When Do Regulations Turn Private Insurance into Government Insurance?

Summary: A new Senate health proposal might turn private insurance into government insurance, at least from CBO’s perspective.

In the 1990s, the Congressional Budget Office dealt a key blow to President Clinton’s health legislation when it decided that the reforms would move large portions of the health care system into the government and thus onto the budget. In that case, CBO concluded that regulations on private insurance would be so intrusive that it would effectively become a governmental activity. That finding strengthened the hand of opponents who portrayed the proposal as a big government expansion.

Policymakers have taken great pains to avoid the same fate in their current efforts at health insurance reform. Early in the process, Congressional leaders asked CBO to detail how it would decide which proposed policies should be treated as part of the government — and thus be recorded on the budget for Congressional purposes — and which not. To provide some answers, CBO released a brief back in May that describes how it would draw the line between government and non-government in evaluating health insurance proposals.  In his blog, Director Doug Elmendorf summarized the key distinction as follows:

In CBO’s view, the key consideration is whether a proposal would be making health insurance an essentially governmental program, tightly controlled by the federal government with little choice available to those who offer and buy health insurance—or whether the system would provide significant flexibility in terms of the types, prices, and number of private-sector sellers of insurance available to people. The former—a governmental program—belongs in the federal budget (including all premiums paid by individuals and firms to private insurers), but the latter—a largely private-sector system—does not.

The health legislation being considered in Congress includes many new regulations on private insurance (e.g., to forbid screening based on pre-existing conditions and to require coverage for certain activities), but CBO has consistently found that they aren’t enough to bring private insurance into the federal budget. The regulations would certainly change insurance markets, but in CBO’s view would leave enough flexibility and choice for those markets to still be considered private.

Until last week, that is, when a new proposal emerged that might cross CBO’s line and bring significant portions of the private insurance market onto the federal budget. That proposal would require health insurers to achieve a “medical loss ratio” of at least 90%. [A medical loss ratio (MLR) is the amount that the insurer spends on health care divided by the premiums that it collects. The difference between premiums and health spending covers the insurer’s overhead and administrative costs and provides profits for its shareholders (if any; many insurers are non-profits).]

Some insurance companies have MLRs that are 85%, 80%, or lower. Critics believe those lower ratios reflect either wasteful administrative costs or unwarranted profits. Defenders, on the other hand, point to the high administrative costs of providing careful care and cost management, as well as the higher costs of serving some parts of the insurance market.

Whatever the relative merits of those arguments, the key question for CBO is whether limiting MLRs would fundamentally transform the private insurance market. Based on what I’ve heard from several reporters this afternoon, it appears that the answer is yes. CBO has apparently concluded that when combined with other regulations in the proposed health legislation, strict limits on MLRs (e.g., establishing a minimum of 90%) would cross the line and bring any affected insurance into the federal government and onto the federal budget. On the other hand, much less stringent requirements on MLRs (e.g., establishing a minimum of 80%) would not cross that line.

Given the painful memories of the Clinton effort, you can be sure that Senate leaders are working hard to make sure their new proposal won’t cross the line. But it might come really, really close.