Not many would cheer a bomb exploding. And why would they? Bombs are meant to destroy things. Their only positive purpose is to blow up something old, decrepit, or unused to make way for something better.
Nevertheless, some liberals are cheering the weekend’s explosion of a “bomb” buried deep in Obamacare. In a widely read article for Forbes, Rick Ungar argues:
“The provision of the law, called the medical loss ratio . . . is the true ‘bomb’ contained in Obamacare and the one item that will have more impact on the future of how medical care is paid for in this country than anything we’ve seen in quite some time. Indeed, it is this aspect of the law that represents the true ‘death panel’ found in Obamacare – but not one that is going to lead to the death of American consumers. Rather, the medical loss ratio will, ultimately, lead to the death of large parts of the private, for-profit health insurance industry.”
Following the destruction of the private market, Ungar writes, is the “inescapable path to a single-payer system for most Americans and thank goodness for it.”
Liberals like Ungar are not the only ones who dislike the current system. Indeed, Republicans agree that it is in desperate need of widespread reform. We just tend to believe that blowing up the private market to replace it with a government-run one is far from ideal. It’d be like blowing up a Chick-fil-a citing the need for healthier options and then building a Burger King in its place. Or for college football lovers, it’d be like finally dismantling the BCS bowl system, but rather than install a playoff, they go back to the Bowl Alliance.
So what is the “medical loss ratio” anyways?
It’s a requirement that commercial insurers spend at least 85 cents of every premium dollar on medical costs. The minimum in Obamacare was created with the intention of forcing insurers to spend money on policyholders rather than administrative costs, or even worse…profits (gasp). But as economist Milton Friedman once said, “One of the great mistakes is to judge policies and programs by their intentions rather than their results.”
And the results of the medical-loss ratio are potentially disastrous, even if the bomb doesn’t completely wipe out the private market.
That’s because the Obamacare mandate makes the incorrect assumption that the ratio is a measure of service. That is to say, a lower ratio must be tied to a reduction in the quality of care for patients.
But, this ignores another, equally plausible outcome. As James C. Robinson, a researcher for Health Affairs, has argued, this understanding is “politically the most volatile and analytically the least valid issue of the statistic.”
In fact, lower ratios may actually indicate that health insurers are succeeding in achieving one of Obamacare’s primary stated goals – bending the cost curve. To understand why, we must first understand that the medical-loss ratio is a fraction where medical expenditures are the numerator (the number on top) and insurance premiums are the denominator (the number on the bottom).
To “improve” the ratio to fit the mandate, I can influence either of the numbers. In other words, one method of meeting Obamacare’s guideline is to led the cost of medical care rise, regardless of whether it improves health outcomes.
This cost creep could be completely avoided in a free-market system. In such a structure, insurance companies will attempt to maximize profits. One of their prime tools to accomplish this is to keep premium inflation down over time. The more insurers hold healthcare providers’ feet to the fire over the cost of services, the more profit they stand to earn. Consumers will likewise benefit because insurers will have to compete in the marketplace for customers through lower priced plans.
Obamacare’s medical-loss ratio destroys this competitive incentive toward lower rates. By establishing a minimum that insurers must spend on health care, we are essentially incentivizing cost increases.
So yes, a bomb has gone off. Will it destroy the private insurance market? Unlikely. But you can be sure that insurance costs will explode.