The Economics of Insurance Companies

Insurance companies measure their profitability as a Medical Loss Ratio (MLR). A Medical Loss Ratio is determined by calculating money spent by the insurance company spends on healthcare for patients and how much is spent on administrative costs. If an insurer uses 80 cents out of every premium dollar to pay its customers' medical claims and activities that improve the quality of care, the company has a medical loss ratio of 80%. A medical loss ratio of 80% indicates that the insurer is using the remaining 20 cents of each premium dollar to pay overhead expenses, such as marketing, profits, salaries, administrative costs, and agent commissions.

The Affordable Care Act sets minimum medical loss ratios for different markets, as do some state laws. MLR requires insurance companies to spend at least 80% or 85% of premium dollars on medical care, with the review provisions imposing tighter limits on health insurance rate increases. If they fail to meet these standards, the insurance companies will be required to provide a rebate to their customers starting in 2012.

If an insurance company has a low MLR (below 80%) this means they are spending more on administrative costs and likely denying medical services to patients. Conversely, if the insurance company has a high MLR (greater than 85%) they are spending more money on medical services than they budgeted. Basic economics says that when there is more money going out than coming in it is time to tighten the budget. In the case of a high MLR, the insurance company will scrutinize services and issue more denials.

When billing the item, use the associated HCPCS codes with the LT or RT modifier, K level modifier, and the RA modifier. RA indicates this is a replacement device.

What does this mean for you? If you are working with an insurance company who has denied a service for your patient, ask them about their Medical Loss Ratio. This identifies you as a savvy provider and puts the insurance company on alert that you will not take the denial without a fight. Another tool for you to use when appealing claims and services