Emory Corporate Governance and Accountability Review

Biohazard: The Medical Loss Ratio as Constitutionally Permissible Garbage (And How to Dispose of It)
Joseph Erkenbrack Joe Erkenbrack is interested in corporate accountability, constitutional rights, housing discrimination, environmental justice, and jurisprudence. He graduated in 2009 with a B.A. in Philosophy, and was a social worker immediately before enrolling at Emory. Joe enjoys chess, cooking, and dogs, and playing sports.

Since the Affordable Care Act (ACA) became law in 2010, 1See Patient Protection And Affordable Care Act; Pub. L. No. 111-148, 124 Stat. 119 (2010) it has been subject to political and constitutional scrutiny. 2See Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519 (2012) While most critics have focused on the expansion of Medicaid and the individual mandate, 3Id. the rest of the bill is by no means universally praised. One such controversial provision is the Medical Loss Ratio (MLR). Congress crafted the MLR with the purpose to improve patient care and reduce unnecessary administrative spending and excessive corporate profits. 4 See 42 U.S. Code § 300gg–18 Those companies which do not, in a given year, spend the mandated amount on patient care, as opposed to other expenses, must make up the difference by providing a rebate to their policyholders. 5See Medical Loss Ratio, Ctr. for Consumer Information & Oversight, Ctrs. For Medicare & Medicaid Servs. (2017) https://www.cms.gov/CCIIO/Programs-and-Initiatives/Health-Insurance-Market-Reforms/Medical-Loss-Ratio.html The purpose of the rebate is both to provide an incentive for insurance companies to comply with government regulations regarding revenue apportionment and compensate consumers who have been “shortchanged.” This Perspective will (1) show that the MLR is constitutional, (2) but that it is nevertheless poor policy, and (3) suggest some alternatives for Congress to consider should it repeal and replace the ACA. 6See generally Paul Howard, The Graham-Cassidy Obamacare Overhaul Is Dead. But It’ll Be Back., Washington Examiner (Oct. 5, 2017 at 12:58 PM) http://www.washingtonexaminer.com/the-graham-cassidy-obamacare-overhaul-is-dead-but-itll-be-back/article/2636636

While no one has yet brought a case challenging the MLR, scholars have published law review articles both attacking and defending the provision’s constitutionality. 7See Wesley D. Markham, Healthcare Reform’s Mandatory Medical Loss Ratio: Constitutionality, Policy, and Implementation, 46 U.S.F. L. Rev. 139 (2012); Rebecca Kopps, Dead on Arrival: The Health Insurance Industry’s Bleak Prognosis due to Unconstitutional Ratemaking in the Patient Protection and Affordable Care Act, 31 N. Ill. U. L. Rev. 577 (2011); Richard Epstein, Constitutional Ratemaking and the Affordable Care Act: A New Source of Vulnerability, 38 Am. J. L. and Med. 243 (2012); Meghan Stubblebine, The Federal Medical Loss Ratio: A Permissible Federal Regulation Or An Encroachment On State Power?, 55 Wm. & Mary L. Rev. 341 (2013); Susane Cordner, Note: Adjusting The Benefits And Burdens Of Economic Life For The Public Good: The Aca’s Medical Loss Ratio As A Constitutional Regulation Of Health Insurance Companies, 24 Wm. & Mary Bill of Rts. J. 213 (2015). The authors of these articles disagree fundamentally about which constitutional test to apply when analyzing the MLR: specifically, within the context of the Fifth Amendment Taking Clause, 8U.S. Const. amend. V.cl. 5. they debate whether Duquesne 9See Duquesne Light Co. v. Barasch, 488 U.S. 289 (1989) (holding that the decision of the public utility commission not to consider the investment a utility made in planning to build but never actually building nuclear plants violated the Fifth Amendment.) or Penn Central controls. 10See Penn Cent. Trans. Comp. v. New York City, 438 U.S. 104 (1978) (Holding that a local ordinance to preserve landmarks which disallowed a train station from modifying part of its building to start a new business did not constitute a Fifth Amendment taking).11See Epstein, supra note 6 and Cordner, supra note 6

Instead of endeavoring to determine which of these tests should apply to the MLR, I will let sleeping jurisprudential dogs lie and attempt to settle the question by assuming that the Duquesne test controls and arguing that the MLR is nonetheless constitutional. Since Cordner argues convincingly 12See Cordner, supra note 6 that, should the Penn Central test control, the MLR would be constitutional, our arguments together (if both are accepted), will resolve the question of constitutionality without need to decide which test applies as a technical matter.

I. The MLR as Constitutional Ratemaking Epstein’s Argument

A. Epstein’s Argument

The MLR stipulates that health insurance issuers must spend 80% of the premiums they collect in small group and individual markets, and 85% of premiums in large group markets, on “providing you with health care and improving the quality of your care (as opposed to what it spends on administrative, overhead, [profits,] and marketing costs).” 13See Stubblebine, supra note 6 at 344 (quoting healthcare.gov) Richard Epstein argues the following to show that the MLR is unconstitutional: (1) health insurance companies are not utilities, but are being regulated like they are; 14See Epstein, supra note 6 at 261 (2) this is unnecessary and inappropriate because the health insurance industry is competitive; 15Id. (3) the government provides no protections or special considerations to health insurance companies which public utilities enjoy; 16Id. at 262. One might consider health care subsidies which the Affordable Care Act provides to be an example of such special treatment, but while they do benefit the insurer they are being distributed to the policyholders. (4) the extent of regulation through the MLR, coupled with the government’s ability “to declare rate increases unreasonable, and thus force companies off the exchanges,” (5) stymies the ability of insurance companies to such a degree that the MLR amounts to a confiscatory taking under the Fifth Amendment. 17Id. When Epstein refers to these government declarations, he misrepresents the power they have. According to his own explanation earlier on (256-257) “While HHS does not have the authority to reject rate increases, HHS has, nevertheless, called upon health insurance issuers to rescind putatively unreasonable proposed premium increases.” In fact, this soft scrutiny which lacks rejection power only kicks in when insurers seek “rate increases of ten percent or more” – and even then all HHS can do is require a justification to be submitted and issue an opinion about its reasonableness. Epstein concedes that this would not be a taking as applied to any new company which wanted to enter the fold, but that “existing firms…do not have effective exit rights because of the huge amount of capital they have sunk into their businesses, which will have to be sold for salvage value if they quit the business,” resulting in a taking. 18Id. at 265 This lack of exit strategy would violate the rule that insurance companies “are not required to either submit to confiscatory rates or go out of business.” 19See Markham, supra note 6 at 159 (quoting Aetna Cas. & Sur. Co. v. Comm’r of Ins., 263 N.E. 2d 698, 703 (1970).

B. MLR Ratemaking as Non-Confiscatory

While cogent, Epstein’s argument contains flaws. 20See Markham, supra at 156-158. While he ultimately supports Epstein’s conclusion, he points out four problems with Epstein’s reasoning. At the time of its publication months after Congress enacted the ACA, Epstein could not rely on empirical data. Instead, he made universal deductive claims that no insurer could earn a fair rate of return under the new regulatory system. 21See Epstein, supra note 6 at 265 Now, some six years after the passage of the ACA, we do have empirical data and the results are mixed.

While insurance companies have almost universally lost money on policies administered under ACA exchanges, 22 See Bob Bryan, The Country’s Largest Health-Insurance Company Is Almost Entirely Quitting Obamacare, Bus. Insider, (Apr. 19, 2016, 11:40 AM) http://www.businessinsider.com/united-healthcare-quitting-obamacare-2016-4; Brandon Morse, First Major Health Insurance Company To Withdraw From Obamacare, The Blaze, (Feb. 14, 2017 at 9:08 PM) http://www.theblaze.com/news/2017/02/14/first-major-health-insurance-company-to-withdraw-from-obamacare/; Guy Boulton, Assurant Health, which employs 1,200 in Milwaukee, going out of business, Milwaukee Wisconsin Journal Sentinel, (June 10, 2015) http://archive.jsonline.com/business/assurant-to-exit-health-insurance-business-b99516948z1-306779721.html/; Mara Lee, Nonprofit Obamacare Insurer In Connecticut Going Out Of Business, Hartford Courant (July 5, 2016 at 8:17 PM) http://www.courant.com/business/connecticut-insurance/hc-obamacare-healthy-ct-20160705-story.html. overall health insurance company profits are soaring. 23See Jeffrey H. Anderson, Insurers’ Profits Have Nearly Doubled Since Obama Was Elected, The Weekly Standard, (Oct. 26, 2016 at 8:00 AM) http://www.weeklystandard.com/insurers-profits-have-nearly-doubled-since-obama-was-elected/article/2005073. It is difficult to square the proposition of an unconstitutional taking with the observation that profits of the regulated companies have almost doubled industry-wide since the ACA’s implementation. 24Id. Even if limiting the analysis to the segment of insurance administered under ACA exchanges, 25 Sixty-nine percent of policy holders went through ACA exchanges last year. See Robert Laszewski, Is Part of the Health-Insurance Market Entering a Death Spiral?, National Review, (Aug. 3, 2017 at 4:00 AM) http://www.nationalreview.com/article/450095/obamacare-death-spiral-exchange-enrollment-down-29-percent. a causal connection between the potentially confiscatory rates and the MLR itself is missing. Other regulatory aspects of the ACA unrelated to the MLR may account for the losses in the exchanges: namely, the fact that insurance companies must (1) take all comers, and (2) are very limited in their ability to charge more to people who are more likely to get sick. 26Id. at 252. These market realities and regulations, combined with the fact that neither the MLR nor any other provision of the ACA actually set rates, 27 Recall the discussion above regarding the HHS’ ability to oversee rate increases. demonstrate the MLR’s constitutionality under a public utility ratemaking analysis.

II. The MLR Is Bad Health Care Policy

Despite being constitutional, the MLR remains poor public policy. The MLR was passed because “[m]any insurance companies spend a substantial portion of consumers’ premium dollars on administrative costs and profits, including executive salaries, overhead, and marketing.” 28See note 5 supra The MLR has not been effective in curbing these expenditures: in addition to the skyrocketing profits alluded to earlier, at least one study shows that the MLR is actually responsible for driving health insurance costs higher. 29See Steve Cicala, Ethan M.J. Lieber, and Victoria Marone, Cost of Service Regulation in U.S. Health Care: Minimum Medical Loss Ratios, The Nat’l. Bureau of Econ. Rsrch., NBER Working Paper No. 23353 (2017) http://www.nber.org/papers/w23353: (“While intended to reduce premiums, we show this rule creates incentives analogous to cost of service regulation. Using variation created by the rule’s introduction as a natural experiment, we find claims costs rose nearly one-for-one with distance below the regulatory threshold: 7% in the individual market, and 2% in the group market. Premiums were unaffected.”) This is no surprise, because the MLR creates an incentive for insurance companies to raise the amount of dollars it spends on patient care (the denominator in the ratio), which effectively eliminates any incentive for the insurer to bargain with hospitals, doctors, and pharmaceutical companies to lower prices for patient care. This lack of competition among the different industry interests in health care keeps prices artificially high.

A. Possible Alternatives

Three possible alternatives to achieve the goals behind the MLR while limiting some of the problems it has produced are to (1) make health care a utility, (2) mandate sliding scale care, or (3) enact transparency forcing regulations to protect free-market competition. Each of these solutions have positives and negatives discussed below.

1. Make Health Care a Utility

The first alternative is to actually set rates. Under this proposed scheme, Congress would delegate authority to HHS 30 One problem with this suggestion is whether to organize it on the local, state, or federal level; public utilities commissions are state level, but leaving discretion to the states has political and logistical difficulties. to set fair market rates for every medical procedure: there would be a set cost for everything from a preventative care visit to a bypass surgery. While this proposal would do a great job of reining in the cost of health care, determining a cost for each procedure would not only be a cumbersome regulatory impossibility, but would lead to uncertainty about which price category new procedures/techniques would fall into. Such uncertainty may stifle the implementation of new medical technologies. Finally, such a regulatory scheme may affect insurance company profits to such a degree that the taking might be total or near total, which would force us to reconsider Epstein’s constitutional concerns.

2. Adopt Universal Sliding Scale Pay through Income Tax

A second option would be to regulate the cost of not health services but insurance premiums. Under this scheme, everyone would be entitled to the same essential health benefits, 31See Epstein supra note 6 at 248. They are already mandated under the current version of the ACA. but the amount one pays in premiums would be determined based on income. Since the Supreme Court upheld the individual mandate under the power to tax, it is likely that this would be a constitutional solution. This approach is probably doomed politically, though; the idea of such a massive tax increase (even for universal free healthcare) would be wildly unpopular and attacked as socialist.

 

3. Enact Transparency Forcing Regulations to Protect Free Market Competition

Under this approach, consumers would know exactly how much their care will cost their insurance company before they consume it. 32 Of course, there would have to be exceptions for life-threatening emergencies, and when patients are unconscious. Insurance companies could provide rebates to policy holders who elected cheaper/fewer treatments. This approach would balance the values of protecting vulnerable consumers while allowing maximum competitive market efficiency, and it would incentivize both insurance companies and consumers to think about cost when considering their care decisions. Most importantly, this would spark competition to lower prices among doctors, hospitals, and pharmaceutical companies. This solution is likely not only the most effective but the most politically feasible of the three I suggest.

Conclusion

The MLR is a constitutional but unwise regulation. As Congress considers new legislation to repeal and replace the ACA, it would be wise to do away with the MLR and push for regulations which mandate price transparency from insurance companies, doctors, hospitals, and pharmaceutical companies to protect free-market competition in an industry that is complicated enough both in the exam room and in the board room to shroud antitrust collusion and bewilder policy holders who are all, as mortals that can get sick, inherently vulnerable.

Footnotes

1See Patient Protection And Affordable Care Act; Pub. L. No. 111-148, 124 Stat. 119 (2010)

2See Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519 (2012)

3Id.

4 See 42 U.S. Code § 300gg–18

5See Medical Loss Ratio, Ctr. for Consumer Information & Oversight, Ctrs. For Medicare & Medicaid Servs. (2017) https://www.cms.gov/CCIIO/Programs-and-Initiatives/Health-Insurance-Market-Reforms/Medical-Loss-Ratio.html

6See generally Paul Howard, The Graham-Cassidy Obamacare Overhaul Is Dead. But It’ll Be Back., Washington Examiner (Oct. 5, 2017 at 12:58 PM) http://www.washingtonexaminer.com/the-graham-cassidy-obamacare-overhaul-is-dead-but-itll-be-back/article/2636636

7See Wesley D. Markham, Healthcare Reform’s Mandatory Medical Loss Ratio: Constitutionality, Policy, and Implementation, 46 U.S.F. L. Rev. 139 (2012); Rebecca Kopps, Dead on Arrival: The Health Insurance Industry’s Bleak Prognosis due to Unconstitutional Ratemaking in the Patient Protection and Affordable Care Act, 31 N. Ill. U. L. Rev. 577 (2011); Richard Epstein, Constitutional Ratemaking and the Affordable Care Act: A New Source of Vulnerability, 38 Am. J. L. and Med. 243 (2012); Meghan Stubblebine, The Federal Medical Loss Ratio: A Permissible Federal Regulation Or An Encroachment On State Power?, 55 Wm. & Mary L. Rev. 341 (2013); Susane Cordner, Note: Adjusting The Benefits And Burdens Of Economic Life For The Public Good: The Aca’s Medical Loss Ratio As A Constitutional Regulation Of Health Insurance Companies, 24 Wm. & Mary Bill of Rts. J. 213 (2015).

8U.S. Const. amend. V.cl. 5.

9See Duquesne Light Co. v. Barasch, 488 U.S. 289 (1989) (holding that the decision of the public utility commission not to consider the investment a utility made in planning to build but never actually building nuclear plants violated the Fifth Amendment.)

10See Penn Cent. Trans. Comp. v. New York City, 438 U.S. 104 (1978) (Holding that a local ordinance to preserve landmarks which disallowed a train station from modifying part of its building to start a new business did not constitute a Fifth Amendment taking).

11See Epstein, supra note 6 and Cordner, supra note 6

12See Cordner, supra note 6

13See Stubblebine, supra note 6 at 344 (quoting healthcare.gov)

14See Epstein, supra note 6 at 261

15Id.

16Id. at 262. One might consider health care subsidies which the Affordable Care Act provides to be an example of such special treatment, but while they do benefit the insurer they are being distributed to the policyholders.

17Id. When Epstein refers to these government declarations, he misrepresents the power they have. According to his own explanation earlier on (256-257) “While HHS does not have the authority to reject rate increases, HHS has, nevertheless, called upon health insurance issuers to rescind putatively unreasonable proposed premium increases.” In fact, this soft scrutiny which lacks rejection power only kicks in when insurers seek “rate increases of ten percent or more” – and even then all HHS can do is require a justification to be submitted and issue an opinion about its reasonableness.

18Id. at 265

19See Markham, supra note 6 at 159 (quoting Aetna Cas. & Sur. Co. v. Comm’r of Ins., 263 N.E. 2d 698, 703 (1970).

20See Markham, supra at 156-158. While he ultimately supports Epstein’s conclusion, he points out four problems with Epstein’s reasoning.

21See Epstein, supra note 6 at 265

22 See Bob Bryan, The Country’s Largest Health-Insurance Company Is Almost Entirely Quitting Obamacare, Bus. Insider, (Apr. 19, 2016, 11:40 AM) http://www.businessinsider.com/united-healthcare-quitting-obamacare-2016-4; Brandon Morse, First Major Health Insurance Company To Withdraw From Obamacare, The Blaze, (Feb. 14, 2017 at 9:08 PM) http://www.theblaze.com/news/2017/02/14/first-major-health-insurance-company-to-withdraw-from-obamacare/; Guy Boulton, Assurant Health, which employs 1,200 in Milwaukee, going out of business, Milwaukee Wisconsin Journal Sentinel, (June 10, 2015) http://archive.jsonline.com/business/assurant-to-exit-health-insurance-business-b99516948z1-306779721.html/; Mara Lee, Nonprofit Obamacare Insurer In Connecticut Going Out Of Business, Hartford Courant (July 5, 2016 at 8:17 PM) http://www.courant.com/business/connecticut-insurance/hc-obamacare-healthy-ct-20160705-story.html.

23See Jeffrey H. Anderson, Insurers’ Profits Have Nearly Doubled Since Obama Was Elected, The Weekly Standard, (Oct. 26, 2016 at 8:00 AM) http://www.weeklystandard.com/insurers-profits-have-nearly-doubled-since-obama-was-elected/article/2005073.

24Id.

25 Sixty-nine percent of policy holders went through ACA exchanges last year. See Robert Laszewski, Is Part of the Health-Insurance Market Entering a Death Spiral?, National Review, (Aug. 3, 2017 at 4:00 AM) http://www.nationalreview.com/article/450095/obamacare-death-spiral-exchange-enrollment-down-29-percent.

26Id. at 252.

27 Recall the discussion above regarding the HHS’ ability to oversee rate increases.

28See note 5 supra

29See Steve Cicala, Ethan M.J. Lieber, and Victoria Marone, Cost of Service Regulation in U.S. Health Care: Minimum Medical Loss Ratios, The Nat’l. Bureau of Econ. Rsrch., NBER Working Paper No. 23353 (2017) http://www.nber.org/papers/w23353: (“While intended to reduce premiums, we show this rule creates incentives analogous to cost of service regulation. Using variation created by the rule’s introduction as a natural experiment, we find claims costs rose nearly one-for-one with distance below the regulatory threshold: 7% in the individual market, and 2% in the group market. Premiums were unaffected.”)

30 One problem with this suggestion is whether to organize it on the local, state, or federal level; public utilities commissions are state level, but leaving discretion to the states has political and logistical difficulties.

31See Epstein supra note 6 at 248. They are already mandated under the current version of the ACA.

32 Of course, there would have to be exceptions for life-threatening emergencies, and when patients are unconscious.

Joe Erkenbrack is interested in corporate accountability, constitutional rights, housing discrimination, environmental justice, and jurisprudence. He graduated in 2009 with a B.A. in Philosophy, and was a social worker immediately before enrolling at Emory. Joe enjoys chess, cooking, and dogs, and playing sports.