Why the New MLR Rule Will Cause Higher Insurance Premiums

The [minimum Medical Loss Ratio (MLR)] rule will make it necessary for state regulators to require higher premiums. Why? Before the MLR rule came into effect, insurers could use reserves built up in low-claim years to pay claims in high-claim years, thus reducing premiums (averaged over multiple years) from what they would have been otherwise. Now, with the MLR rule in effect, in low-claim years insurers will have to pay higher rebates rather than accumulate more reserves. This means that premiums will, on average, have to be higher than they would have been otherwise — because insurers will have to pay more claims in high-claim years, without being able to accumulate as much reserve funding in low-claim years. Now, when a specific insurer has a low-claim year, they will end up paying rebates — including federal subsidy dollars — to their customers.

More from Robert Book.

Comments (14)

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  1. Harley says:

    I seriously doubt they consider market effects when penning legislation. It’s just too much to ask a bureaucrat to think like a rational person.

  2. Jacob Druisdael says:

    Harley be nice, I’m sure that all those insurance companies have socialist leanings just like our great leader and they’ll do whatever is in the best interest of the proletariat. Just like Soviet Russia and China did.

  3. Vladamir Viatopolkovsky says:

    Jacob! Spoken like a true bourgeoisie 🙂 Sounds like the MLR defies how insurance works.

  4. Studebaker says:

    Book’s argument makes a lot of sense.

  5. Michael Ainslie says:

    How about we return to what insurance should be – to insure risk. Let’s let patients decide their MLR ( Through HSA etc) and have insurance cover catastrophic loss not first dollar.

  6. Chopra says:

    This whole health care dilemma is a hot mess! And with the ACA coming in, who knows, this is only going to become way more complex.

  7. Desai says:

    What is the reasoning behind imposing this new regulation?

  8. Sandeep says:

    Thanks for this post, now I know what to expect in the coming years.

  9. Killshot says:

    Michael Ainslie — if we really returned to “insurance” then all those bogus dollars collected for “1st dollar coverage” of migraines and toenail fungus could not be skimmed for the “float”, invested, and used for very early retirements on the part of crooks like UHC management.

  10. Politics Debunked says:

    Actually he is missing the main problem with Medical Loss Ratios which are supposedly to keep insurance overhead&profit under control. In reality they are a scam to benefit healthcare providers since they provide incentive for insurers to let medical costs rise. As this new page on crony capitalism and healthcare details:


    They require for instance some insurers to spend 80% of their premiums on medical expenses.

    The real intent is apparent if you look at the inverse of that ratio. They need to spend 4 times as much on medical expenses as they do on overhead and profit. i.e. if they are on the boundary, the only way to increase profit is to increase medical expenses. They can’t cut back on costs and take the savings as profit (and later reduce premiums due to competition).

    See the page for more details on how crony capitalism drives up healthcare prices, and why Obamacare isn’t the answer. Much of the commentary on the topic is written mostly for those who already advocate free markets in general. Much of the public fears undue corporate influence over government, so it is useful to focus on that aspect of the problem.

    It is a bit long, but challenge anyone to read it and come away still supporting Obamacare. Much of it may be familiar to those who read Dr. Goodman’s work, but there are may be some points you haven’t seen before.

  11. Politics Debunked says:

    Actually that article he linked to does “bury the lead” but it does mention the issue of MLRs providing incentives to increase healthcare costs. Perhaps those of us in the business world attach different importance to aspects of these laws than those who are primarily policy analysts. We think about how we would react if faced with such rules.

  12. Erik says:

    Can anyone tell my why during a high claim year the 80% MLR would be any different the a lean claim year except the insurance company cannot keep the difference?

  13. Don Levit says:

    Politics debunked:
    You explained it very well by writing “they need to spend 4 times as much on medical expenses as they do on overhead and profit; the only way to increase profit is to increase medical expenses.”
    I was wondering how something like the MLR could backfire, and the article John posted is pretty convincing.
    The only objection I have is that the subsidies, as I understand them, will be limited to the growth in the CPI, so that increasing premiums over the CPI will require more out of pocket for the consumer, due to a “lower” subsidy.
    This also lowers the money going from the taxpayers to the insurers in relation to the increased premium.
    Don Levit

  14. neil carter says:

    blue cross of northeast pennsylvania is lowering rates because of this, the medical loss ratio. health insurance has become cheaper.in this day that is more than unusual, and yet it is a fact.