Veteran Sacramento-based journalist and policy wonk Daniel Weintraub, who recently launched his HealthyCal.org Website, deserves a big shout out for pointing out California law requiring health plans and insurers spend at least 70 cents of each premium dollar on medical care for plan members and policyholders can do virtually nothing to hold down premium increases. Moreover, it may even lock in the absolute growth of health plan and insurer profits that many consumer advocates blame for rising premiums.
Simple mathematics explains why. Seventy percent of medical treatment costs — a quantity that has been outpacing the rate of inflation over the past decade — is still a growing number in absolute terms. For example, if the cost of providing medical care to plan members and insured policyholders increases from an average of $3,000 annually per plan member or policyholder to $5,000, a health plan or insurer would be required to spend on average at least $3,500 per member versus just $2,100 under the 70 percent minimum loss ratio requirement. Premiums must naturally rise to absorb the increase. The 30 percent left over after health plans and insurers meet the minimum medical loss ratio grows into a bigger pot of cash. The same math would be at work if the minimum medical loss ratio were increased as some policymakers have advocated.
Rising medical treatment costs produce ratcheting upward pressure on both premiums and potentially the profits of health plans and insurers when administrative costs are netted out. This ratcheting effect also undermines arguments by health plans and insurers that if everyone was required to have coverage — the so-called individual mandate — then coverage would become more affordable and accessible since there would be a much larger pool of people with coverage and paying in premiums to cover the cost of their medical care.
An individual mandate might produce some temporary relief by spreading risk across a bigger pool of people. But due to the ratcheting effect of rising health care costs, the same underlying mathematics would be at work, simply subjecting a larger number of people to rising premiums while locking in higher absolute profits for health plans and insurers.
An individual mandate does however make sense when viewed from the perspective of the business model of health plans and insurers when that model assumes profit margins in the low single digits such as suggested last week by Anthem Blue Cross President Leslie Margolin in testimony before a California legislative committee. Low margin businesses (such as grocery chains and airlines, for example) offset their skinny profit margins with big sales volume. So it’s not surprising that health plans and insurers like the idea of forcing everyone to have coverage. It would be like the airline industry requiring everyone to purchase at least one round trip ticket per year. Or requiring everyone to shop at a major grocery chain outlet at least monthly. It’s no wonder that both free market conservatives and more liberal consumer advocates dislike the individual mandate. The former because it’s contrary to free market economics and consumer choice and the latter because they fear consumers will end up trapped on the up escalator of rising medical costs that will be passed through to them by health plans and insurers.
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