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Changes with medical loss ratio rule may mean lower insurance premiums

Gregory Warner Nov 22, 2010
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Changes with medical loss ratio rule may mean lower insurance premiums

Gregory Warner Nov 22, 2010
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Tess Vigeland: Three eagerly-anticipated letters were spoken by the Health and Human Services secretary today:
M, L, R. It stands for medical loss ratio. The government issued rules limiting how much of our premiums can go toward administrative costs and executive salaries at insurance companies. And on that news, insurance company stocks went up.

We asked Gregory Warner at our health desk at WHYY in Philadelphia, to explain why.


Gregory Warner: The medical-loss ratio rule says starting in January, every dollar we spend in premiums, insurance companies have to spend 80 cents on our health care. They can keep 20 cents for other costs. The White House announced today that companies don’t have to count income taxes as part of that 20.

Ana Gupte analyzes the industry for the firm Sanford Bernstein in New York. She says that for the seven largest companies, that one change means $300 to $400 million they’re allowed to keep instead of refunding back to their customers.

Ana Gupte: That’s right.

And on that news Wall Street rallied. So how big a refund might each customer expect?

Gupte: Um, I would have to do the math on that.

So let’s try. Take this year. You and I didn’t go to the doctor that much. And so as a result, the seven largest insurance companies hauled in $15 billion in profits. If this new rule had applied, they would have had to refund $750 million that they didn’t spend on health care back to their customers.

Gupte: Which means we get a rebate check on average, $125 for the year.

Warner: So, about 10 bucks a month.

Gupte: Ten bucks a month.

That is only an average. Some of us would get less, some a lot more. Gary Claxton is vice president with the Kaiser Family Foundation. He says people who buy their insurance retail instead of through a company would see a better discount. It could give all insurers an incentive to set lower premiums.

Gary Claxton: I mean, if you don’t get to keep the money anyway then you might as well have as competitive a premium as possible, because it’s actually a pain to pay rebates.

The hope is that insurers will weigh that pain before they set next year’s rates.

In Philadelphia, I’m Gregory Warner for Marketplace.

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