ratio of 80% for the individual market and 85% for the small group market.

Why is there such a clear distinction between the expenses above the line and below the line?

Traditionally, only the money above the line provides direct benefit to the member, the person paying the premium. The rest of the stuff (administrative costs, exorbitant executive salaries, bonuses, and dividends to shareholders buying and selling on some distant stock exchange) has no connection to the member’s health.

Let’s erase the line. Let’s make every dollar count for the member and use every dime to improve health. All the money is paid by members; all the money should be used on behalf of members. Yes, there are salaries, but let’s make them reasonable, and let’s make sure those employees are working for the benefit of the member, not a stockholder. Administrative costs are a reality, but we should be able to report to our members how each and every dime is spent to help provide them with care.

Of course, not every individual is guaranteed 85% of their premiums back in health care services. Hopefully, you won’t need that much care this year. Insurance is a pooled risk. Everyone puts some in so that when an individual needs it, the care is covered. But in 2013, 8.5 million Americans received a rebate from their insurance company because the company did not spend enough on health care services.

Every dollar belongs above the line, every dollar should be used to benefit the member.

MLR is an offensive term and should never be used in the health insurance industry. Your injury, your family illness, your aspiration for wellness should not be my business loss. The money we spend on helping you get and stay healthy should be a celebration. If they insist on using the term MLR,

by Jack Westfall, MD, MPH

Dr. Westfall is the Chief Medical Officer of Colorado Healthop.