Free Lunches, Tooth Fairies, & MLR Rebates from CIGNA and Other Health Insurers

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If we could trust corporate behaviors, then understanding complicated and slippery financial calculations would not be necessary.    There would be no compelling need to read this article that helps to explain what the Medical Loss Ratio (MLR) is, how the new healthcare laws are trying to impact profits by limiting MLRs and how insurance companies may comply with the law but not its intent.

When it comes to health insurance companies, I’m skeptical.  The combination of many years as a healthcare professional, including 3 years as a Nurse Case Manger for Liberty Mutual when Managed Care was new and more recently my review of the book, Deadly Spin by former CIGNA Executive, Wendell Potter have all contributed to my belief that profits, not coverage, is their priority.  So, when my friend and colleague showed me a recent letter from CIGNA announcing an MLR rebate, I laughed!

It was a nice letter and includes lots of information about the new law and even a FAQ sheet about MLR.  Some excerpts*:

This letter is to inform you that [CIGNA] will be rebating a portion of your health insurance premiums through your employer or group policy holder.  This rebate is required by the Affordable Care Act – the health reform law.

The Affordable Care Act requires [CIGNA] to rebate part of the premiums it received if it does not spend at least 85 % on the premiums it receives on doctors and hospital bills and activities to improve health care quality such as patient safety.

[In New Hampshire] In 2011, [CIGNA] spent only 84.9% of a total of $77,507,141 in premium dollars on health care and activities to improve health care quality.

Since it missed the 85% target by 0.1% of premium it receives, [CIGNA] must rebate 0.1% of the total health insurance premiums paid…

Understanding Medical Loss Ratios

Basically, this number is used to demonstrate the percent of every dollar that goes to paying for care.  Theoretically, the higher the number, the more it suggests that money going into insurance companies is being used to cover health related claims.  Consumers want this number to be high where as shareholders in for-profit insurance companies such as CIGNA would want this number to be low.  The higher it is, the more money being spent on care.   The lower it is, the more valuable the stock. An MLR of 80% suggests that 80 cents of every dollar was spent on healthcare or improving healthcare quality. I say suggests, because related statistics, despite attempts to control and define, have the potential to be manipulated with clever statistic formulations.  As you will see, this creates some wiggle room that may undermine the intent of the law.

The Affordable Care Act  and MLRs

With respect to MLRs, the health care reform law attempts to set limits, even cut back on the profits that healthcare insurance companies can make.  For large employer group policy holders the MLR that must be spent on care is 85% and for individual policy holders the that MLR must be 80%  (It can be higher, but not lower.)  If it is higher, than consistent with CIGNA’s letter, a rebate must be provided.

How Do Healthcare Insurance Companies Use MLR Numbers?

Wendell Potter, who offers us a unique perspective about MLRs given his former position of CIGNA VP for public relations in his book, Deadly Spin.  He left this six-figure job at CIGNA in 2008 because of what he calls a “crisis of conscience”.  Here are some excerpts from his book related to this issue:

If an insurer reports that its MLR was lower than the preceding quarter than during the same quarter a year earlier, it means the company spent less on medical care–and therefore had more money left over to cover sales, marketing, underwriting, other administrative expenses, and most important, profits.  

If anyone hates to see the MLR going up more than investors do, it is the insurance company executives and their favored senior managers–who get much of their bonus compensation in the form of stock options.

I never got close to the same pay grade as the CEO, but I nevertheless hated to see the value of my stock go down.  So I paid close attention to the stock price for personal reasons just as every other executive in a for-profit health insurance company does–including medical directors who call the shots on whether to pay for expensive treatments and procedures like transplants.  They know they play a key role in reducing medical expenses, and they also stand to benefit financially if the company meets Wall Street’s expectations.

I could always tell how busy my day was going to be when CIGNA announced earnings based on MLR numbers.  If shareholders were disappointed, the stock price would almost certainly drop and my phone would ring constantly with financial reporters wanting to know what went wrong.

The Tooth Fairy’s Worry

When low MLRs were needed to impress Wall Street Investors, insurance companies excluded the cost of nurse hotlines, medical reviews, and disease management programs from medical costs.  Now that the government is demanding minimum MLRs, the insurers want regulators to consider those expenses as medical costs, a clear cut signal to investors that they will resist efforts to trim profit margins. 

Consider Potter’s assertion along with  Emily Berry, amednews staff‘s May 31, 2012 post entitled, Compensation for most health plan CEOs rose in 2011–to $87 million in total in which she reports, “Cigna CEO David Cordani made the most, at $19.1 million. Humana’s Mike McCallister had the smallest compensation package, with $7.3 million.”

Can we create healthier, fairer, safer care,  if we don’t eliminate fortune-making from healthcare in the USA?  As much as I want to be supportive of healthcare reform and respect the hard work going into it from many devoted leaders, I think the financial incentive for corporate stakeholders is too powerful while the smoke and mirror efforts supported by the same money, keep things too confusing to fight.   In my opinion, financial gain as a consequence of other people’s misfortune or illness is fundamentally wrong and as long we don’t address this as a nation with a clear vision for USA healthcare, we’ll limp along.

*I modified excerpts from letter by replacing Connecticut General Life Insurance Company with CIGNA because it is easier to read and allows the reader to focus on understanding the content.  As a teacher/writer, that is my goal. (In three paragraphs, the longer name is written out six times!  Hmmmmm)


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