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So that encourages greater payouts more or less synced with greater premiums in order to increase year over year real profits. And given that the payouts are v

So that encourages greater payouts more or less synced with greater premiums in order to increase year over year real profits. And given that the payouts are very nearly a function of how hard the insurance company can negotiate, they can simply choose to call off the negotiations when they reach their target amount.

Retric 5y ago
Only up to a point, they still accept or recheck claims arbitrarily to get closer to their targets. Worse they have incentives to decrease efficiency by increasing paperwork etc. Private medical insurance in the US is a horridly inefficient system. Separating the claims process from insurance companies hands might help, but their incentives are never going to line up with consumers.
- lotsofpulp 5y ago
  This is not remotely true.
- dllthomas 5y ago
  > Worse they have incentives to decrease efficiency by increasing paperwork etc. Money spent on paperwork comes out of the same pile as profit. The MLR cap preserves incentive to reduce paperwork, wherever premiums and payouts sit.
  - Retric 5y ago
    Not internal paperwork. Think in terms of industry wide collusion not a single insurance company. If lobbing or an industry group can drive up healthcare costs via say paperwork or regulations then every health insurance company is “forced” to raise premiums and as the maximum profit per premium ratio is fixed that also increases the total possible industry wide profit. Of course insurance companies are also in competition so they have individual incentives to keep premiums cost competitive.
    - dllthomas 5y ago
      I think even in terms of industry-wide collusion, the push of an MLR cap would be to decrease (money spent on) paperwork. With R = revenue, P = profit, A = administrative expenses, and M = medical expenses, we have: R = P + A + M which we can rearrange a little bit to get P = R - M - A From the point of view of an individual company, clearly increasing our own expenses means less profit: P₂ = R - M - (A + δ) = P - δ But, as you say, if we force everyone to do likewise the situation is better because we can raise prices to raise revenue: P₃ = (R + δ) - M - (A + δ) = P This holds whether or not we have an MLR, but in either case assumes that demand is sufficiently inelastic that we can raise prices enough to make δ more revenue (it won't be a matter of simply raising prices by δ/(number of customers) because some customers may chose to purchase less insurance), and at best it puts is right back where we started. Does the MLR cap have an impact? MLR = M / R MLR₃ = M / (R + δ) MLR₃ < MLR By raising our revenues to compensate for the additional expense, we find ourselves with a lower MLR. If we are not near the cap this has no effect; focusing on the other case we are forced to do something to raise the MLR. Where does that come from? Recall our present situation: P = (R + δ) - M - (A + δ) We can lower P or A, but our whole question here is whether we can raise P by raising (everyone's) A so doing the former defeats our purpose and the later contradicts our assumption. We are stuck raising M and further raising R (if market conditions allow it). In a sufficiently inelastic market this is possible, but I really don't see the case where we've forced some extra slop that allows us to raise profit. Of course if I believe that my company is better able to handle the new paperwork than my competitors, that could help - but if the whole industry believes that's the case then most of them are wrong, and in any event I believe this incentive is weakened not strengthened by the MLR cap. If paperwork keeps new entrants out of the market, that is something current participants can probably agree on, but that's true in any case and I don't see how the MLR cap makes it stronger. I don't think this analysis changes if we pull executive compensation out of "administrative expenses" and treat it as something we're maximizing in addition to (or instead of) profit.
      - deleted 5y ago
        [deleted]
      - Retric 5y ago
joshAg 5y ago
Only to a degree because policies basically always have an upper limit on coverage. If the payouts are dropping because there's a massive reduction in claims, then there's a pretty decent chance that paying the policy maximum on each claim still won't be enough. Plus, profits don't come directly from the premiums anyway. They come from the investments the insurer makes with the premiums. So sure, they can try to convince policy holders to increase coverage which allows them to charge a higher premium, or they can work on their loss modeling and investment strategy to better predict their actual loss ratio (which means they can have less money in reserve and more money in investments) or get better returns on the investments. And those 2 are usually a better use of resources since increasing coverage means an individual conversation with each policy holder. That's a lot of human-hours compared to the modeling and investing.
- monocasa 5y ago
  > So sure, they can try to convince policy holders to increase coverage which allows them to charge a higher premium Or they just stone wall and increase premiums anywhere they can until they hit targets. Like at a previous job I had at a 250 employee company where premiums went up $150/m one year because the previous year had two families had a kid get (very different kinds of) cancer out of the blue. You'd think that shopping around would've helped in that case, but the word got out somehow to the other insurance companies and they were giving us similar quotes. The power relationship is very very tilted in the insurance company's favor and they can more or less dictate terms.
  - folkhack 5y ago
    > Like at a previous job I had at a 250 employee company where premiums went up $150/m one year because the previous year had two families had a kid get (very different kinds of) cancer out of the blue. It's bad enough that I've heard office gossips complain about other employees leveraging their healthcare turning into higher premiums the year after. Like, as evil as complaining their coworker's kid got cancer. When employees go through big health events it's hard to keep it under wraps in a work environment... especially in this "race to the bottom" society we happen to live in. You can bang on about privacy all you want, but people talk. I guess I'm shocked it happened in an office of ~250 as I've always seen it happen at much smaller places.

Retric 5y ago

Only up to a point, they still accept or recheck claims arbitrarily to get closer to their targets. Worse they have incentives to decrease efficiency by increasing paperwork etc. Private medical insurance in the US is a horridly inefficient system. Separating the claims process from insurance companies hands might help, but their incentives are never going to line up with consumers.

lotsofpulp 5y ago
This is not remotely true.
dllthomas 5y ago
> Worse they have incentives to decrease efficiency by increasing paperwork etc. Money spent on paperwork comes out of the same pile as profit. The MLR cap preserves incentive to reduce paperwork, wherever premiums and payouts sit.
- Retric 5y ago
  Not internal paperwork. Think in terms of industry wide collusion not a single insurance company. If lobbing or an industry group can drive up healthcare costs via say paperwork or regulations then every health insurance company is “forced” to raise premiums and as the maximum profit per premium ratio is fixed that also increases the total possible industry wide profit. Of course insurance companies are also in competition so they have individual incentives to keep premiums cost competitive.
  - dllthomas 5y ago
    I think even in terms of industry-wide collusion, the push of an MLR cap would be to decrease (money spent on) paperwork. With R = revenue, P = profit, A = administrative expenses, and M = medical expenses, we have: R = P + A + M which we can rearrange a little bit to get P = R - M - A From the point of view of an individual company, clearly increasing our own expenses means less profit: P₂ = R - M - (A + δ) = P - δ But, as you say, if we force everyone to do likewise the situation is better because we can raise prices to raise revenue: P₃ = (R + δ) - M - (A + δ) = P This holds whether or not we have an MLR, but in either case assumes that demand is sufficiently inelastic that we can raise prices enough to make δ more revenue (it won't be a matter of simply raising prices by δ/(number of customers) because some customers may chose to purchase less insurance), and at best it puts is right back where we started. Does the MLR cap have an impact? MLR = M / R MLR₃ = M / (R + δ) MLR₃ < MLR By raising our revenues to compensate for the additional expense, we find ourselves with a lower MLR. If we are not near the cap this has no effect; focusing on the other case we are forced to do something to raise the MLR. Where does that come from? Recall our present situation: P = (R + δ) - M - (A + δ) We can lower P or A, but our whole question here is whether we can raise P by raising (everyone's) A so doing the former defeats our purpose and the later contradicts our assumption. We are stuck raising M and further raising R (if market conditions allow it). In a sufficiently inelastic market this is possible, but I really don't see the case where we've forced some extra slop that allows us to raise profit. Of course if I believe that my company is better able to handle the new paperwork than my competitors, that could help - but if the whole industry believes that's the case then most of them are wrong, and in any event I believe this incentive is weakened not strengthened by the MLR cap. If paperwork keeps new entrants out of the market, that is something current participants can probably agree on, but that's true in any case and I don't see how the MLR cap makes it stronger. I don't think this analysis changes if we pull executive compensation out of "administrative expenses" and treat it as something we're maximizing in addition to (or instead of) profit.
    - deleted 5y ago
      [deleted]
    - Retric 5y ago

joshAg 5y ago

Only to a degree because policies basically always have an upper limit on coverage. If the payouts are dropping because there's a massive reduction in claims, then there's a pretty decent chance that paying the policy maximum on each claim still won't be enough. Plus, profits don't come directly from the premiums anyway. They come from the investments the insurer makes with the premiums. So sure, they can try to convince policy holders to increase coverage which allows them to charge a higher premium, or they can work on their loss modeling and investment strategy to better predict their actual loss ratio (which means they can have less money in reserve and more money in investments) or get better returns on the investments. And those 2 are usually a better use of resources since increasing coverage means an individual conversation with each policy holder. That's a lot of human-hours compared to the modeling and investing.

monocasa 5y ago
> So sure, they can try to convince policy holders to increase coverage which allows them to charge a higher premium Or they just stone wall and increase premiums anywhere they can until they hit targets. Like at a previous job I had at a 250 employee company where premiums went up $150/m one year because the previous year had two families had a kid get (very different kinds of) cancer out of the blue. You'd think that shopping around would've helped in that case, but the word got out somehow to the other insurance companies and they were giving us similar quotes. The power relationship is very very tilted in the insurance company's favor and they can more or less dictate terms.
- folkhack 5y ago
  > Like at a previous job I had at a 250 employee company where premiums went up $150/m one year because the previous year had two families had a kid get (very different kinds of) cancer out of the blue. It's bad enough that I've heard office gossips complain about other employees leveraging their healthcare turning into higher premiums the year after. Like, as evil as complaining their coworker's kid got cancer. When employees go through big health events it's hard to keep it under wraps in a work environment... especially in this "race to the bottom" society we happen to live in. You can bang on about privacy all you want, but people talk. I guess I'm shocked it happened in an office of ~250 as I've always seen it happen at much smaller places.