What was the impact of regulating markups for US health insurance?

Part of the Affordable Care Act mandated a medical loss ratio (MLR) for health plans in the individual and small group markets. What this means is that if the MLR is 80% and insurers charge $100 in premiums, plan enrollees must receive $80 in services on average. If they do not (say they only receive $75 of services on average), then they would get a premium rebate ($5 in this example). The goal of the legislation is to make sure enrollees ‘get their money’s worth’ for the premiums they pay.

While this makes sense at first, the drawback of the MLR approach becomes apparent when considering the insurer’s perspective. With no MLR requirement, insurers capture 100% of any cost saving initiatives they put in place. With the MLR, cost savings is problematic since reducing costs also reduces your profits since it reduces the maximum premium you can charge and cost saving initiatives typically cost money.

This is exactly what a paper by Cicala, Lieber and Marone (2019) find:

We show that minimum MLR regulations are predicted to curtail cost-reducing effort and increase medical claims, while the impact on premiums is ambiguous (and depends on the relative curvatures of the demand and cost-reducing effort functions).

The authors measure this impact empirically. They do this using 2015-2013 data from the National Association of Insurance Commissioners (NAIC). The authors then applied a difference-in-difference econometric strategy that compares changes in outcomes (MLRs, medical claims per life-year, and premiums per life-year) over time between health insurers with low MLRs (i.e., below the MLR regulatory threshold) against health insurers whose MLRs were persistently already in compliance with the ACA rule before it took effect.

Overall, they find that for health insurers whose MLRs were too low, claims increased rather than premiums decreased. Specifically,

Our preferred estimates show a 7 percent increase in claims in the individual market for firms that were previously out of compliance; in the group market, we estimate a 2 percent increase in claims, though the latter estimate is imprecise…We find little evidence of a reduction in premiums.

Addendum: Note that prior to the ACA, some states (n=29) did have MLR regulations in place. However, the authors note that the MLR regulations were not strongly enforced, largely because they were based on expected (i.e., ex-ante) MLRs, not realized (i.e., ex-post) MLRs as is the case under ACA.