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Regulating Markups in US Health Insurance

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  • Steve Cicala
  • Ethan M. J. Lieber
  • Victoria Marone

Abstract

A health insurer's Medical Loss Ratio (MLR) is the share of premiums spent on medical claims, or the inverse markup over average claims cost. The Affordable Care Act introduced minimum MLR provisions for all health insurance sold in fully insured commercial markets, thereby capping insurer profit margins, but not levels. While intended to reduce premiums, we show this rule creates incentives to increase costs. Using variation created by the rule's introduction as a natural experiment, we find medical claims rose nearly one-for-one with distance below the regulatory threshold: 7 percent in the individual market and 2 percent in the group market. Premiums were unaffected.

Suggested Citation

  • Steve Cicala & Ethan M. J. Lieber & Victoria Marone, 2019. "Regulating Markups in US Health Insurance," American Economic Journal: Applied Economics, American Economic Association, vol. 11(4), pages 71-104, October.
    • Handle: RePEc:aea:aejapp:v:11:y:2019:i:4:p:71-104
    Note: DOI: 10.1257/app.20180011
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    References listed on IDEAS

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    Cited by:

    1. E. Tice Sirmans & Petra Steinorth, 2020. "New post‐ACA insurance data highlights health insurer spending on health care quality," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 23(2), pages 209-218, June.
    2. Mark Shepard & Ethan Forsgren, 2023. "Do insurers respond to active purchasing? Evidence from the Massachusetts health insurance exchange," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 90(1), pages 9-31, March.
    3. Patricia H. Born & Evan M. Eastman & E. Tice Sirmans, 2023. "Managed care or carefully managed? Management of underwriting profitability by health insurers," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 48(1), pages 5-31, January.
    4. Abe Dunn & Joshua D. Gottlieb & Adam Shapiro & Daniel J. Sonnenstuhl & Pietro Tebaldi, 2021. "A Denial a Day Keeps the Doctor Away," NBER Working Papers 29010, National Bureau of Economic Research, Inc.
    5. Yu Lei & Mark J. Browne, 2020. "Health insurers' operations in the face of health care reform: An analysis of the Supplemental Health Care Exhibit," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 23(3), pages 277-286, September.
    6. Mohammed Al‐Hamdani & Kayla M. Joyce & Tristan Park & Megan E. Cowie & Sherry H. Stewart, 2021. "Cannabis packaging: An opportunity for facilitating informed decisions," Journal of Consumer Affairs, Wiley Blackwell, vol. 55(3), pages 1150-1168, September.
    7. Patricia H. Born & E. Tice Sirmans & Petra Steinorth, 2023. "Health insurers' use of quality improvement expenses to achieve a minimum medical loss ratio requirement," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 90(1), pages 123-154, March.

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    More about this item

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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