Watch Reform For The Medical Loss Ratio

Health care reform will likely pass and be enacted into law.

Many think this is a bailout of health care in America.

They are correct.

Further, many think this is a bonanza, a windfall, for health insurers.

But this last proposition depends entirely on the "medical loss ratio" -- the percentage of total annual premiums insurers collect that they pay out for actual health care.

The medical loss ratio is the most important measure of how much premium money insurers keep for themselves. A 80% ratio means that insurers keep the other 20% for themselves.

There will be numbers established in the final bill for the required minimum medical loss ratio.

In the 1990s the average medical loss ratio was well above 90%.

Lately it has been near 80%.

Medicare itself is efficient, and it's medical loss ratio is between 94% and 97% (depending on what parts of health-related spending by other federal agencies are included).

The appropriate medical loss ratio regulation under reform for the year 2014 would be 90% to 92%.

Part of the reason the ratio should return to levels last seen in the 1990s is that private health insurers will no longer need so many administrative workers working hard to deny claims and cancel policies for people that get sick.

I've written important details about how to regulate the medical loss ratio at the end of this post. Establishing a number is only one crucial piece of regulating the medical loss ratio. Regulation must also encourage innovation (under a simplistically rigid ratio, cost-reduction innovations could temporarily reduce profits and thus reduce the motive for such innovation), and I offer a clear, effective method in the link to gain the best of both worlds -- good ratio levels and good incentives for innovation which reduce medical costs.