al franken to health insurers devote 90 of revenue to medical expenses or else

Al Franken to Health Insurers: Devote 90% of Revenue to Medical Expenses or Else

Apparently not content with merely “pressuring private insurance companies to charge more affordable rates and implement fairer policies” by introducing a government-run public option, some Democrats in Congress would like to dictate to insurers how they must spend their money.  That is what Senator Al Franken wants, anyway, according to Wendell Potter at the Huffington Post (who himself is championing this):

Sen. Al Franken (D-Minn.) is now leading a group including Sens. Jay Rockefeller (D-W. Va.) and Blanche Lincoln (D-Ark.) to introduce an amendment that would go further by requiring that 90 percent of the money consumers spend on health insurance premiums go directly to health care costs.

The senators are proposing a reform that strikes at the heart of a health insurance system that puts profits first, and it would have a profound effect. When MLRs increase, that eats into profits, and Wall Street becomes very unhappy. A case in point is Aetna, the nation’s third largest publicly-traded health insurance plan. Three years ago, the company reported that its quarterly MLR had inched up from 77.9 percent to 79.4 percent in 12 months. On the day this was disclosed, Aetna’s share price plunged 20 percent as investors sold off their shares, reducing the company’s market value by billions of dollars.

According to Potter, the insurers were spending 95 cents of every revenue dollar on medical expenses in the early 90’s, but today it is closer to 81 cents.  So Democrats would like to reverse that by forcing the companies to spend more on medical matters.  Yet, it seems that Democrats still don’t understand the effect of unintended consequences.

There are many time I might say that a measure designed to “help the little guy” has good intentions, but that it had some unforeseen side effects.

Not so here.

This isn’t meant to help anyone, except perhaps Democrats’ egos.  Why?  Well, they don’t understand what would happen if such a bill were to pass.  Lets start with administrative costs.  According to a report released in 2008 by the American Medical Association, the National Health Expenditures report found that private insurers spent an average of 14.1% of their revenue in 2005 on just on administrative costs.  Another report, conducted by a single-payer advocacy group, claims 31% was spent (take that number with discretion).  Either way, to force the insurers to spend 90% on health insurance would force them to either cut costs or raise premiums even more.

The insurers could raise premiums, but I think a lot of their customers (especially the corporate clients) would cry foul.  So, I think the more likely answer is that the insurers would cut costs to meet the required medical expense percentage.  This will, of course, mean great things like loss of services (as in those that are not already imposed on them), more horror-story creating scenarios of rescission (legal or otherwise), and worst of all, the loss of jobs.  You know, all the things Democrats are worried about, or should be worried about, right now.

“But look at Medicare’s low administrative overhead,” say the liberals.  Well, the AMA has an answer to that:

Private insurers face administrative costs not imposed on public programs, such as the need to comply with multiple sets of state and federal regulations. Both overregulation and arbitrary differences in regulation create unnecessary administrative costs and prevent cost-savings from economies of scale. Private insurers also must pay premium taxes, usually counted as an administrative expense, driving up administrative costs as a percentage of total costs and creating the appearance of reduced efficiency.

Basically, it takes the extra resources and manpower to follow all the intricate regulations each and every state has.  More time, more employees, more cost.  Extra taxes must also be handled (doesn’t Obama want a new tax on “Cadillac plans”?).  And even those who accept Potter’s figures on administrative costs from the ’90s can’t deny that things have gotten a lot more expensive since then.

Private insurers simply have extra costs, and the Democrats’ attempt to take control of their money isn’t going to change that.  Instead, what it might do is negatively affect the little guys for whom they’re supposedly targeting the effects of this legislation.  Something that Senator Franken and other supporters of this legislation should keep in mind.

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  1. anon

    December 9th, 2009 at 07:11

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    #1

    Not so. Any organization can get bloated and inefficient over time. And given that there no current incentive to trim excess fat, insurers will continue to do so.

    The 90s level might seem unattainable given the new laws and regulations, but since then computers have become much better integrated in business administration.

    I think this is a move in the right direction. And leaner and meaner businesses will see their stock prices rising.


  2. Interested

    December 9th, 2009 at 07:37

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    #2

    umm anon.

    the Market forces any non-gov entity to either compete or die, this is most evident during a recession when expenses are trimmed to be below income. This is opposite of gov’t run entities that grow no matter the economic condition.

    Outside interference on market forces alter the equation and ultimately alter the ability to perform.


  3. Alvy Singer

    December 9th, 2009 at 07:46

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    #3

    From Franken’s support of woman’s rights to his work on the health care bill, Franken I see much in this man to admire. I cannot say I knew too much about him pre-election and what I heard I did not like. Yet, Franken seems committed, like no other I have seen, to do right by the American people. To be succinct, if Franken believes this (90% to health care costs) to a good idea, then I am willing to take him at his word and support it.


  4. ameliahumphrey

    December 9th, 2009 at 08:04

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    #4

    You can get full medical coverage at the lowest price from http://bit.ly/7XH2ka


  5. David Fliflet

    December 9th, 2009 at 15:15

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    #5

    @Alvy Singer

    You should definatly take his word for it; he has to be telling the truth…*NO THANKS – Ed.*


  6. anon

    December 9th, 2009 at 16:20

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    #6

    not so, Interested

    The insurance market is one of high entry cost and requirements, and as such the barriers to entry make it a cozy habitat for those already in.

    This makes the incentive to innovate, reorganize, and cut costs dwindle.

    Your econ101 theory of markets is based on suppositions that are not valid in this case. Especially since the items sold are a requirement and are sold only by a handful of providers, and said providers with lobby power to pass laws to their benefit.

    My statement that this will increase stock prices should indicate that I am not a government lover and should dispel your worries that this forum is being invaded by liberals. Have no fear.

    The US is best in the world in a number of industries, because we run those industries lean and mean. The healthcare industry is not one of those.

    Let’s hope the healthcare industry turns into one of less administrative costs and better service for those in need of it.


  7. Random Walk

    December 9th, 2009 at 18:23

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    #7

    anon

    you are wrong.

    a number of insurers have publicly announced cost cutting initiatives, so i do see the insurers are disciplined like other industries. you seem to suggest that increased regulation on the MLR front would lead to even more efficiencies, and then say that stock prices would rise. Wrong. hard to imagine that stock prices would rise once profitability gets slashed.

    A lot of the administrative costs are used to monitor fraud and conduct disease management. also the cap will drive a lot of insurers out of business, and cause even greater market concentration. less competition, more fraud, and less disease management, and other unintended consequences.

    you say the US runs industries lean and mean. Hard to imagine that increased regulation will continue to accomplish that.

    Checkmate. Game set match.


  8. janna

    December 9th, 2009 at 18:57

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    #8

    David Fliflet :

    @Alvy Singer

    You should definatly take his word for it; he has to be telling the truth…stupid bimbo.

    Let me say, as a “stupid bimbo”, I, too, support Franken’s idea.


  9. Doomed

    December 9th, 2009 at 20:46

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    #9

    The forces of Free markets vs the forces of Cradle to grave entitlements.

    Whats next after health care?

    Do we all deserve a new battery operated car because they are so expensive to make. Surely GOVERNMENT MOTORS is screwing us for profit.

    What other entitlements are we owed by the government. Paid for by those working. Subsidized for those who worked their arses off to go to college or just work hard to make a good living…My brother being a truck driver making 80k a year as an example.

    What other entitlements are we OWED.

    Surely a new car. Better linen for our beds. Caviar. Plane tickets are too expensive. Hawaii should not only be for those who work and can afford a vacation.

    Never before has the rift dividing those who have and those who have not been so great.

    never before has those who have been under attack by those who have not. They have a champion. Harry Reid. Nanny Pelosi and now Al Franken.

    Here I only pay 400k a year in income tax. Why shouldnt I pay another 200k? Surely YOU are WORTH IT.


  10. anon

    December 9th, 2009 at 21:42

    -Random Walk:

    Play your own games.

    You are not only wrong, but clearly have little knowledge of running businesses.

    As it is, there is no incentive for the providers to cut costs, as long as they are

    all running the same way.

    ANY business can run leaner, and more efficiently, up to a point. And with these businesses under discussion, that point is not even on the horizon.

    This is not government taking over. This is setting up a standard.

    Your lack of foresight is that you do not understand that cutting costs means better profitability.

    Now, the obvious question is why aren’t they doing it now? The answer to that is it requires overhaul that is not profitable short term. And that is what stock markets respond to. Not one of them would take the initiative it if they know others would not follow suit. You mention games, read game theory.

    I cannot fathom why anyone would be so stupid as to reject a move that would mean better structure and profits on the long run. This is what communists do, turn their backs on progress and stay with what’s established.

    You guys are poor capitalists.

    And you reject good ideas because you don’t like the glasses the guy’s wearing. I don’t either, but I am not prejudiced, I am utilitarian. I’ll take any good idea and make a profit. As we Americans always have.


  11. Ron Cohen

    December 9th, 2009 at 23:21

    Trying to cap medical loss ratios (gross operating margins) will almost certainly run into issues of definition, and the iron rule that any maximum will become a minimum.

    The only answer is competition, as every Member of Congress knows full well. The question is whether Members have the courage to face down the health insurance industry and their Wall Street backers, and revise or repeal The McCarran-Ferguson Act. This law, passed in 1945, exempts all insurance companies from most federal anti-trust regulation. A bill now before Congress would do just that, the Health Insurance Industry Antitrust Enforcement Act, S.1681 and H.R.3596. Alternatively, there has been talk of including its provisions in the health reform legislation now taking shape in Congress.


  12. mary joan rourke

    December 10th, 2009 at 01:23

    that’s why we need a single payer system and right now nothing is going to improve the system

    except that. we have the poorest health outcomes in the developed counties and it is getting worse

    so if we want to go to the bottom we need to stay on this same path.

    w


  13. Michael Merritt

    December 10th, 2009 at 02:42

    anon :

    Not so. Any organization can get bloated and inefficient over time. And given that there no current incentive to trim excess fat, insurers will continue to do so.

    The 90s level might seem unattainable given the new laws and regulations, but since then computers have become much better integrated in business administration.

    I think this is a move in the right direction. And leaner and meaner businesses will see their stock prices rising.

    I think there is definitely room for a lot of these companies to cut fat and waste. Actually, it seems that there is room for a health insurance company (new or existing) to emerge that can claim most of their revenue going toward health expenses, assuming they can work around state regulations cheaply.

    That wouldn’t be enough. They’d have to be cheaper as well (can you do both?), but I think if consumers know (or perceive) that most of their premiums are going toward their health care, that company could see a lot of growth.

    I’m just not convinced that the government needs to set this “standard.”


  14. Tully

    December 10th, 2009 at 02:54

    **we have the poorest health outcomes in the developed counties **

    BS. That’s simply not true, and repetition does not make it any less false. There is NO direct measure of health CARE outcomes in which the US is at the bottom. Not one. And quite a few where we lead the world.

    The claim is usually based on indirect proxy measures (such as life expectancy) that are heavily influenced by factors OTHER THAN quality of health care.


  15. Doomed

    December 10th, 2009 at 04:44

    anon

    Yep. So let all health care companies sell all health care products in every state.

    Why do we have to have a public option.

    Because we all KNOW that the democrats want to run health care and absolutely rape, pillage and plunder millions upon millions of good jobs and replace them with civil servants make squat.

    The health care industry is probably on the order of 35 million American workers when you take the whole thing into account. Running that with our government will be the final nail in the USA’s coffin.

    period. They aint touched anything YET they aint Bankrupted.

    Turn out the lights…the parties over the fat ladies not only tuning up but its become a battle of not bands but a battle of fat ladies singing.


  16. Insurance Employee

    December 10th, 2009 at 07:16

    “No incentive to keep costs down” — are you crazy? I’ve worked for the government as a state employee and for an insurance company. I can tell you there is little concern for cost containment working for the government and constant incentive to keep costs down working in private insurance. Every dollar wasted is a dollar that doesn’t go to profits or investing in future cost savings initiatives. Bids are won or lost based on your administrative costs. There is no complacency.

    A 90% MLR is crazy. That means 10% for profit and administration. That may sound reasonable, but it isn’t.

    Insurance requires a huge up front investment to create “reserves” to qualify for an insurance license. To get that money, investors need assurances of a relatively modest 3% profit margin. No 3% profit margin = no investors = no insurance license = no insurance company.

    You also need 1% contingency to feed reserves required by Departments of Insurance.

    You also need 2% to pay insurance fees included in the new bill! So, we’re up to 5% and we haven’t paid a claim yet.

    Doesn’t matter if you are government or an insurance company — It costs 3% in infrastructure, information technology, buildings to pay claims.

    So now we’re up to 8%. What’s left? Regulatory compliance That’s another 2%.

    Ok, we’re done — 10%. What do we have to drop? Salaries, Disease management, case management, pharmacy management, quality improvement, care coordination, cost-containment iniatitives, and anti-fraud initiatives. Most of this stuff actually lowers costs — but who cares — we now no longer have an incentive to do that. Anything we “save” beyond the 10% goes back to the government.

    Instead of creating an incentive to get more efficient — this provision will do the opposite.


  17. anon

    December 10th, 2009 at 09:49

    Doomed:

    Read my posts, I never, ever mentioned the public option, or the government running healthcare as profitable options. Your response must be to some other anon, in another debate.

    What I’ve been for is government setting goals in industries where potential loss of short term profits would prohibit overhaul. There is no incentive to do so if there is no mandate. In fact, any one of those companies would be crazy to do so, given that all their competition would watch them crumble.

    Insurance Employee:

    I cannot debate your numbers. I take your word for them. But your argument is based on assumptions that the structure of said organizations will remain as they have been.

    What am I talking about? George C. Marshall took over the Army as a bloated, slow, incommunicative, inefficient organization. He retired those with old habits, rebuilt the organizational structure, speeded up communications many times over, among other radical changes. We ended up with one mean fighting force.

    Had he argued the existing numbers, and tried to trim here and there, he also would have found it impossible. He devised different ways instead.

    He had a goal imposed upon him, and he did the impossible, which, we now now is not. A similar goal imposed upon the insurance providers, hopefully, will benefit us all.

    Used to be ten telephone operators in an office filled with hundreds of typists carbon copy typing almost identical documents with names. Impossible to let go of any one of them, since the work to be done is there. Now it is an electronic switchbox and a computer with a printer. Different ways.


  18. Doomed

    December 10th, 2009 at 14:01

    Anon

    You are wanting to trim a vast amount of jobs to reach your goal of affordable health care for the poor.

    But taking your George Marshal analogy…yes the health care industry can cut MILLIONS OF JOBS…to make you happy.

    Then we have MILLIONS of people without work. Thats what happens when you cut funding for anything……When you cut the money going into ANY business sector it SHEDS JOBS.

    Those on your side are convinced that health care is a GOD GIVEN right to be paid for and consequences seem to be lost to those advocating for a massive overhaul of the healthcare industry in ONE FELL SWOOP.

    Because my friend becoming a lean, mean fighting machine as you put it the health care industry is going to have to lay off, fire and otherwise terminate millions of workers to reach your goal.

    Because its not only those evil Insurance companies. They tell hospitals what they will pay…They tell doctors what they will pay. Hospitals getting less money lay off workers….Doctors getting less money lay off staff.

    But I guess they could go build windmills.

    Oh wait…their are no windmills to build.

    ITS FREE!!!……..WEEEE!!!! No one has to pay a dime…Its FREE!!!!

    Sorry for oozing cynicism….its the same cynicism that I ooooozed when GWB told me that Iraq would welcome us with open arms.

    Let me tell you a story. I have a doctor. His office is growing quiet. I asked wheres everyone at. The response….hiring freeze. Why? Health Care Reform. Medicare is going to be cutting their pay to nothing. I have to see patients for pennies on the dollars. I cant afford to have a big staff.

    Thats what affordable health care means in America. Lost jobs.

    There aint nothing free. Yes….McDonalds could sell their Quarter pounder with cheese meal for a dollar cheaper, but then you would have to wait about 30 minutes for it while the Owner and his wife gets to you…because all those kids are now hanging out on the street corner without jobs because the government mandated that Quarter pounders with cheese are a God given right and that you must be lean and mean to sell your hamburgers.

    Dreams are a nice thing. Reality is what the rest of us live with.


  19. Jack

    December 10th, 2009 at 21:00

    @Doomed

    You’re an idiot doomed.


  20. Doomed

    December 10th, 2009 at 21:35

    Thanks Jack. I look forward to more of your insight.


  21. Tully

    December 11th, 2009 at 00:03

    “Dreams are a nice thing. Reality is what the rest of us live with.”

    Indeed. Repeat loud and often.


  22. c3

    December 11th, 2009 at 02:14

    anon :

    Not so. Any organization can get bloated and inefficient over time. And given that there no current incentive to trim excess fat, insurers will continue to do so.

    The 90s level might seem unattainable given the new laws and regulations, but since then computers have become much better integrated in business administration.

    I think this is a move in the right direction. And leaner and meaner businesses will see their stock prices rising.

    As someone who works in the business I can assure you that those who buy our products (employers and individuals) are constantly pushing us to reduce costs. Its a core reason why my company has had significant position reductions in the past year.

    I know its easy/tempting to find the “bad guy” in all this and penalize and regulate the hell out of him/it. But when all is said and done the costs are attributable to OUR demand. Medicare has very low overhead. It has little “hassle factor”, its has dramatically reduced the percentage it reimburses (and fortunately it has the regulatory power of the US government behind it) And with all of that it has not reduced the cost of healthcare and it will itself go “bankrupt” in then next 8 years.


  23. Gwenyth

    December 11th, 2009 at 17:18

    I feel that the insurance industry is bloated and profit margins are outrageous. The circumstances have created a situation of minimal competition, tightly controlled supply, ever increasing demand, and layers of systems to hide real profit margins. There is great disinformation about what end products will actually be due to huge efforts to not pay out whenever possible.

    However, I do not think that a flat profit cap is an effective incentive. It seems unlikely to pass for one. And it seems most likely to inspire new and interesting ways to cheat more then anything else. But it does get the numbers on the table in a big way.

    I feel if medicare is as effective as people here state, and for the reasons they state, then the answer should be simple. A public option, with 90% efficiency. In situations where there is minimal incentive to compete, a more effective state run competitor will force the industry to work more effectively.

    There has been much talk about whether a public run healthcare system would be effective, or bloated. Whether it would be a boon or a horrible slush. How about we find out?


  24. Doomed

    December 11th, 2009 at 17:35

    Well at least Gwenyth is honest which is refreshing. This debate is really not about reforms. Its not about insurance companies.

    People.

    There are speechs revealed in which the left advocates they DEMONIZE insurance industry in order to make the case that there is a CRISIS. There is no crisis…there are speeches about creating a crisis in order to sell the Americans on Health care reform.

    There is no CRISIS.

    This whole thing is contrived by the progressive left to get UNIVERSAL GOVERNMENT RUN healthcare into our nation.

    This is NOT nor has it ever been about REFORMING health care. IT has always been about remaking health care in America into a state run entitlement program. Our federal government in my mind has become Unconstitutional.


  25. Tully

    December 11th, 2009 at 22:11

    MediCare’s much-touted “low overhead” is illusory. It’s due at least in part to its ability to offload some of its overhead onto the federal government, such as fraud investigations. Medicare patients (the elderly!) are also more expensive to serve than the general population, and that high expense denominator makes the overhead-per-patient numerator look smaller as a percentage of costs. The real figure one should look at is the per-patient overhead cost.


  26. Jay_C

    December 11th, 2009 at 23:32

    @Insurance Employee

    exacly Insurance Employee,

    nice article that makes your point:

    http://apnews.myway.com/article/20091025/D9BI4D6O1.html


  27. Tully

    December 12th, 2009 at 00:39

    Of course we must remember that this is the same Al Franken who had to pay piles of back taxes for mismanaging his personal corporation…so you know what HIS level of business expertise is.


  28. Doomed

    December 12th, 2009 at 02:46

    According to the Congressional Budget Office, a family of four earning $54,000 in 2016, when the health legislation is fully in effect, would be eligible for a subsidy of $10,100 to help defray the cost of insurance under the health legislation being debated by the Senate. By then, one of the most popular federal plans, a nationwide Blue Cross and Blue Shield policy, is projected to cost more than $20,000.

    That could leave the family earning $54,000, slightly more than the current median household income, with monthly premium costs of more than $825.

    Thats what you have to pay when your UNEMPLOYED OR GO TO JAIL.


  29. Interested

    December 12th, 2009 at 11:43

    @anon

    Have you ever run a business? Wait, make that have you ever successfully ran a business. There has to be a good idea in order for a good idea to be rejected.

    But I’ll allow you some wiggle room.

    Show me figures that Al Frankin has done up on his own to accommodate his thesis. And by figures I mean market studies, panels of Accountants to pour over the reams of data showing where exactly the costs fall into. Clear, concise categorizations of what is Care related vs Administration.

    Or we toss it into the irrelevant pile until he can produce said items.


  30. anon

    December 15th, 2009 at 02:09

    Interested :

    @anon

    Have you ever run a business? Wait, make that have you ever successfully ran a business. There has to be a good idea in order for a good idea to be rejected.

    But I’ll allow you some wiggle room.

    Show me figures that Al Frankin has done up on his own to accommodate his thesis. And by figures I mean market studies, panels of Accountants to pour over the reams of data showing where exactly the costs fall into. Clear, concise categorizations of what is Care related vs Administration.

    Or we toss it into the irrelevant pile until he can produce said items.

    LOL

    Interested, I can pee farther than you can.


  31. Tully

    December 15th, 2009 at 16:41

    Interested: That would be a “no” answer.

    CBO’s analysis said that the 90% limit would essentially make the insurance companies no more than an am of the government. Which is, of course, Franken’s aim, if he’s bright enough to have one.




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