Mandating Losses

Imagine with me, if you will, someone requiring you and your business to take on more losses.  It seems inconceivable I know but just play along for a moment.  Let's take your business for example.  Suppose you happen to carry a 95 percent collection rate on your entire receivables.  That would be great - wouldn't it?  This would mean that you only have to write off 5 percent as bad or uncollected debt.  I'm just choosing round numbers and I have no idea if that's good or bad.   Now, suppose I came into your business, with the full weight and might of the U.S. federal government and I said that a 95 percent collection rate was way too good.  You need to bring on more bad debt.  You'd think I was crazy.  Right?  You'd bemoan that this isn't how a free market system is supposed to operate - not mention, it would have the effect of eroding your profit margins.  You'd also have to pass that increase cost on to your customers.  No business owner likes to do that.  You might also have to lay off some people as a result of this added burden.  Yet, this is exactly what the federal government is mandating to health insurance companies by having them carry a minimum loss ratio of 80 percent on individual policies and 85 percent on group policies.

An insurance companies minimum loss ratio (MLR) is nothing more than the amount of all premium collected subtracted by the amount of claims for all of their policies.  The amount that's left over goes to things like overhead, salaries, administrative expenses and commission paid to brokers like me.  So, in normal profit making ventures the object is simple; grow revenues of the business and keep expenses in line to maintain a reasonable profit.  I use the term "reasonable" loosely because I'm a free market guy and I don't want companies to be punished for managing their finances well.  However, that's exactly what's taking place in this new mandate that health insurance carriers take on a minimum loss ratio.  So, if I'm currently carrying an 80 percent loss ratio on group business, I'm now going to be forced to increase my losses by 5 percent across the board.  Who do you think will feel the weight of that new mandate?  That's right, you, in the form of higher premiums.  It's no different than our example earlier with the small business who now has to write off more bad debt.

Look, let's for a moment put aside our natural inclination to want to see the "big guys" get what's coming to them.  This will end up hurting you as much as it will hurt them.  After all, how much do you really think is left over for a health insurance carrier after all premium is collected and all the claims are paid?  Not as much as you would think.  Maybe a couple of points.  Let's also not forget that these so called "evil insurance carriers" employ tens of thousands of employees in this country.  They're huge employers.  How do you think an increase in the cost of doing business will impact their jobs? 

I welcome your viewpoint, especially if you think this is a good thing.  Email me at bknauss@employeemployersolutions.com or visit my website at www.employeemployersolutions.com