What is the Medical Loss Ratio?
Is the MLR driving up employer healthcare costs?
A piece of the Affordable Care Act that seeks to cap insurer profits may be driving employer healthcare costs in some cases.
The ACA’s Medical Loss Ratio intended to cap the profits of insurance companies by requiring them to pay out 80 percent of what they collect in premiums, leaving 20 percent for administrative costs, marketing and profit.
The reasoning behind this was to put eight out of every ten insurer dollars toward claims, as opposed to other parts of their business.
However, this also means the maximum profit insurers can collect is 20 percent of premiums. As a result, the avenue to profit growth is to increase premiums altogether, especially for those not surpassing the 80 percent threshold.
Employers are left to question whether insurers are best positioned to help employers lower medical claims, and what really drives annual premium increases of 10 percent, 15 percent, 20 percent or more.
Arguably two services make up the bulk of a traditional insurer’s value proposition—negotiating discounts for medical services with providers, and administrative services around paying claims.
But as healthcare service prices have skyrocketed, many employers are finding that even with a 50 percent insurance discount, employers are still often paying double or triple what the government pays for the same service. (More: What is an insurance network discount worth?)
The second service insurers provider is paying claims. But medical bills are consistently wrong, and with insurers incentivized to increase their 20 percent margin, many are questioning their motive to inspect these bills for errors and overcharging.
Ultimately, many employers are finding that there are more transparent and cost-effective ways to pay for employees’ healthcare, including direct contracting and reference-based pricing.
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