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Loss Ratio for Minnesota Health Insurance Plans on The Exchange

6. Loss ratio requirements for health plans offered through the exchange

Generally speaking, a loss ratio is the amount of money that a health carrier pays out in claims as a percentage of total premiums in a given year. (The remaining money that is not paid out in claims is either administrative cost or profit.) Current Minnesota law establishes minimum loss ratio requirements for health insurance carriers that sell coverage to small employer groups and individuals, with different requirements depending on the type of health carrier and market share. The current requirements are summarized in Table 1.

Table 1: Minimum Loss Ratio Requirements

For the small group and individual markets as a whole, loss ratios in recent years have been well above the minimum levels set in statute. In 2006, the aggregate loss ratios were 87% and 93% in the small group and individual markets, respectively. Particularly for the individual market, where the costs of underwriting and marketing policies are high, recent loss ratios suggest that carriers are likely losing money on these policies; some carriers reported loss ratios higher than 100%.

Establishing a health insurance exchange would reduce some health plan administrative costs, such as costs for marketing and premium billing. In combination with other market reforms it is likely that administrative costs could be reduced by even more. For example, underwriting costs would be reduced by guaranteed issue, modified community rating, and a personal responsibility requirement.

Because this study recommends allowing the sale of all insurance products inside and outside the exchange and not limiting product choice, it is not necessary to establish special loss ratio requirements for products sold in the exchange. If a decision is made to merge the small group and individual markets, then it will be necessary to consider what an appropriate minimum loss ratio for this merged market would be. The small group market in Minnesota currently includes an estimated 440,000 enrollees, and is twice the size of the individual market (220,000 enrollees). Given the reduction in overhead costs that would be associated with the insurance market reforms described above and the fact that the small group market would represent a large share of the merged market, it seems reasonable to set an expectation in the merged market that minimum loss ratios should be at least as high as the current standards for the small group market.