Beyond fully adopting a universal or two-tiered healthcare system, the U.S. may need to change the way in which the healthcare market is currently incentivized to make a profit. Chris Thurin, executive vice president of organic growth at OneDigital, which focuses on healthcare and wellness benefits management, names the medical loss ratio as an effective place to start.
The MLR, a provision within the Affordable Care Act, was passed in 2011 and stipulates that large group insurance plans use at least 85 cents of every premium dollar to pay for its customers' medical claims and services related to quality of care. The remaining 15% is meant for administrative, overhead and marketing costs. If the insurer fails to meet the MLR rule, they must refund the policyholder, which would often be the employer.
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“The Affordable Care Act was well-intentioned — it wanted to prevent insurance carriers from earning outsized profits in our healthcare system,” says Thurin. “But it creates a perverse financial incentive instead. Basically, when claims spend grows, that’s good for insurance carriers’ bottom line.”
In other words, insurers are incentivized for their customers to spend more, so their 15% can equal more profit. Employee Benefit News spoke with Thurin to gain more insight into the MLR rule, what it means for the healthcare landscape and how to turn this incentive around.
Can you further explain why the MLR rule works against the interests of health insurance customers?
There’s an assumption that carriers collect on clinical services and quality improvement, and the remaining 15% is allocated to administrative costs and similar expenses. So, the MLR rule sounds like a good strategy to control greed. But insurers are actually incentivized to grow their claim spend in order to grow profit — an insurance carrier has to grow the whole pie in order to grow the 15% slice, which can include profit. It is important to remember that most insurers have an obligation to shareholders and other stakeholders to grow their profits on a year-over-year basis. They cannot ignore that mandate.
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When you start connecting the dots to the MLR rule, then we also know insurance carriers are going to make more money if they're selling more expensive drugs. If a drug manufacturer is going to pay a rebate to the insurance carrier as well, now they're making additional money, potentially outside of the MLR rule — and that’s regardless of whether that drug costs the employers more money.
Then what’s the danger in health insurance carriers being primarily beholden to shareholders and stakeholders?
I don't know if that in and of itself is a danger to our healthcare system. It’s a system intended to operate on a free market. But perverse incentives create an unintended consequence where the only way carriers can actually grow their profit is to allow claims costs to increase.
Insurance carriers also have to compete with one another and they have to be able to say that they have a better deal when they negotiate with the providers. But even then, if they are overly aggressive in those contract negotiations, they actually reduce claims spend, which reduces the amount of profit that they can earn — so allowing overutilization or over-treatment actually increases profits. Meanwhile, efficient and value-based care, which would improve care coordination and health outcomes, would decrease their ability to make a profit.
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Still, I don't think that insurance companies set out to do a poor job. It's hard to deliver low-cost, high-quality care that actually is focused on improving the health of individuals. If you then layer reverse incentives like the MLR rule, it becomes clear that we pay providers for the most part based on the volume of care, not the value of care. No matter how ethical and good people are, if you have the wrong incentives in place, you're going to drive the behaviors that you're incentivizing.
How can insurance companies profit based on quality cost-effective care?
The best way for an insurance carrier to improve its process would be if they can make changes that allow them to grab significantly more market share from their competitors. Then their ability to earn a profit from operating in a more effective way for customers would actually enable them to be far more competitive. This would be a lot easier for a new entrant in the market who is starting from zero. If you're at a large insurance carrier and you're protecting a significant amount of revenue built up over the last 40 years, it's much more difficult to make those changes and feel confident in presenting changes to shareholders.
How can insurers be pushed to make changes that promise a competitive advantage?
The answer lies with employers. Employers insure close to 116 million people — if employers become part of the solution and start demanding better from the healthcare system, insurance carriers and providers, that's going to really help move the needle. Because if insurance brokers, consultants and companies all find that the pain of doing business the same way is greater than the pain of charting a new path forward, then that is going to be how we can make a change. Employers can create that pressure.
Employers have to demand a 100% transparency from insurance carriers. They have to demand access to the carrier’s data at a granular level. They have to demand that insurance carriers are going to deliver healthcare through value-based contracts, not volume-based contracts.
When you think about today, we're in this period of the great resignation where employers are laser-focused on retaining and rewarding top talent. They're fearful, and rightfully so, of doing anything that might undermine their objectives. When employers start thinking about healthcare as an essential tool to attract, retain and engage employees, then we're going to see changes in the healthcare system that will be sustainable and long-lasting.
