Why Health Insurers Are Encouraged to Spend More, Not Less

In their recent marathon interview with Tucker Carlson, Calley Means and Dr. Casey Means mentioned in passing that under Obamacare, 85% of the revenue that health insurers collect as premiums must be paid out as claims. The result, the Meanses say, is that insurance companies are incentivized to maximize healthcare spending. The Meanses’ key message was that there is now no institution in U.S. healthcare with a financial incentive to help people get and stay well.

What’s going on here?

Medical Loss Ratio (MLR) rules

Under Obamacare, an insurer makes the most profit if it pays out exactly 85% of its premium revenue as claims.

Underpayment

If an insurer fails to spend 85% of premium revenue on medical claims, the insurer must issue rebates to policyholders to make up the difference. While it may seem that insurers’ P&L statements are indifferent to whether revenue is distributed to pay claims or fund rebates, rebates come with significant costs.

First, issuing rebates has significant administrative expenses, including legal oversight. Second, rebates reveal that the insurer has miscalculated, an embarrassment to the company’s leadership and a hit to the company’s reputation. In addition, significant rebates could draw attention from regulators, and investors and analysts might develop concerns about the company’s ability to accurately forecast costs.

Overpayment

If an insurer pays more than 85% of premium revenue on medical claims, its profit is reduced because they have less money left over after paying operating costs. However, insurers in these circumstances are taken care of. Insurers that have overpaid can now justify to regulators the need to raise premiums. According to the 85/15 rule, insurers will simply enjoy higher revenue and profits in future years.

Health insurance compared to auto insurance

While health insurers make more money the more claims they pay, other insurance industries operate with different incentives. For example, in the case of auto insurance, the more policyholders crash, the more money auto insurers lose. Auto insurers can theoretically raise premiums in response to higher claims, but car insurance is a standard product and there’s plenty of competition for consumers to explore.

To limit the impact of claims on their profitability, auto insurance companies run programs that encourage safe driving:

• Discounts for drivers who have maintained accident-free records
• Discounts to drivers who complete approved defensive driving courses
• Discounts for cars equipped with advanced safety features like automatic braking, lane departure warnings, and collision avoidance systems

In an environment with proper incentives, health insurance companies would offer similar “safe driver” discounts to members, such as rewarding policyholders that belong to a gym, or those who live south of 37 degrees latitude.

To be fair, MLR rules do in fact allow health insurers to spend revenue on “quality improvement” programs, in addition to claims, to reach the 85% threshold. These programs can include preventive care efforts that encourage screenings and well visits.

Still, a cynical person might respond that these prevention initiatives make an enormous assumption: that the more frequently people participate in the healthcare system, the better the health outcomes. Controversy swirls around whether wellness interventions (mammograms, vaccines, cholesterol checks, DEXA scans) really improve health. One could argue that these touchpoints aren’t actually meant to keep people out of the healthcare system, but exist instead to lead policyholders to the top of the healthcare sales funnel.