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What is Medical Loss Ratio, and how does it hurt your agent in 2011.

The “Medical Loss Ratio” is the amount that an insurance company pays for claims divided by the premiums that people paid for insurance . A claim is a bill for medical items or services. For example, if an insurance company pays an average of 80 cents in claims for every dollar it collects in premiums, then its medical loss ratio is .80.

“Administrative Cost” is the flip side of the medical loss ratio. Administrative cost is the difference between what an insurance company collects in premiums and what it pays for claims. Administrative cost pays for claims processing, underwriting, marketing, utilization review, building up reserves, general management, and profit. Administrative cost is often shown as a percentage of the premium and ranges from 5% to 50% or more. For example, if an insurance company pays 20 cents for administrative cost for every dollar it collects in premiums, then its administrative cost is 20%.

A low administrative cost generally means that an insurance company is efficient. Consumers get more dollars of covered services for the premiums they pay. However, there is a bigger picture. A better measure of efficiency is how much health insurance contributes to people’s health for the premiums they pay. This is not always the same as the most dollars of services paid per premium dollar. Some administrative costs can help you to get more for your money. For example, some administrative costs are used to help an insurance company negotiate lower prices for services or to develop programs to improve your health. Company “A” that pays $100 per x-ray may have lower administrative costs than company “B” that pays $60 per x-ray, but company “B” may provide more health for your premium dollar.

The Health Care Reform dictates that in 2011 the Medical Claim Loss Ratio in the individual market can not be higher than 0.80 and for large groups 0.85. As a result insurance companies have reduced the agent commission in half for the the individual market starting in 2011. This means we have to work twice as hard to earn the same amount of money.

This is a hardship for any agency and will cause us to reduce staff and not to hire employees. We will be able to survive but will reduce any expenditure we can avoid.

I wonder if we would tell any public employee, we are cutting your salary in half, what would happen. Although we agent are associated with NAHU, we were not able to help ourselves as we are to small a number to play any role.

It is a pity because we are the liaison to the consumer, who needs us more than ever to find an affordable health insurance coverage.

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