{"id":1849,"date":"2013-10-30T17:43:33","date_gmt":"2013-10-30T21:43:33","guid":{"rendered":"http:\/\/blogs.law.harvard.edu\/pamphlet\/?p=1849"},"modified":"2013-10-30T17:43:33","modified_gmt":"2013-10-30T21:43:33","slug":"the-affordable-care-acts-contradictory-free-market-stance","status":"publish","type":"post","link":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/2013\/10\/30\/the-affordable-care-acts-contradictory-free-market-stance\/","title":{"rendered":"The Affordable Care Act’s contradictory free market stance"},"content":{"rendered":"\n\n\n\n
\"Medical<\/a><\/td>\n<\/tr>\n
\u2026in the upper 90’s\u2026<\/span>
\napparently from Health Care for America Now!<\/a> via logarchism.com<\/a>.<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

The Patient Protection and Affordable Care Act<\/a> (ACA) limits the \u201cmedical loss ratio<\/a>\u201d (MLR) that an insurer can have \u2014 the percentage of collected medical premiums that must go to medical services for the insured. The minimum MLR mandated by the law is 80-85% depending on the particular market<\/a>. (For simplicity, let\u2019s call it 80%.)<\/p>\n

On its face, this seems like a good idea. If an insurer\u2019s MLR is really low, say 50%, they\u2019re keeping an awful lot of money for administration and profit, and it looks like the premium-payers are getting a raw deal. By limiting MLR to at least 80%, premium-payers are guaranteed that at most 20% of their money will go to those costs that benefit them not at all. But there may be unintended consequences of the MLR limit, and alternatives to achieving its goal.<\/p>\n

Because of the MLR limit, an insurance company that spends $1,000,000 on medical services can generate at most $250,000 in profit. They\u2019d reach this limit by charging premiums totalling $1,250,000, yielding an MLR of 1,000,000\/1,250,000 = .80. (Of course, they\u2019d generate even less profit than this, since they have other costs than medical services, but $250,000 is an upper bound on their profit.) They can\u2019t increase their profit by charging higher premiums alone, since this would just blow the MLR limit. The only way to increase the profits (governed by the denominator in the MLR calculation) is to increase medical services (the numerator) as well \u2014 pay for more doctor visits, longer stays, more tests, just the kinds of things we\u2019re already spending too much on with our moral-hazard\u2013infested medical care system. The MLR limit embeds an incentive for insurance companies to push for more medical services, whether needed or not.<\/p>\n

And why 80%? Medicare has had an MLR in the upper 90%’s for a couple of decades, and private insurers used to make a go of it in that range as well in the early 1990’s. (See graph.) Other countries<\/a> have MLR’s in the mid-90’s as well. An MLR limit of 80% means that once an insurer reaches 80% MLR, the regulation drops any incentive to improve further.<\/p>\n

Wasn\u2019t this moral hazard and inefficiency just the sort of thing the ACA was supposed to resolve by using market forces? When people buy insurance premiums on a transparently priced exchange, if one insurer is less efficient or egregious in profit-taking (therefore with a low MLR), it should end up outcompeted by more efficient and leaner insurers. No need to mandate a limit; the market will solve the problem.<\/p>\n

If you think that the market forces in the health care exchanges won\u2019t compete down adminstrative overheads and profits (that is, raise MLR) on their own and that regulation is necessary to prevent abuse, then you\u2019re pretty much conceding that the market doesn\u2019t work under the ACA, and that we should move to a single-payer system. MLR limits are not a way of achieving a more efficient insurance system<\/a> but rather an admission that our insurance system is inherently broken. The MLR limit looks to me like a crisis of faith in the free market. What am I missing?<\/p>\n","protected":false},"excerpt":{"rendered":"

\u2026in the upper 90’s\u2026 apparently from Health Care for America Now! via logarchism.com. The Patient Protection and Affordable Care Act (ACA) limits the \u201cmedical loss ratio\u201d (MLR) that an insurer can have \u2014 the percentage of collected medical premiums that must go to medical services for the insured. The minimum MLR mandated by the law […]<\/p>\n","protected":false},"author":2110,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[116],"tags":[],"class_list":["post-1849","post","type-post","status-publish","format-standard","hentry","category-policy"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p5pLfN-tP","jetpack-related-posts":[{"id":2290,"url":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/2015\/06\/26\/plain-meaning\/","url_meta":{"origin":1849,"position":0},"title":"Plain meaning","author":"Stuart Shieber","date":"Friday, June 26, 2015","format":false,"excerpt":"In its reporting on yesterday\u2019s Supreme Court ruling in King v. Burwell, Vox\u2019s Matthew Yglesias makes the important point that Justice Scalia\u2019s dissent is based on a profound misunderstanding of how language works. Justice Scalia would have it that \u201cwords no longer have meaning if an Exchange that is not\u2026","rel":"","context":"In "language"","block_context":{"text":"language","link":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/category\/linguistics\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":858,"url":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/2011\/06\/07\/the-nih-responds-to-my-letter\/","url_meta":{"origin":1849,"position":1},"title":"The NIH responds to my letter","author":"Stuart Shieber","date":"Tuesday, June 7, 2011","format":false,"excerpt":"Front steps of National Library of Medicine, 2008, photo courtesy of NIH Image Bank Imagine my surprise when I actually received a response to my letters in recognition of the NIH public access policy, a form letter undoubtedly, but nonetheless gratefully received. And as a side effect, it allows us\u2026","rel":"","context":"In "open access"","block_context":{"text":"open access","link":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/category\/scholarly-communication\/open-access\/"},"img":{"alt_text":"Front steps of National Library of Medicine, 2008, photo courtesy of NIH Image Bank","src":"https:\/\/i0.wp.com\/blogs.law.harvard.edu\/pamphlet\/files\/2011\/06\/nlm-203x300.jpg?resize=350%2C200","width":350,"height":200},"classes":[]},{"id":41,"url":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/2009\/05\/29\/what-percentage-of-open-access-journals-charge-publication-fees\/","url_meta":{"origin":1849,"position":2},"title":"What percentage of open-access journals charge publication fees?","author":"Stuart Shieber","date":"Friday, May 29, 2009","format":false,"excerpt":"In the popular conception, open-access journals generate revenue by charging publication fees. The popular conception turns out to be false. Various studies have explored the extent to which OA journals charge publication fees. The results have been counterintuitive to many, indicating that far fewer OA journals charge publication fees than\u2026","rel":"","context":"In "open access"","block_context":{"text":"open access","link":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/category\/scholarly-communication\/open-access\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":1574,"url":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/2013\/01\/03\/when-practice-and-logic-conflict-change-the-practice\/","url_meta":{"origin":1849,"position":3},"title":"When practice and logic conflict, change the practice","author":"Stuart Shieber","date":"Thursday, January 3, 2013","format":false,"excerpt":"...our little tiff in the late 18th century...\"NYC - Metropolitan Museum of Art: Washington Crossing the Delaware\" image by flickr user wallyg. Used by permission. I'm shortly off to give a talk at the annual meeting of the Linguistic Society of America (on why open access is better for scholarly\u2026","rel":"","context":"In "language"","block_context":{"text":"language","link":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/category\/linguistics\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":373,"url":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/2010\/01\/22\/373\/","url_meta":{"origin":1849,"position":4},"title":"Harvard response to White House RFI on public access policies","author":"Stuart Shieber","date":"Friday, January 22, 2010","format":false,"excerpt":"Harvard's provost Steven Hyman has submitted a response on behalf of the university to the White House Office for Science and Technology Policy's RFI on public access policies. It should appear on the OSTP blog within a day or so, and is duplicated here as well. I am in strong\u2026","rel":"","context":"In "open access"","block_context":{"text":"open access","link":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/category\/scholarly-communication\/open-access\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":22,"url":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/2009\/06\/08\/the-death-of-scholarly-journals\/","url_meta":{"origin":1849,"position":5},"title":"The death of scholarly journals?","author":"Stuart Shieber","date":"Monday, June 8, 2009","format":false,"excerpt":"One of the frequent worries I hear expressed about open-access policies such as the ones at Harvard is that they will lead to the death of journals (or of scholarly societies, or of peer review). When we first began addressing Harvard faculty on these issues, I heard this worry expressed\u2026","rel":"","context":"In "open access"","block_context":{"text":"open access","link":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/category\/scholarly-communication\/open-access\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"_links":{"self":[{"href":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/wp-json\/wp\/v2\/posts\/1849","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/wp-json\/wp\/v2\/users\/2110"}],"replies":[{"embeddable":true,"href":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/wp-json\/wp\/v2\/comments?post=1849"}],"version-history":[{"count":12,"href":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/wp-json\/wp\/v2\/posts\/1849\/revisions"}],"predecessor-version":[{"id":1861,"href":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/wp-json\/wp\/v2\/posts\/1849\/revisions\/1861"}],"wp:attachment":[{"href":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/wp-json\/wp\/v2\/media?parent=1849"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/wp-json\/wp\/v2\/categories?post=1849"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/archive.blogs.harvard.edu\/pamphlet\/wp-json\/wp\/v2\/tags?post=1849"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}