I was asked about administrative costs and overhead in my previous post about insurance, so I wanted to expand on it in a new post.
What he is referring to is called the Medical Loss Ratio (MLR). That’s the proportion of the insurance company’s revenue that is spent on actual medical care.
Let’s suppose that Xantar National Insurance collects $1.2 million and has to pay out $1 million to doctors, hospitals, therapists, and other care providers. This leaves $200,000 for Xantar to use towards worker salaries, marketing, overhead, and cocaine for the CEO. The medical loss ratio is the medical payouts divided by total revenue or in other words $1 million/$1.2 million = 83%.
That’s actually pretty good by many standards.
Before Obamacare, there was no regulation of the MLR. It wasn’t unheard of for an insurance company to have an MLR of 70% or even lower. 1 out of every 4 dollars in insurance premiums were going towards something other than actual health care.
Obamacare put in a regulation that said that insurance companies must maintain an MLR of at least 80% (some really big insurance companies had to hit 85%). This regulation applied to ALL insurance, not just insurance sold on Healthcare.gov. If an insurance company ended up with too much surplus, it had to refund the money to its members. Last year, insurance companies paid out about $2.4 billion to 8 million Americans. The healthcare industry is worth several trillion, so that’s not much in the grand scheme. But it’s something.
By the way, government programs like Medicare regularly achieve an MLR of 95% because they aren’t trying to make a profit, government workers aren’t paid as much as private sector workers, and the government doesn’t spend a lot on marketing. This is one reason why ideas like the Public Option or Medicare Buy-in scare conservatives and insurance executives so much. They cannot possibly compete.
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