Obamacare requires insurers to meet a federally specified medical loss ratio. That is, they must spend a certain percentage of premiums on medical expenses. The remainder can be used to cover administrative costs and, if there’s anything left, profits. But if insurers don’t shell out enough in medical losses to meet the requirement, they’ll have to rebate the difference to policyholders.
The idea is to limit insurers’ profits and create incentives to reduce administrative costs. But it’s not as clear cut as it sounds. After all, what exactly counts as a medical expense?
“Is giving patients access to a team of nurses to discuss and monitor their health really an administrative function?” Newt Gingrich and David Merritt ask. “What about a fraud-prevention program that targets criminal providers who endanger patient care?” How Obamacare answers these kinds of questions is vitally important. If it labels many initiatives like these “administrative costs,” insurers will find it increasingly difficult to stay in business.
The National Association of Insurance Commissioners(NAIC) has been tasked with defining what is and is not a medical cost. Jennifer Haberkorn reports for Politico that “top House and Senate chairmen want to include as many items as possible on the administrative side of the ledger, which would make the quota harder to reach.” But the “NAIC has signaled that it’s not likely to side with the Democrats over where to count federal taxes in the calculation, among other issues.”
The decision ultimately rests with Health and Human Services Secretary Kathleen Sebelius. If she adheres to the recommendations from NAIC, she could face the discontent of congressional leadership. But following them loosely would risk being seen as “playing politics on a highly controversial piece of legislation.”
A broad definition of administrative expenses could be disastrous for private insurance. Heritage’s Robert Book writes, “By putting an inflexible ceiling on how much insurers can spend on medical costs and how much they can charge in premiums—without any limit on what cost they could be required to incur—this legislation opens the door to the complete elimination of people’s ability to choose private health plans.”
If private insurers are forced out of the market, what would be left? The answer should come as no surprise. Obamacare includes a placeholder for a public option: health plans offered through the exchanges by private insurers, but ultimately defined by the federal Office of Personnel Management. It appears that these plans won’t be held to the same rules applied to other :”private” plans—including the rules governing medical loss ratios.