Math is hard

The White House is bragging about the Obamacare provision requiring health insurers’ “medical loss ratio” (the amount of a premium that is spent on medical care) to be at least 80%. This proves that the White House not only does not understand economics, they don’t even understand fractions.

What this provision does is eliminate any incentive that insurers might have to deliver care more efficiently. Without it, an insurer who managed to reduce expenses could turn a tidy profit. Now, if they do reduce expenses, they just have to return the savings to the consumer. So why bother? Thus “medical loss ratio” helps to ensure that wasteful medical spending continues to rise.

It also directly pushes health premiums higher. Insurers cannot make money by keeping expenses down, but they can make more money simply by raising premiums. That way they keep 20% of a larger pie. Even if they have to return some of it, they still come out ahead.

And that is exactly what we are seeing. Yes, some rebates are being sent, but also premiums are skyrocketing. How much of the latter is due to “medical loss ratio” is hard to say.

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