Since the implementation of the Affordable Care Act (ACA) in 2014, health insurance premiums and deductibles have skyrocketed. Since 2013, premiums have nearly tripled—rising by 169%–and deductibles have doubled. Health insurance was supposed to become more affordable, not less. So, why has this happened? The short answer is government mandates such as the Medical Loss Ratio.
There has been a vast imposition of state and federal regulations on health insurance. Between 1993 and 2013, the number of state health insurance mandates increased by 167%—increasing the costs of health insurance by up to 50%, depending on the state. Heavy regulation, although well-intended, is an attempt to force affordability, which does not work. In every other industry, we understand that lower prices come from innovation and competition—the two things that regulation severely restricts. Rather than health insurers and providers finding more efficient and cost-effective ways of delivering their services to win the choice of consumers, they have prioritized navigating a complex system to work to their advantage. One great example of this is the Medical Loss Ratio (MLR) mandated by the ACA.
Prior to the MLR, there was concern that health insurance companies were not spending enough of their money on actual patient care. To address this, the MLR requires that insurance companies must put about 80% of enrollee premiums towards medical services, and only about 20% towards their overhead costs and profit. What was meant to be a consumer protection has actually caused a vicious cycle that creates far greater harm.
First, this severely hurt smaller insurance companies and knocked them out of the market entirely. Imagine a small regional insurer with 20,000 enrollees and a national insurer with 20 million enrollees. If 10,000 people on each plan had unusually low medical use and expenses in a given year, the national one would barely notice, while the regional one would fall out of compliance with the MLR. This left many smaller insurers with little choice but to shut down or consolidate with large ones. With fewer insurance companies in the market, consumers don’t have many other options if prices continue to rise. So, companies can continue raising monthly premiums and deductibles, and their customers will pay for it if they want to have health insurance at all.
This also created perverse incentives for insurance companies, making it better to increase costs rather than keep them low. If a company can only put 20% of its revenue from monthly premiums towards overhead costs and profit, then the best way to increase profit is to increase revenue. If I charge $100 in monthly premiums, then I can only use $20 toward my overhead and profits. But if I charge $1,000, then I can use $200 and still be in complete compliance with the MLR. It is starting to make sense why there was such a huge increase after the ACA went into effect.
This was not the only perverse incentive the MLR caused. Since the ACA, vertical integration—when a company owns multiple parts of the healthcare system—has grown rapidly in the healthcare industry. According to the most recent vertical integration map by the Drug Channels Institute, the seven largest healthcare companies own affiliates across multiple services within the drug supply chain, from insurers to pharmacies and providers. This has happened, in large part, due to a loophole that allows insurance companies to protect their profits by buying other businesses. When an insurance company also owns a clinic, it can essentially pay itself for patient care. They steer patients to their clinics, charge higher prices, and make it seem like the insurance is paying more money on paper for medical expenses. But because the company owns the clinic, the profit it makes from those payments stays within the corporate family without violating the rules. So the insurer really isn’t losing any money but just shifting it around internally.
This continues a vicious cycle of more consolidation and less market competition, leaving consumers with fewer choices and higher prices. Regulations and mandates like the MLR incentivize healthcare companies to engage in self-serving behavior that further pushes the needs of patients to the side rather than placing them in the center.
Now, more than ever before with health care prices rising and lawmakers willing to make reforms, we have an opportunity to rethink how we have approached rising healthcare costs. Large companies clearly find ways to twist our attempts at force and punishment to their advantage. Instead, it’s time we put the power into the hands of the only people who can truly decide their fate—the consumers. When the only way to succeed is to offer products and services that fit the needs of their customers, then that is what companies will have to do. We can do this by reforming mandates like the MLR so that competition can enter the marketplace and by passing laws that empower consumers to choose who offers the best products at the best prices. Only then should we expect to see health insurance prices become more affordable.