regulation

“The bomb buried in Obamacare explodes today,” Rick Ungar declares in a December 2^nd 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.