Cost of Service Regulation in U.S. Health Care: Minimal Medical Loss Ratios

A health insurer’s Medical Loss Ratio (MLR) is the share of premiums spent on medical claims. As part of the goal of reducing the cost of health care coverage, the Affordable Care Act introduced minimum MLR provisions for all health insurance sold in fully-insured commercial markets as of 2011, thereby explicitly capping insurer profit margins, but not levels. This cap was binding for many insurers, with over $1 billion of rebates paid in the first year of implementation. We model this constraint imposed upon a monopolistic insurer, and derive distortions analogous to those created under cost of service regulation. We test the implications of the model empirically using administrative data from 2005–2013, with insurers persistently above the minimum MLR threshold serving as the control group in a difference-in-difference design. We find that rather than resulting in reduced premiums, claims costs increased nearly one-for-one with distance below the regulatory threshold: 7% in the individual market, and 2% in the group market. ∗We are grateful to Michael Chernew, Leemore Dafny, Joshua Gottlieb, Neale Mahoney, Magne Mogstad, Matthew Notowidigdo, Christopher Ody, Morten Olsen, Ariel Dora Stern, and Glen Weyl, as well as seminar participants at Chicago, Northwestern, and Harvard for helpful comments and suggestions. This paper combines work from Marone (“Bending the Cost Curve the Wrong Way? Evaluation of Medical Loss Ratio (MLR) Regulation in the Health Insurance Industry”) that was initially conducted in parallel with that of Cicala and Lieber. All errors remain our own.