In praise of low medical loss ratios

The new health insurance reform law will generally require health plans to pay out at least 80 or 85 percent of premiums in medical expenses, depending on whether they are selling to individuals/small groups or to large groups. Intuitively it makes sense that purchasers would want the medical loss ratio to be as close to 100 percent as possible –since the purchaser doesn’t derive utility a plan’s administrative expenses and profits.

But there is another way to look at it.

From a personal perspective, I’d rather stay away from doctors, hospitals and pharmacies. If I get just my routine physical and recommended screening tests my medical cost will be very low. If everyone’s like that, then the insurance company will have a very low medical loss ratio. Maybe I’ll get lucky and it will just happen that way on its own. On the other hand, I can envision scenarios where administrative activities by my health plan help keep me healthy and away from expensive but not useful medical products and services. For example:

  • Smoking cessation or anti-obesity programs that help me stave off diabetes and heart disease
  • Utilization management that keeps me from getting unneeded CT scans
  • A subsidy for gym membership that keeps me in shape
  • Health literacy programs that help me interact with the health care system more intelligently
  • Network development so that the best physicians and hospitals are in network
  • Benefit design that encourages appropriate use of the health care system

Having lost the battle on medical loss ratio regulation, health plans are busy trying to classify many of the above expenses as “medical costs.” They’ll have some success in that regard but it won’t get them where they want to be.

Another reason to allow low medical loss ratios is it keeps premium inflation down over time. If insurers can make big profits by holding the line on costs, those profits will eventually be competed away. If the goal is to spend a high percentage on medical costs, the tendency will be to drive premiums up over the long term so that relatively fixed administrative costs (like executive salaries) decline as a percentage of premiums.

I’m not saying all administrative costs are good. But it is foolish to look at medical costs as good and administrative costs as bad.

May 21, 2010

7 thoughts on “In praise of low medical loss ratios”

  1. Excellent, thoughtful post, David.

    Too many people writing about loss ratios have no idea what they’re talking about. It’s a pleasure to read such an informed and provocative post!



  2. Indeed, the one size fits all approach & the “High MLR good, low MLR bad” bleating is very silly, e.g. see

    One prediction: since Congress has mandated the minimum MLR, in a couple of years there won’t be any plans with MLRs above the minimum…

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