The Medical Loss Ratio Debate

I greatly admire Wendell Potter for his guts in coming forward, and for his contribution to returning the health care debate to some level of sanity.

I do have a quibble about his statement on MSNBC to the effect that it can be hard to get good numbers on medical loss ratios and the ability of insurers to fudge the numbers with accounting tricks. They may certainly try to do that, but if Congress enacts proper standards, it should be possible for even the most naive regulator to find the correct number.

I was able to get a back-of-the-envelope number simply by using publicly available Census Bureau tables. Although the data available to me was out of date — from 2006 — I was able to confirm the general belief that MLR averages 80% or less.

In 2006, according to the Census Bureau, total personal income was a little under eleven trillion dollars. After taxes, they had $9.63 trillion to spend. During the same year, total national expenditures on health care were 2.11 trillion dollars — an amazing 22% of net personal income.

Now, although $2.11 trillion was spent on health care, only $1.97 trillion was spent on actual health care goods and services. The difference, about 140 billion dollars, is presumably the “net cost” incurred by non-health care providers (i.e., insurance companies, HMOs and similar gatekeepers). That figure includes any income not directly spent for health care, such as advertising, marketing, sales commissions, premium taxes, additions to reserves, and profit.

In 2006, $723.4 billion was spent on health insurance premiums. Deducting the $140 billion leaves $583.4 billion spent on health care providers, which works out to a loss ratio of 80.6 percent. Since the providers spent some of that money on their own advertising and marketing, and their profits, the actual amount spent on direct health care is probably quite a bit less. If the providers spent 90% of their income on health care, that would result in a real MLR of 72.5%.

I was a math major in college, but I’m a lawyer, not a statistician. The lesson is that if I could derive these numbers in half an hour using public information, regulators getting detailed figures from each company could easily do a more accurate job. The key is not to add, but to subtract!

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