For years the main constraint on the cost of health insurance premiums for policy holders has been an insurance company's competitive position vis-à-vis other insurance companies. It didn't matter whether a health insurer's top executives drew megamillion salaries and stock options, spent lavishly and flew in corporate jets, or if they limited or denied coverage for their sickest subscribers, or if they spent barely 70 percent of policy revenues on actual health care for their customers. What has mattered was whether their policy rates were competitive with like-minded insurers from both the for-profit and not-for-profit sector, which traditionally have labeled their spending on actual medical care for their customers as "medical loss."
The Affordable Care Act has changed that treacherous behavior by setting floors on the share of revenues from insurance premiums that health insurers must spend on actual health care provided to their customers. Insurers now must spend at least 80 percent of their premium dollars for individual policy holders and for subscribers in small groups, and at least 85 percent of their revenue from premiums for members of large groups. The difference was allowed on insurers' arguments that they could manage overhead costs for large groups more efficiently than costs for individual subscribers and small groups.
That regulation took effect in 2011. And now, BlueCross BlueShield of Tennessee, the state's largest health insurer, estimates it will have to refund up to $13.5 million to its large-group subscribers to meet its required spending floor.
Given its record $5.1 billion in revenues from premiums last year, to be sure, that's a relatively small amount. It suggests that the company's premiums are largely in line at least with the floors that curb insurance abuse, if not with the industry's national leaders on restraining overhead costs and funding care.
Overall, BlueCross managers say, the company spent 81cents of every premium dollar on direct health care. According to its breakdown, it spent 25 percent of premium revenue on physician services, 26 percent on inpatient care, 17 percent on outpatient care, 8 percent for prescriptions, and 5 percent on other medical care. The other 19 percent includes 3 percent for profits, 3 percent for premium taxes, 7 percent for administration, and 5 percent for an overhead category labeled quality, support and fees. Ideally, policy holders could expect a tighter grip on overhead and executive salaries, somewhere closer to the considerably smaller percentage that BlueCross and other insurers bid to handle administration of Medicare regional contracts.
Regardless, it's important for people under the Medicare entry age of 65 to realize that the incremental reforms of the Affordable Care Act are continuing to take hold. Earlier steps include a ban on pre-existing conditions for insurance policies covering children, a ban on arbitrary insurer limits on policies' annual coverage, and a ban on premature recission (or termination) of policies when people get sick; inclusion of coverage under family policies for children under 26; risk pools for high-risk persons who can't get insurance; and other administrative rules for insurers, such as the 2011 spending floors for insurers' actual health care.
The chief benefit of the Affordable Care Act, of course, will be affordable comprehensive health insurance policies for all Americans. In 2014, it will include wage-adjusted subsidies to purchase insurance, a ban on pre-existing conditions, and a mandate for flat community rates to limit insurers' cherry-picking of the healthy. That is, if the U.S. Supreme Court's pending ruling on legal challenges to the health care reform does not hamstring or gut the ACA, as Republican opponents want.