Wellness a medical cost? Answer key to HMO profit
Susan Heavey & Lewis Krauskopf for Reuters

Does calling a nurse hotline count as medical care?

Whether health insurers’ costs for providing such services count as medical care or administrative work is at the heart of critical debate that could affect the industry’s bottom line as the Obama administration works to implement key parts of the recently passed U.S. health reform law.

Under new rules that take effect next year, health insurance companies are required to spend at least 85 cents of every premium dollar on actual medical care rather than salaries, overhead and other administrative expenses. Smaller plans for individual customers or small groups get somewhat more leeway and must spend at least 80 cents on the dollar.

Such spending rates, known as medical loss ratios, or MLRs, are closely watched by Wall Street as one sign of potential profitability. They are also a key part of determining the price insurers set for their monthly rates. Continued »

One thing that’s been known for years is that the loss ratios considered acceptable in the health insurance industry are considered horrific in the property insurance industry. At one point, industry standard for health insurance in the area where I worked was a loss ratio in the 72-75% range; industry standard for property insurance was about 50%. Since the smallest insurance plan can involve the administration of a few million dollars every year, this is a significant difference.

At the same time, one company I routinely worked with reported loss ratios in the 75% range while paying its CEO seven figures and its other C-levels in the high six figures. I wasn’t the only one who wondered what the loss ratio would be without those expenses, and by extension I wasn’t the only one who wondered what, exactly, went into the 25% of their revenue that they considered administrative expenses.

It seems the crafters of PPACA asked the same kinds of questions.

There is a gray area between medical care and administrative expense; the article uses nurse hotlines as an example but a better one might be case management. The case manager’s job is to make sure that the insured gets the best possible care for the lowest cost to the insurance company. Is that coordination of medical care, or is it a cost control procedure?

The true answer is that it’s both.

Insurers, then, would prefer it be considered medical care. Consumer groups would of course see it the other way: it shouldn’t be counted as part of the loss ratio. When loss ratios were held to industry standards instead of federal regulations, it was simply a frequent debate. Now that they’re being regulated, it’s becoming a critical issue.

As such, I wasn’t surprised to find out that PPACA included a significant period for designing the “basic insurance coverage” that would be required under its guidelines. It’s going to take a lot of definition and argument before the exact design standards can be developed. It’s also very likely to result in a volume of regulatory guidelines that will rival the Internal Revenue Act.

That’s one reason I’m not concerned about a loss of jobs in the health care financing industry. The jobs will simply evolve into something different.