Finding the right floor: How much should insurers spend on medical care?

News about health insurance companies -- policy rescissions, multimillion-dollar settlements over unfair business practices, soaring premiums -- raised an urgent question for state legislators.

How much of the premiums their constituents paid was going to CEO salaries, overhead and efforts to maximize profits, rather than to doctors and patient care?

At least 15 states have passed laws requiring insurers to spend a minimum percentage of premium dollars on care, and disclose those figures. Other states are considering similar legislation -- despite insurers' protests that they already more than meet those minimums.

California, the source of much of this year's news about insurers dropping sick patients and paying huge fines for other alleged misdeeds, was one state where health care spending drew legislators' criticism and scrutiny.

In February, Sen. Sheila Kuehl introduced a bill to raise the medical-loss ratio -- the percentage of each premium dollar an insurer must spend on health care -- to 85%.

"It's not acceptable for us to ignore such massive waste in the insurance industry when Californians are being bankrupted by rising health care premiums and gutted benefits," Kuehl said in a statement released in June.

Her statement accompanied a report from the California Medical Assn. detailing what managed care companies spent on medical care in the fiscal year ended June 30, 2007.

In CMA's report, Great-West Healthcare of California, since acquired by Cigna, reported a medical-loss ratio of 69.4%, the worst rate in the state.

California Gov. Arnold Schwarzenegger appeared to support Sen. Kuehl's bill at first but ultimately, it was one of several health system reforms he vetoed, saying he preferred a complete overhaul of the state's system. The CMA is hoping to see the idea return in future legislation, a spokesman said.

Nationwide, the advocacy group Families USA looked specifically at individual health insurance products and found some medical-loss ratios as low as 60%.

According to its report, at least 15 states have statutes setting a minimum medical-loss ratio, ranging from 55% to 82%. But some ratios apply only to one type of policy or only to nonprofit plans. A few other states have guidelines that leave enforcement up to insurance regulators.

That may be changing. This year, legislators in New York, Pennsylvania, Illinois, New Mexico, Massachusetts and Michigan took up medical-loss ratios. Washington lawmakers raised that state's ratio for individual health insurance from 72% to 77%.

Insurers say they are already spending more on improving members' health than they get credit for, and that mandating medical-loss ratio is not an effective health system reform.

Speaking with analysts in an October conference call, WellPoint President and CEO Angela Braly said policymakers should focus on the cost of care, not the cost of administering a plan.

"One of the concerns we had around minimum medical-loss ratios is that it really creates the wrong policy incentive, because the focus needs to be on the cost and quality of health care and delivering the right results there," she said.

Insurers point out some spending, such as for information technology, disease management and data analysis, is not counted as a medical expense, although those investments both benefit members and diminish short-term profits.

"Setting an MLR doesn't do anything to bring down the underlying cost of health care," said Robert Zirkelbach, spokesman for the trade group America's Health Insurance Plans. "It's not the best way to measure health plan performance."

At an October AHIP conference, Charlie Baker, president and CEO of Harvard Pilgrim Health Care, said the Massachusetts Legislature considered a bill earlier this year that would have set an 85% minimum medical-loss ratio. The bill was bundled into a committee request for further study of health insurance regulation, so the proposal could come up again.

If the state does mandate a minimum medical-loss ratio, Baker said, "I'll be astonished if it's not 88%, 89% by 2011."

He criticized comparisons of commercial insurers' administrative costs, which run from 5% to 40%, with Medicare's costs, often reported at as little as 3%. Medicare's high percentage of medical spending is only possible because its equipment, facilities, transaction costs and other overhead are covered by other parts of the federal budget, he said. "It's a phony baloney comparison."

AHIP President and CEO Karen Ignagni, on stage with Baker at the same forum, said insurers need to better explain their services. "I think we should look for every opportunity to talk about the things that we're doing ... that have no business being counted as administrative cost."

Double-edged sword

While insurers want credit for investments in disease management and information technology, many also routinely assure investors they are working to keep down the medical-loss ratio in order to maximize profits. Investors and analysts use the ratio to gauge whether plans have been successful at pricing policies sufficiently above what medical care will actually cost.

Most large health plans have been reporting rising medical-loss ratios across all products, even if medical costs for single product lines have seen small decreases. Plans typically do not report medical-loss ratios at the product or market level but give an overall figure or one ratio for commercial business and another for government business.

As health plans' business has begun to shift from employer-sponsored insurance to the individual market, expectations for keeping costs low and profits high have risen even higher. Individual insurance products tend to have a lower medical-loss ratio because of additional marketing costs, and the fact that companies in most states can cherry-pick healthier people to insure.

The Families USA report was critical of those low numbers, noting that few states set any threshold for medical spending in individual health insurance products.

In Michigan, an effort to set a standard medical-loss ratio was championed by the state's largest health plan. The proposal was part of a wish list for Blue Cross Blue Shield of Michigan that competitors said would have made the market more friendly to the Blues, particularly in individual insurance. The Michigan State Medical Society opposed the bill.

State Sen. Tom George, MD, an anesthesiologist from Kalamazoo, introduced an alternative insurance reform bill. He said a minimum medical-loss ratio doesn't make sense for Michigan, but he understands why the issue has come up.

"The public has this sense that insurance companies are bad -- more money should go for the provision of medical procedures in health care. I am just uncomfortable trying to put that in state law," he said.

"We do have concerns about medical-loss ratios that are low, [whether due to] excess administrative or excess profit," said F. Remington Sprague, MD, an internist who sits on the MSMS board and is chief medical officer for Mercy Health Partners in Muskegon.

Despite wanting to see more premium dollars going for medical care, he said, the state society took the position that it was not necessary to regulate medical-loss ratios. "We'd like to see a thriving insurance market in Michigan, and when we start regulating MLR, that discourages insurance companies from competing in those markets."

The bills, one introduced by Dr. George and the other with requests from Blue Cross, were in committee as of early November.

A New York bill, supported by the Medical Society of the State of New York, that proposed raising the medical-loss ratio for small group policies to 80% was not voted on by the Assembly. A bill in Pennsylvania that would have allowed insurance regulators to deny a premium increase request based on medical-loss ratio passed the House but didn't make it past Senate committee.

In Illinois, a proposal to require insurers to report medical-loss ratios passed the House and is pending in a Senate committee.

Similar proposals in New Mexico stalled in committee.

Standardizing a definition

Experts say there is room for improvement in the way states define, regulate and enforce insurers' spending on members' care, but setting a single medical-loss ratio probably is not the answer. One major wrinkle is that medical-loss ratio is defined differently among states and companies.

John E. Schneider, PhD, a health economist and consultant based in Morristown, N.J., suggested a standard definition would be a good first step. The federal government could create an industry standard by imposing minimum medical-loss ratios for its contractors, but that does not appear likely.

The Children's Health and Medicare Protection Act that passed the U.S. House in August 2007 would have required Medicare Advantage plans to report medical spending and penalized those who failed to spend at least 85% of their premiums and government reimbursements on health care. That bill was opposed by Medicare Advantage plans and never passed the U.S. Senate.

The possibility of setting a minimum medical-loss ratio for Medicare contractors came up again in an April hearing called by U.S. Rep. Pete Stark (D, Calif.).

Stark and other members of Congress have been critical of the profits made by companies running Medicare Advantage programs. According to estimates by the Medicare Payment Advisory Commission, Medicare Advantage costs the government 13% more on average than the same care under fee-for-service Medicare, and members don't always receive additional benefits.

Richard Foster, chief actuary for the Centers for Medicare & Medicaid Services, told Stark that mandating and publishing a medical-loss ratio for Medicare Advantage plans could help beneficiaries choose the most efficient plans with the most valuable benefits, but also could interfere with competition.

"It makes some of us a little uneasy about what this might do to the nature of competition among plans, if every plan knew what every other plan -- their cost factors -- were," Foster said.

Other experts also find flaws with setting a one-size-fits-all medical-loss ratio.

Dr. Schneider said regulating medical-loss ratios is probably not the best way to rein in profits. Plans would be likely to just cut disease management and technology investments.

"How many of these [insurers] are actually going to say, 'We're just going to accept a 2% instead of a 4% profit?' " he said.