Last week I wrote about the medical loss ratio and wondered who would enforce it. It’s part of a broader issue about enforcement, given that the health care bill has settled on a regulatory reform model instead of a public insurance model.

I asked Sen. Al Franken’s office for some guidance on this. Sen. Franken was the leading voice in getting the 85/80% medical loss ratio into the Senate bill, and has used the provision as an example of the positive aspects of the reform package. Here’s how they responded:

I just spoke to our MLR expert before she caught her plane home to MN and she explained that part of the benefit of having a federal law is to have a uniform definition and calculation for these measures. Making this law at the federal level gives us the ability to have better oversight. She and Senator Franken will actively monitor the regulatory process for implementation of the MLR provisions to minimize the risk of gaming. Furthermore, Senator Franken sits on the HELP Committee, which oversees the laws related to the private insurance markets including MLR.

This is another example of the importance of the implementation stage. Congress has chosen not to make a lot of the specific rules governing their broad regulations, so the Health and Human Services Department and the state insurance regulators and a few other agencies will spend the next several years determining just what the bill means for the industry, who will enforce the law, et al. There are states with MLR guidelines which the federal government can look to as a model, but HHS better have a provision to double their budget in the implementation phase. There are many really important issues – regulatory guidelines, minimum benefit packages, some of the abortion provisions, cost-sharing exemptions – where the Department will have a lot of control over how the reform looks. And you have to be pretty optimistic about this and other future HHS Departments to invest it with so much power.

Franken’s in the HELP Committee gives him an oversight role, but it’s not entirely possible for Congressmembers to involve themselves in day-to-day regulatory oversight. They need to be sure their processes can work on their own. To that end, I asked RJ Eskow, a blogger who previously worked for several years in the insurance industry, to assess the Franken response. “It’s not a bad response, but I just sat down and figured out five ways the insurance companies could game it. It only took a few minutes.”

Eskow described a number of ways that the industry could overcome the rules. He discussed a figure called “IBNR” – incurred but not reported medical losses. These numbers have some flexibility built into them. If the “unreported” medical losses are increased, the total amount spent on medical care would look bigger than the reality. Costs could shift across fiscal years as well, with more pushed into one year to make it look like the 85% number has been hit. Also, Eskow said, “They can – and probably will – reclassify some administrative expenses as ‘medical,’ rather than ‘non-medical.’ I’ve seen insurance companies do this in workers’ compensation. They’ll classify their own doctors, nurses, and medical paraprofessionals on staff as part of the medical expenditure in order to make their numbers look different and game the results.”

Eskow said he only thought about this for a few minutes before coming up with some strategies. Insurance companies will have paid staff looking for several years to surmount regulations like the medical loss ratio requirements. That doesn’t mean that a vigilant regulator and strong oversight cannot push back and enforce their own rules – but since we don’t even know what those rules are yet, it’s worth questioning.

Finally and perhaps most perversely, the MLR requirements could lead to higher medical costs throughout the system, or at least push the incentives in that direction. “The easiest way to maximize profit under an 85% rule would be to increase medical payouts,” Eskow said. “That’s obvious, right? If you can keep 15 cents in profit for every 85 cents spent on medical expenditure, spend more on medical. There are easy ways to do that — one is to increase reimbursements to doctors. Another is to negotiate higher rates with key hospitals. Would they do that? I don’t know. Logic would say no, since premiums would go up and they would become less competitive. But it’s certainly not impossible. And, even in the best case, they’re certainly not being given an incentive to keep costs down.”

It’s important to scrutinize this closely because it has been held up as one of the most crucial reforms in the entire Senate bill. And yet the drafting, enforcement and oversight have not yet been clarified. And clearly, insurance companies will have the potential to devise strategies that will not ensure a certain amount of premium dollars get spent on medical care, given their fiduciary responsibility to shareholders to maximize profit.