The debate at Forbes over what ObamaCare — and more specifically minimum medical cost ratio requirements — will mean for health insurers is a fun one. This being the holiday season, let me take this opportunity to say I disagree with everyone.
Rick Ungar argues that the MCR rules will mean the death of the health plan industry and the arrival of single-payer healthcare in America. Well, Rick, we may one day go to single-payer, but it won’t be because of MCR requirements. My back-of-the-envelope calculations suggest that MCR regulations will cut industry profits up to 7% in 2011 and new reform-related taxes will trim another 10%. So health insurance will become a far less profitable industry, but still a viable one. Even if margins are tiny, aggregate profits remain big.
Avik Roy argues that MCR regulations will lead to private health plan monopolies that drive up premiums. Roy tends to write in a dizzying array of concentric circles, but I think his argument is MCR rules will force small individual plans to exit the market while making it harder for start-ups to enter.
That would leave the big plans as monopolies. Rather than cut administrative costs, he argues, they will raise premiums and spending to hit the 80% individual MCR minimum. His math looks like this. A plan with a $10k premium, $7k in medical costs and $3k in admin costs would have a 70% MCR. But a $15k plan with $12k in medical costs and $3k in admin costs would have an 80% MCR. The arbitrary MCR rules, he argues, just encourage waste.
Of course, there’s another way plans can meet the MCR: reduce premiums. Or as Citi analyst Carl McDonald noted last year:
I think what you’ve started to see and will be seeing more of is plans lowering premium rates to bring that adjusted loss ratio closer to 80%. The thought is that a lower priced product will be better at attracting new members than maintaining the same price and writing a rebate check….Doesn’t always mean that absolute premium dollars go down, but it could mean that a plan that was planning on raising rates 10% because of increasing cost trends doesn’t have to do that anymore.
In other words, there’s a good chance plans will keep a lid on premiums and take the margin hit in exchange for share. Yes, there will be consolidation, so Roy is right on that score. But there’s also the chance that innovators will figure out how to operate with a lower cost structure in an exchange — providing commoditized individual coverage that meets basic benefit and MCR requirements and beating traditional players at their own game.
Finally, there’s John Graham, who argues that both Ungar and Roy are correct. Monopolies will arise initially, he says, but they will abuse the public trust. Result: the last of the health insurance industry’s political supporters will “switch sides and collapse” in support of “Medicaid-for-all” (I assume he means Medicare for all, but you get the point).
Frankly, I just can’t see someone like House Majority Leader Eric Cantor (R-VA) or John Goodman of the National Center for Policy Analysis switching sides in favor of single-payer. More likely is a continued evolution toward a public-private system in which health plans are heavily regulated — sort of like utilities.
One interesting sidebar: Even as we debate the merits and faults of ObamaCare, the private market is rapidly adopting consumer-directed health plans — the approach favored by free-market advocates. Or as Drew Altman of the Kaiser Family Foundation notes:
Conservatives rail about Obamacare, but they may be winning more than they are losing; it is their vision of insurance with more “skin in the game” that is gradually taking over the marketplace because employers have no other way to control costs.
In other words, we’ve unwittingly created a real-world health system laboratory — providing a unique opportunity to simultanously test and compare the liberal vs. conservative approaches. May the best plan win.