What's in a Medical Loss Ratio?

Today’s Managing Health Care Costs Indicator is 80%

Health care reform requires that commercial health plans spend at least 80% of their collected premium on delivering medical care.  The idea of this rule is to prevent bloated administrative costs, including executives with sky-high compensation, high profit margins for shareholders of public companies, and massive administrative structures which add cost but not value to health care.  But the devil, of course, is in the details.  The Times  reports that health plans are frantically lobbying to reclassify some costs as medical costs.

Insurers have focused on the “medical loss ratio,” or MLR, for years. Wall Street analysts routinely issue “sell” ratings for health plans with high MLRs, and regard health plans which have low MLRs as likely to ‘outperform’ the market.   That’s why many plans sought to keep their MLRs low to please Wall Street, even if now they will need to keep MLR high to please regulators.  But MLRs are like most of accounting – and are far more subjective than they might at first appear.

How do health plans spend their premiums?

They pay for health care delivery – cut checks to doctors, hospitals, pharmaceutical companies, medical device companies, and all sorts of other parties who directly deliver health care.   Those payments are unequivocally part of the medical loss ratio – there is no argument.

BUT – some health plans, like Kaiser Permanente, pass more of their premium dollar on to their delivery system (the Permanente Medical Organization for outpatient and professional care). The Kaiser delivery system does some of the medical management that would be done by one of the national health plans (like Anthem, Aetna, Cigna or United) for providers not in an integrated system.  So, there is general agreement that the cost of medical management programs, whether done by providers or done by health plans, can also be counted in the MLR.

There are some things health plans do which pretty obviously should NOT be counted in the MLR.  For instance, a health plan sponsors a local baseball team, or purchases advertisements on television.   I don’t think anyone would argue that this should be part of its medical loss ratio. Same goes for stock dividends, or bonuses for the senior leadership team.  These are administrative expenses, plain and simple.

Then, there are health plan activities that might improve health care delivery, but feel very much like health plan administration.   Aetna argues that its fraud detection programs should count as part of the MLR. Anthem wants to count its physician credentialing activities.  AHIP wants MLR to include any health plan expense to move from ICD9 to ICD10, a method of classifying diagnoses.

The Washington Post reported that Anthem/Wellpoint recategorized a half billion dollars of expenses from administrative to MLR in April. 

Many health plans are also seeking to exclude payments to brokers from the definition of premiums collected, since these premiums were not available to the health plan, and the brokerage commissions are critical to making health insurance available (much as it’s often hard to sell a home without a realtor). 

There’s also another problem of small numbers.  Health plans will be judged state by state, and some health plans have very small populations in some states.  These small enrollments might have a low (or high) MLR based on chance alone, and this regulation could cause health plans to further consolidate or to forego expansion to contiguous states, diminishing competition.  The Maine insurance regulator has requested a waiver from the 80% rule, fearing that one of two remaining health plans in that state would abandon Maine if forced to lower its profit margin.  

My business school accounting professor, Mike Kirschenheiter, asked us to recite  “There is no truth in accounting” at the beginning of each class session.   He went on to point out that subjective decisions inherent in accounting should be made with a clear vision of the goals.   In this instance, the goal is that health care premiums are used to improve health care.   We should keep this in mind as regulators clarify what is counted in the “medical loss ratio.” 

Administrative Waste In Office Practice

Today’s Managing Health Care Costs Indicator is

$7 billion dollars

Even in health care, $7 billion is a lot of money.   Athenahealth, a major force in physician billing, puts out a “pain in the butt” index each year, indicating how difficult each insurer makes it for physicians to collect their fees.  Athenahealth suggests that the excess cost of physician billing due to the multitude of different rules and different requirements from health plans is $7 billion. There, I’ve said it three times.

A few ‘fun facts’ from the NPR Planet Money podcast  about this:

  • o   The average physician gets 1000 faxes from insurers each month
  • o   Athenahealth bills 1700 different insurers. This vastly understates the issue, since each insurer has hundreds or thousands of plan designs, often dictated by self-insured employers.


Researchers at the Mass General Physicians Organization published an insightful article in Health Affairs a few months back  simulating how much money this physician practice spends coping with the myriad of different insurer rules and requirements.  I’m pretty sure this article is where the $7 billion figure comes from.    The researchers built a new staffing model assuming that there was a single payer with uniform Medicare-like rules, and were able to reduce their total office costs by 12%.              

A few critical findings from this study (of 2006 claims)
  • o   18.2% of claims were rejected in the first place on ‘nonclinical’ grounds. It’s hard to reject a clain on clinical grounds!
  • o   They calculated wasted physician time per physician at 4 hours per week, and wasted nurse time at 5 hours per week.
  • o   4 out of every 5 rejected claims were eventually paid

The MGH researchers only calculated the cost of this patchwork system in the physician office.  This calculation doesn’t include the cost of processing on the health plan side.

There’s no perfect answer to this mess.  HIPAA had requirements for standardizing billing requirements, and billing is much better structured already then, say, electronic medical records

I’m not confident that eliminating administrative waste alone would make health care affordable,.  But clearly creating administrative efficiency will be critical to managing health care costs.

Preventive Services Regulations Issued

Today’s Managing Health Care Costs Indicator is


The Obama Administration has announced regulations  clarifying the new requirement that health plans cover preventive care without copayments.   The regulations were announced less than four months after the passage of the Patient Protection and Affordable Care Act (PPACA), and apply to health plans that are not “grandfathered.”   Last week, the administration announced regulations around grandfathering, clarifying which changes in benefit design  will mean a plan will no longer be grandfathered.

There are three categories of required covered services
  1. 1.     Those rated “A” or “B” by the US Preventive Services Task Force.   This list ranges from screening for cancer to providing folic acid supplements to women considering pregnancy to giving aspirin to prevent heart attacks. 
  2. 2.     Immunizations recommended by the Centers for Disease Control and Prevention.  This includes pediatric and adult vaccines.
  3. 3.     Recommendations from the Health Resources and Services Administration (HRSA) regarding preventive care for children  . Recommendations for women’s health are expected in early 2011.

Here’s a link to the complete list of required covered services. 

This is good news for health care.  Preventive services are among the most cost-effective services available in health care. Further, they are terribly underused. For instance, less than 7% (!) of adults get the Zoster vaccine to prevent shingles, a painful complication from childhood chickenpox that often affects adults over 50. 

This is good news for patients, since eliminating financial barriers will increase the use of these services than can help patients live better lives.

The regulations will cause some angst at health plans, where new systems will have to be developed to arrange for payment for a number of nonprescription drugs which have previously not been covered.  

Some intuitively believe that covering more preventive services will save money.  Some of these services (pediatric immunizations) are indeed cost saving.   However, most are cost-effective – so that there will be incremental cost, but it will be modest compared to the benefits.

The Obama Administration is being honest here, and says that these new regulations will increase health care costs by 1.5%.   To put this in perspective, employer-sponsored health care costs about $700 billion per year, so this type of an increase would cost $10.5 billion.  This isn’t a small amount, but it’s an investment well worth making.

Today’s Managing Health Care Costs Indicator is
$180  million

That’s the amount that the Seattle Children’s Hospital says it has saved in capital costs over the last six years by instituting lean techniques, or the Toyota method.  The effort is highlighted in an article in today’s New York Times.  

Seattle Children’s Hospital has invested in training and measurement and consulting services to adopt the Toyota method,  and has studied its processes and standardized, overcoming physician demands for autonomy and nursing demands for high (and fixed) staffing ratios.   The hospital has been able to increase its volume while resisting large new capital investments in its facilities. That’s important, because capital investments require higher reimbursements in the future.  The cost of servicing this type of debt (3%, 10 year amortization) is $5.6 million per month – so avoiding this new investment really matters

One of the ‘wastes’ that the Toyota system focuses its attention on is waiting.  Keeping patients waiting a long time isn’t just bad for patients – it’s really expensive.  An efficient system that eliminates the waste of waiting needs fewer staff, fewer  chairs, and even fewer new parking spaces.  The result is that a “lean” health care system is able to deliver care that is more likely to satisfy patients, and do it for less.

This is especially important as we travel into the post-health-reform world.  The pressures on hospitals to lower their costs will be very large.  Hospitals will receive $245 billion less  in increased reimbursements over the next ten years as part of the PPACA Act, and more patients will be enrolled in Medicaid, which historically pays very low rates.  It will be hard for hospitals to simply shift those costs onto those with employer-sponsored insurance, since that would raise employer premiums so much that more would exit offering health insurance altogether.

It’s heartening to see institutions reengineering to lower their resource costs. That’s the only way that we can succeed in expanding access dramatically without continuing to have rampant health care inflation.   Seattle Children’s Hospital is using techniques honed in the best manufacturing plants in the world to provide higher value.

Canadian Provinces Overpay for Generics

Today’s Managing Health Care Costs Number is 46%

That’s the percentage of Canadian provincial budgets that are dedicated to health care.  It’s up from 35% in 1999.

Health care cost woes are not unique to the United States!

The rise of health care costs crowds out other important government services, and this is not sustainable.

The Economist  reports that if there is no change in health care inflation, Ontario will spend 80% of its budget on health care by 2030!

What’s the problem?

For one thing, the Canadian provinces are overpaying for generic medications. Each province sets rates for generic medications, and in Ontario these are pegged at 50% of brand name price, and scheduled to drop to 25% later this year.  Generic prices are often 10% or less of the branded product cost in the United States. 

Some will suggest that this is further proof that we should rely on market forces to drive down prices, rather than having the government set prices.  I think this shows that regulatory agencies have a hard time being dynamic in their approach to prices.   It’s likely that regulations to cap prices of brand name medications is effective, but there is no need for price controls for commodity generic medications. In Ontario,  setting prices actually artificially inflates costs.

We’re likely to have arguments in Massachusetts and in the United States about price controls in the coming months and years.   In the US, our high unit costs are the main reason our health care is more expensive than the rest of the developed world.    Price controls work (at least temporarily) in some instances, but they can lead to paradoxically high costs rather than cost savings.  

Domestic Medical Tourism - Why Competition Can Lower Price Even if No Volume Moves

Today’s Managing Health Care Cost Number is


Today’s USA Today  (from Kaiser Health News) reports on domestic medical tourism.   Many have written about domestic and international medical tourism, and projected huge increases in this.  In fact, Deloitte breathlessly suggested in 2008 that 6 million Americans (1 in 50) would go abroad for treatment in 2010!  [I can’t find an active link to this report now –it’s apparently no longer online.)  Deloitte revised these trends substantially in fall, 2009, now estimating that by 2012 international medical tourism will reach 1.3 million in 2011.

Here’s why I’m focused on zero.  Hannaford Brothers, a large supermarket chain, initiated an international medical tourism program in 2007 for knee and hip replacements in Singapore.    The plan was widely reported, and widely commented upon.  Many suggested    Today’s USA Today article reveals that exactly no one took Hannaford up on the offer.

Does that mean Hannaford’s program was an utter failure? Au contraire!  The program was a real success.  The credible threat of competition led to a number of offers for less expensive orthopedic surgery in the US, and the local hospitals in Maine were willing to lower their prices.

So – a program that creates competition can lower prices even if it doesn’t actually move volume.  Not so good for the entrepreneurs in Singapore, but excellent for the patients and the shareholders of Hannaford.

Insurance Up, but Emergency Visits Up Too

Blog Note:
I’ve become a devotee of NPR’s Planet Money npr.org/money – which starts each podcast off with a number – and then dissects the implications of that number.  I think that’s a great idea – so today, I’ll inaugurate beginning each post with a relevant statistic.

Today’s Managing Health Care Cost Number is…..


That’s how much emergency department use in Massachusetts has risen over the past 4 years.  The Division of Health Care Policy and Finance released this report at the end of June, and the Boston Globe reported the results on July 4.    The total number of ED visits in the Commonwealth went up to almost 3 million. 

Emergency Department Visits in Massachusetts, 2004-2008

Massachusetts has the lowest rate of uninsured in the country – so many figured this would help decrease emergency department utilization.

As Nancy Turnbull pointed out in the Globe, the rate of health insurance among Massachusetts residents has been high for some time. Therefore, the percentage of those going to the ED who were uninsured was low even before we passed health care reform – so any change in the number of uninsured was not likely to have a big impact on ED utilization.  ED utilization was increasing before health care reform, and the increase has continued unabated since we passed health care reform. 

The real problem is that there is a lack of access to less-expensive alternatives to the emergency department.  Many Massachusetts residents have a hard time finding a primary care physician. That’s especially true for healthy people who have acute illnesses and haven’t already developed a primary care relationship.   We’ll need retail clinics and non-physician providers (nurse practitioners and physician assistants) to create enough access so that ED rates don’t keep on going up.  We also need tools (like nurse lines) to allow patients to make the best decision about when it’s necessary to go to an emergency department.

Health care reform has improved access to health insurance in Massachusetts.  We now need to make substantial improvements to the delivery system if health care reform is to fulfill its promise.

Payment Reform: Off the Rails in Massachusetts

Massachusetts not only led the nation in passing and implementing legislation to dramatically decrease the number of uninsured, but it also planned to lead the nation in reforming provider payment to be sure that we could afford near-universal coverage.

Health care reform in Massachusetts remains popular, but the wheels are coming off of the payment reform bus.

A state commission recommended a multi-year transition from predominately fee for service to a series of bundled payments to encourage better coordination and to discourage providers from “running the meter” and recommending diagnostic and therapeutic care which would enrich providers without real value to patients. 

The Boston Globe reported Saturday   that state Senate President Terese Murray has, for the moment, given up on enacting legislation to reform payment in Massachusetts.  She said ““It’s like going around in circles…Nobody is in agreement on anything.’’

It’s no surprise.  The goal of payment reform is to lower overall costs, and that means that some stakeholders will earn less.  Since all of us are intensely loss averse, the losers will fight much harder against reform than the winners will fight for reform.

Here is my summary of barriers to payment reform, and some steps to help overcome these barriers.   Under the best of circumstances, it’s hard to reform payment methods.  It’s probably even harder when money has to come out of the system.

Potential Enablers

Many providers are doing quite well under fee for service, and perceive the threat that payment reform will lower their earnings.

As long as providers feel that fee for service will yield continued increases (in both fee per unit and allowed utilization), they will insist on continued fee for service.   We won’t see health care payment reform until providers feel a meaningful threat that there will not be future fee for service increases.

The payment system is fragmented, and employers demand that every health plan include (almost) every provider.   This gives health plans little leverage to change the payment methodology.

For most adult practitioners, Medicare is a huge source of revenue.  The commercial payers cannot legally collude around payment, so any health care reform will depend up on a Medicare waiver allowing CMS to pay other than fee for service for Medicare services. Limited networks could facilitate introduction of bundled payments.

Providers are fragmented, and few are arranged in such a way to take “risk” or capitation for their entire population.

As long as fragmented fee for service payment is available, many physicians who deeply value their autonomy will continue to practice in nonintegrated practices.  We'll need transitional approaches for those physicians who are not currently in integrated groups. We also should continue to pay fee for service for some specialty services. 

Providers remember that the capitation of the 1990s included inadequate risk adjustment.

Risk adjustment software is far better than 10 years ago 

We demand choice, and bundled payment is far easier to arrange if patients are locked in to a delivery system

We need bundled payments that have corridors to avoid excess loses or windfalls, and we must include contingencies for when patients choose to split their care among different systems. 

Most large companies self-insure, and it’s difficult to administer payments other than fee for service for these plans which  are governed by ERISA

Health plans must show their clients that paying fee for service, even with discounts, is more costly than paying for bundles of care. 

Capitation or global budgets lead to an incentive to undertreat

Payment reform must include quality scores and report cards, and payment must be decreased if all appropriate evidence-based care has not been delivered.

Capitation or global budgets lead to an incentive to reject the sickest patients

Risk adjustment should help – although we’ll have to rely on physicians’ professionalism too.  That’s imperfect, since we know professionalism has not prevented overtreatment in the fee for service system.

These aren’t all the challenges, and there’s no guarantee that these steps will overcome enough of the objections to payment reform in the provider community.  From my discussions with colleagues over the past few weeks, I’m convinced that many physicians and hospitals accept that we will need to reform payment to be able to afford to cover our population.

But it will take a real sense of crisis to move forward, and a real threat that rejecting health care payment reform will lead to unacceptable fee for service payment cuts.