Loss ratio’s unintended consequences

chartState insurance commissioners voted today on proposed regulations governing medical loss ratios — the new requirements under health care reform to encourage insurers to spend less on overhead and more on patient care. If insurers don’t spend enough on patient care, they could be forced to rebate a portion of premiums back to policyholders.

The medical loss ratio concept is a fine idea, but when it comes to fraud, the requirement could very well result in perverse incentives. An insurer that is out of balance with the required loss ratios could find it more profitable to disinvest in fraud prevention and just pay suspect claims. Reducing or eliminating an anti-fraud program would help reduce overhead expenses (and leave more room for profit) while the extra payout for suspect claims would help the insurer get that side of the equation in balance.

Now, most health insurers are smart enough not to scuttle anti-fraud programs, and none I know would intentionally pay fraudulent claims. However, I could envision scenarios where insurers might take a pass on investigating borderline cases, especially if they are complex and costly investigations, which many are.

With this new requirement, there also will be little incentive for investing in new technology or enhanced training of fraud investigators or funding complex civil litigation to counter criminal fraud enterprises.

One unintended consequence of the medical loss ratio is that it may spur medical inflation. If insurers can only increase profits by increasing the size of the overall pie, there’s little incentive to keep medical costs in check through anti-fraud programs and by other means, especially in markets that aren’t highly competitive. That’s one reason the Coalition and others pressed regulators to consider anti-fraud activities not as overhead, but as programs that address health care quality and help reduce cost, so that more of the health care dollar goes for patient care — and not to the scam artists who seem to be multiplying by the week.

Health care reform contains unprecedented resources for the federal government to detect, investigate and prosecute medical providers who are ripping off Medicare and Medicaid. Results so far are quite impressive. Pressure is on unethical providers and organized crime rings to avoid defrauding the government. The chances of getting caught have never been greater and the penalties never as severe. So guess where many of these fraudsters will look to ply their trade? Private insurers likely will face increased pressure from criminal enterprises that have cut their teeth on scams against Medicare. The next few years will be the wrong time for the private sector to pull back from combating health care fraud. But with the medical loss ratios, the fear is that’s exactly what many will do.

We will invite policymakers to join us in the next few years in monitoring the level of health care fraud and the private sector’s investment in it. If fraud grows like we and others predict, we hope regulators and legislators will have the wisdom to take appropriate action. We’ll see.