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Health Insurance And “Medical Loss Ratio” Foolishness

Like Ezra Klein, smart people keep saying foolish things about the health insurance business. This time it’s a pair of bloggers talking about the largest expense that health insurers face — their “medical loss ratio.”

According to Richard Dale at the Venture Cyclist:

[W]hy do they call it Medical Loss Ratio? Why is looking after me (or you) called “Medical Loss,” when the whole point of a healthcare system is to look after me (or you)?

(Sigh.)

Alan Katz, one of the leading health insurance bloggers, surprisingly links to this with approval, saying “words matter.” The problem? The word “loss” is probably one of the four oldest words in the insurance industry. I’d say the others are probably “premium,” “commission,” and “profit.” Should we start outlawing these words, too?

Let me answer Richard’s question:

The word “loss” in insurance dates back at least to the 17th century, when the first maritime insurance contracts started being underwritten at Lloyd’s Coffee House in London.  A “loss” refers to the cost to an insurer when the insured event takes place.

Imagine I insure a ship that’s crossing the Atlantic. If it sinks, my “loss” is the cost of the ship. If I sell home insurance and a tree falls on the roof of the house, my “loss” is what it takes to fix the roof. And if I insure someone’s health, my “loss” is how much money I pay if the person gets sick.

“Loss,” then, is just the word used to describe these kinds of costs. Insurers have all kinds of other expenses, and so they differentiate the costs of paying for the sunken ship from the costs of their offices and salaries and other things in this way.

Now, they need separate out their expenses like this for a number of reasons.

The most important is that how many dollars they spend on paying for insured events is critical for calculating how much they have to charge for coverage. The ways insurers do this is by calculating –- and paying very close attention to –- their “loss ratio.” That’s the the quotient you get when you divide these costs by the amount of premium collected.  In health care you often hear this called “medical loss ratio,” but you just as often hear it called just “loss ratio” or “loss experience.”

So are Richard and Alan right that these words don’t make sense since “the whole point of a healthcare system is to take care of you (or me)?” Put differently, is there something sinister in the use of the words “medical loss ratio?”

Of course not. No matter how you organize a healthcare system, someone, somewhere, is going to have to pay attention to how much money it costs when someone gets sick. If those people come from the insurance industry, the accounting business, or from the government, they’re going to call those costs “medical losses.”  \The term isn’t meant to convey any idea beyond that.

We could, of course, decide to call medical losses something different, but it wouldn’t make a whit of difference as to what they actually are.

What’s in a name? That which we call a rose by any other name would smell as sweet.

UPDATE: For a smart take on medical loss ratios, read David Williams’ latest post at the Health Business Blog.

*This blog post was originally published at See First Blog*


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