Arnold Kling  

Mandatory Bad Customer Service

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Uwe E. Reinhart writes,

The recently passed Affordable Care Act requires heath insurance issuers to use at least some minimum fraction of revenue from the premiums it receives on medical services. While the idea might sound straightforward, this fraction, known as the "medical-loss ratio," is open to all sorts of creative arithmetic, and you can bet that interest groups from every corner are trying to get the math to add up in their favor.

He does not get what is really wrong with this provision. A big cost component for health insurance companies is customer service. In competitive markets, insurance companies answer the phone. But some states discourage health insurers with regulation, so that we end up with near-monopolies in the individual and small-group market. See Maryland, where just about everyone other than Blue Cross has been driven out of the market by regulation--the situation is more competitive in Virginia. But above all, see Medicare, which has a monopoly on senior.

Try getting through by phone to a monopoly insurer, especially Medicare. If you need to talk to a human being about your situation, heaven help you. And if you have ever been in a situation where you could not get through to a health insurance person, you probably were ready to go postal (in our family, we actually call it "going health insurance.") Physicians, too, feel the bad-customer-service pain.

But under the new health care law, health insurance companies are supposed to act as pure conduits between premium-payers and health-care providers. So what the new "health care reform" law does is provide incentives for health insurance companies to cut back on customer service.

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COMMENTS (2 to date)
Hyena writes:

Shouldn't you be pleased with such a thing? The inability of consumers to do their own research, reassure themselves and navigate options (even in our information-rich world) is a massive drag on the economy.

Stop demanding that we subsidize people who can't figure things out for themselves!

AB writes:

I posted these details about the details of the minimum loss ratio calculation already on Avik Roy's blog, for all of the talk about insurers trying to "game" it, the reality is that the NAIC/HHS are drawing up the regulations in a nonsensical manner. I apologize in advance for the length:

The MLR regulations being drawn up by the NAIC are even more onerous than most people realize, especially during the transition period from 2011-2013.

The loss ratio will be calculated at the state and legal entity level, slicing up the blocks of business into smaller and inherently more volatile pieces. To account for that they allow adjustments depending on the size of the block of business, and any block with fewer than 75,000 members in one year is considered not fully credible. If a block of business is not credible the loss ratio will be calculated using up to three years of experience, but here is the catch: any rebates paid do not count in that calculation, so you will be penalized twice on the exact same experience, effectively making the required minimum loss ratio even higher than 80%.

Some actual numbers will clarify this a bit. Let's say in 2011 you have a block of business that is small enough to not be fully credible, with a loss ratio of 70%. You'll pay a 10% rebate for that year. Then in 2012 the block has a loss ratio of 75% (many insurers are not at the 80% yet, and it will take some time for them to get there so this is a perfectly reasonable example of how a typical insurer's experience will look over the next few years) but it is still not credible so you have to combine the experience for 2011 and 2012. Since you cannot count the rebates paid for 2011, the loss ratio for the two years combined is 72.5%, and you have to pay a rebate of 7.5%.

When you now look the total picture, you've collected $1M in premium in each year, paid out $700K and $750K in claims, and paid $100K and $75K in rebates. So the total effective loss ratio (claims plus rebates divided by premium) across those two years is not 80%, but 81.25%, because you've been forced to double-count the sub-80% loss ratio from 2011, despite the fact that the rebate you paid has already made that year's experience compliant with the law.

The fact that this is double-counting and leads to the actual minimum LR being higher than 80% was brought up to the NAIC, but to no avail. It is going to be very difficult for some smaller insurers to quickly ramp up to the 80% minimum LR, the fact that the rules being drawn up for the calculation make that number even higher than 80% does not bode well for the marketplace.

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