“The bomb buried in
Obamacare explodes today,” Rick Ungar declares in a December 2nd Forbes blog post describing a
regulatory provision in the Affordable Care Act:
"[T]he medical
loss ratio...requires health insurance companies to spend 80% of the consumers’
premium dollars they collect—85% for large group insurers—on actual medical
care rather than overhead, marketing expenses and profit. Failure on the part
of insurers to meet this requirement will result in the insurers having to send
their customers a rebate check representing the amount in which they underspend
on actual medical care."
If this regulation is
indeed a bomb, then nonprofit administrators must now be totally shell-shocked
from navigating the demands of donors, institutional funders, government
agencies charity rating agencies, consultants and even board members who want similar
oversight of the ratio between program and administrative or fundraising
expenditures and then use that data to make claims about operational efficiency.
The fact that this
kind of ratio system is now being applied prominently to a for-profit industry gives
us an opportunity to highlight the way similar measures have served as a
minefield in the nonprofit sector for years.
The differences
between nonprofits and insurance giants are more striking than the
similarities. As for-profit entities, insurance companies’ customers are
expected to pay a market rate for their services, these funds are always
unrestricted, annual surpluses are encouraged rather than stigmatized, and
financial gain is the primary motivator.
None of these apply broadly to nonprofits.
Presumably as a
matter of public policy, the medical loss ratio is being applied to insurance
companies because those companies might otherwise spend even more on lavish
executive salaries, luxurious offices, and so on. But, in an environment where nonprofits face
restricted grants and overall scarcity of funds, not to mention baseline commitment
to mission, what would be the equivalent goal for imposing such ratios on the
nonprofit sector? Are such measures
likely to be successful in inducing “operational efficiency?”
In posts following up
on Ungar’s initial article, Sarah Kliff (on the Washingon
Post’s site) and Ungar raise the issue of how
the government will define which expenses qualify as direct medical care, which
will be administrative expenses, and which expenses could be left out of the
equation altogether. Many of these
particulars seem to be addressed up front in the legislation, though one
assumes that the financial staff of insurance companies will ultimately find
room for interpretation.
For the nonprofit
sector, too, that room for interpretation is significant.
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