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Cost of Service Regulation in U.S. Health Care: Minimum Medical Loss Ratios

Author

Listed:
  • 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. 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 analogous to cost of service regulation. Using variation created by the rule's introduction as a natural experiment, we find claims costs rose nearly one-for-one with distance below the regulatory threshold: 7% in the individual market, and 2% in the group market. Premiums were unaffected.

Suggested Citation

  • Steve Cicala & Ethan M.J. Lieber & Victoria Marone, 2017. "Cost of Service Regulation in U.S. Health Care: Minimum Medical Loss Ratios," NBER Working Papers 23353, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23353 Note: HC HE IO PE
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    References listed on IDEAS

    as
    1. Steve Cicala, 2015. "When Does Regulation Distort Costs? Lessons from Fuel Procurement in US Electricity Generation," American Economic Review, American Economic Association, pages 411-444.
    2. Pinar Karaca‚ÄźMandic & Jean M. Abraham & Kosali Simon, 2015. "Is The Medical Loss Ratio A Good Target Measure For Regulation In The Individual Market For Health Insurance?," Health Economics, John Wiley & Sons, Ltd., vol. 24(1), pages 55-74, January.
    3. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, January.
    4. Depew, Briggs & Bailey, James, 2015. "Did the Affordable Care Act's dependent coverage mandate increase premiums?," Journal of Health Economics, Elsevier, vol. 41(C), pages 1-14.
    5. Leemore Dafny & Subramaniam Ramanarayanan, 2012. "Does it Matter if Your Health Insurer is For-Profit? Effects of Ownership on Premiums, Insurance Coverage, and Medical Spending," NBER Working Papers 18286, National Bureau of Economic Research, Inc.
    6. Gabriel Picone & Shin-Yi Chou & Frank Sloan, 2002. "Are For-Profit Hospital Conversions Harmful to Patients and to Medicare?," RAND Journal of Economics, The RAND Corporation, vol. 33(3), pages 507-523, Autumn.
    7. Meredith Fowlie, 2010. "Emissions Trading, Electricity Restructuring, and Investment in Pollution Abatement," American Economic Review, American Economic Association, vol. 100(3), pages 837-869, June.
    8. Dranove, David & Shanley, Mark & White, William D, 1993. "Price and Concentration in Hospital Markets: The Switch from Patient-Driven to Payer-Driven Competition," Journal of Law and Economics, University of Chicago Press, vol. 36(1), pages 179-204, April.
    9. Liran Einav & Amy Finkelstein & Neale Mahoney, 2017. "Provider Incentives and Healthcare Costs: Evidence from Long-Term Care Hospitals," NBER Working Papers 23100, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Daniel W. Sacks & Khoa Vu & Tsan-Yao Huang & Pinar Karaca-Mandic, 2017. "The Effect of the Risk Corridors Program on Marketplace Premiums and Participation," NBER Working Papers 24129, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • I10 - Health, Education, and Welfare - - Health - - - General
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy

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