Analysis: Should Congress limit health insurance company profits?

The question of limiting the profits of health insurance companies is sparking renewed national debate. The nation’s biggest health insurers have reported robust growth in recent years, due in large part to Medicare. All of the “big five” insurers, United Health Care, Anthem, Aetna, Cigna and Humana have seen increases in enrollment growth and revenues, with profits rising.

At the same time, a growing number of Medicare beneficiaries report that Medicare premiums, deductibles and out-of-pocket costs are consuming an increased share of their Social Security benefits. In our 2018 Senior Survey, 77 percent of survey participants said they support establishing a cap on the maximum amount of profit that private insurers may earn. Survey participants support requiring excess profits to be put toward lowering premiums and out-of-pocket costs. It’s not clear however, that this solution is working as intended for younger adults who shop for their coverage.

Health insurers that operate Medicaid managed care plans for example, must spend at least 85 percent of their revenues on medical care as opposed to distributing it as dividends to shareholders or multimillion dollar salaries for CEOs. Similar limits, called the “medical loss ratio,” were imposed during the implementation of the Affordable Care Act, for plans sold on the federal health exchange to people under the age of 65.

A recent investigative report by Marshall Allen for ProPublica, an independent nonprofit newsroom, reports that the medical loss ratio sounds good in theory, but can contribute to rising healthcare costs due to “perverse incentives.” Allen explores how a hospital charged $70,000 for partial hip replacement surgery, more than three times the Medicare rate for surgery saying:

“If the insurance company has accurately built high costs into the premium, it can make more money. Here’s how: Let’s say administrative expenses eat up about 17 percent of each premium dollar and around 3 percent is profit. Making a 3 percent profit is better if the company spends more. It’s as if a mom told her son he could have 3 percent of a bowl of ice cream. A clever child would say, ‘Make it a bigger bowl.’”

Clearly, how these limits on health insurers’ profits are designed have a big impact on how effective they are in bringing down costs — or not. A considerable amount of greater administrative oversight on the part of Medicare and Congress would also be required, to ensure that insurers and providers aren’t gaming the system. This situation suggests that the medical loss ratio system, as we know it today, still needs a lot more work before it can save the money that it was intended to.

Reprinted from The Senior Citizens League, TSCL is a Washington D.C.-based senior advocacy organization.

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