One of the many pitfalls of Affordable Care Act, I explained in my previous blog post, is that it requires insurers to spend no more than 20 percent of their income from premiums on administrative costs and no less than 85 percent on medical care. Regulating the medical loss ratio (MLR), as it's called, is problematic, I argued, in part because the issue of which expenses can be considered legitimate "administrative costs" is highly open to interpretation.
This kind of regulation creates numerous perverse incentives, but in this post I will focus on five that I think will be especially pernicious.
First, just about any payment an insurer makes to a doctor or hospital is going to count as medical care, no matter how large the administrative costs are for the provider. So both entities have an incentive to find ways of shifting administrative costs from the insurer to the providers. The most obvious way of doing that is for the insurer to contract with an HMO, give the HMO a fixed fee per enrollee, and let the HMO manage all the care, no questions asked.
Second, almost anything the insurer does that conforms to the Obama administration’s view of “improving quality”—managed care, coordinated care, integrated care, electronic medical records—will count as “medical care.” But efforts to detect and prevent fraud will not count. Doctor credentialing won’t count either. One way to think about this is to realize that everything insurers are doing today to hassle good doctors will be encouraged and much of what they do to get rid of bad doctors will be discouraged.
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