Problems with the Governor’s Admin Cap: Part I

There’s elements I like in Governor Arnold Schwarzenegger’s Health Care Proposal. And I admire his political courage in putting forward a comprehensive approach to dealing with the issue.  I’ll have other posts on the “good news.”

This post, however, is the first on what I consider to be one of the more misguided and dangerous proposals: requiring health insurance carriers and HMOs to spend 85% of their premium on medical claims.

The governor inserted this provision as a way to keep health insurance premiums affordable to consumers who would be, under the governor’s plan, required to buy health insurance.

There are too many reasons to oppose this provision than will fit into one post. But Blue Cross of California send out an e-mail today presented one objection I hadn’t thought of.

The e-mail came from Brian Sassi, Blue Cross of California’s president, and stated in part: Administrative costs are largely “fixed costs” that do not vary with premiums. Therefore, products with lower premiums naturally have a higher percentage of revenue attributable to administrative costs. An arbitrary medical loss ratio requirement could result in the inability of health benefits plans to offer some of their lower-priced products. This could have the effect of eliminating the most affordable products in the marketplace ….

Welcome to the wonderful world of unintended consequences. While seeking to keep costs down, the governor’s health plan instead may result in carriers pulling their lowest cost plans, forcing consumers to choose among more expensive options.

Just another reason this cap should be tipped — out of the reform package.