Does Actuarial Value Trump Medical Loss Ratio?

The Affordable Health Care for America Act introduced in the House on October 29 would require any health insurer in the small or large group market to issue rebates to enrollees if its medical loss ratio (the proportion of the insurer’s income from premiums that it uses to pay medical claims) fell below 85%. A quick review of major health insurers’ current medical loss ratios, as reported by the insurers themselves, indicates that most would have to beef up benefits paid, reduce their administrative costs, or provide rebates to their members.

For example, WellPoint, a Blue Cross and Blue Shield organization, reported an 81.1% medical loss ratio for its third quarter; UnitedHealth Group was a close second with an 82% loss ratio. Aetna’s loss ratio, on the other hand, is where it should be, according to the House bill.

The American Medical News on August 24 reported that, for the second quarter of this year, the average medical loss ratio of the largest publicly traded health plans was 85.2%, but ranged from 82.9% to 86.8%.

But limiting insurers’ administrative expenses is not necessarily the most beneficial strategy for insureds. Ensuring a high actuarial value of benefits provided would be best. The Congressional Research Service earlier this year reviewed “actuarial value” issues. The actuarial value provides an estimate of the proportion of health care expenses a plan likely will pay. As the economy has deteriorated, so has the actuarial value of employer-sponsored health insurance. Individuals covered by employer-sponsored health insurance these days get lower actuarial values and less protection

Workers with employer-sponsored health insurance face underinsurance and unaffordability as their insurance costs more, covers less, and health care costs rise, a study published in the June 2 online issue of Health Affairs found. In Trends in Underinsurance and the Affordability of Employer Coverage, 2004-2007, Jon R. Gabel, senior fellow at the National Opinion Research Center; and Roland McDevitt, director of research for Watson Wyatt Worldwide, found that health care plans covered slightly fewer medical expenses in 2007 than in 2004 (80.1% versus 81.4%), and covered much less for workers who were in the upper half of spenders. Expected out-of-pocket expenses for all adults rose 34%, from $545 to $729, but for the highest-cost 10% of adults expenses went up 39%. Even the lowest half of spenders saw their expenses rise by 23%.

Perhaps new requirements for employers, and insurers, to provide at least a minimum standard benefit package would strengthen “actuarial value?”