At first glance, everyone likes the idea of carriers having to pay out 80% of premiums in claims. It seems only fair that the carrier only gets to keep 20% for profit. Except for the fact that the 20% is not profit but rather the amount the company gets to use to cover all costs of doing business. What other business can be told how much money they can use to keep the doors open. Let’s start telling all businesses that they can only charge 20% more than their supplies cost. Another words, yesterday I went and got my oil changed and the bill came to nearly $40. That would mean that the oil needs to be $32 for the five quarts that they put in. Now people will say, Chuck, the employees have to be paid and of course there are costs of the building, taxes, and of course, the business needs to earn a profit. Well, tell me the difference in a carrier and any other business. In the insurance world, the supply costs are the claims that the policy holder incurs. Unfortunately, those costs can vary quite a bit from year to year and we are even going to take away all opportunity for the carrier to estimate future claims (guaranteed issue). Let’s use another example. How about that cell phone that you are using? Network and Other Communication Equipment Industry is one of the most profitable industries in the United States with profits of over 28% according to Fortune 500 magazine. Since more people have cell phones (82%) than have health insurance (79% of adults age 18-65), wouldn’t it make sense to limit their profits. By the way, again the health care reform law limits the carrier’s ability to cover all costs of business. That 20% will have to cover all administration costs, marketing costs, and somehow, still provide a profit so the company can grow and prosper. Doesn’t seem very logical to me to tell a company that no matter how good they are at controlling costs, they won’t be able to benefit from it. Let’s take a look to the future and see how a carrier would react. Let’s assume it is December of 2014 and a carrier determines that their loss ratio is running at 78%. Since that is 2% lower than it needs to be, will the carrier refund the difference divided by all their policyholders which will give each of them a couple of dollars or is it more likely that the carrier will just throw through some claims that otherwise be denied. I am under the assumption that the carrier will just pay claims even if they are not justified. Why, because refunding the money tells the client that they were overcharged during the year and the accounting would be difficult. On the other hand, by paying unjustified claims, they make a few people happy and accounting is simple. Is this really how we want to control costs? The other part of this equation which I don’t understand is that innovation is usually the result of trying to find a more cost effective way of doing business. By telling a carrier that no matter how innovative they are, they have to pay out 80% of premiums in claims, what is the incentive to drive costs down? Did anyone even consider using common sense in this scenario? Apparently keeping costs down is not the goal of those in charge but rather to force carriers to flee the market so the only option left is a public option or a single payer system. This is really what this entire exercise has been about, driving the American people to accept a program run by the government and we are taking it like the “little people” we have become. You, the broker, are the only ones who understand the health insurance and health care business. Now it is imperative that you get involved in the process, get involved in your industry, and get involved in the teaching of America about your industry. Do it before it is too late.
80% Loss Ratio is Proof of Health Care Reform Stupidity
About the Author: Chuck Olson
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