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Cost of Service Regulation in U.S. Health Care: Minimum Medical Loss Ratios

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  • Steve Cicala
  • Ethan M.J. Lieber
  • Victoria Marone

Abstract

A health insurer's Medical Loss Ratio (MLR) is the share of premiums spent on medical claims. The Affordable Care Act introduced minimum MLR provisions for all health insurance sold in fully-insured commercial markets, thereby capping insurer profit margins, but not levels. While intended to reduce premiums, we show this rule creates incentives analogous to cost of service regulation. Using variation created by the rule's introduction as a natural experiment, we find claims costs rose nearly one-for-one with distance below the regulatory threshold: 7% in the individual market, and 2% in the group market. Premiums were unaffected.

Suggested Citation

  • Steve Cicala & Ethan M.J. Lieber & Victoria Marone, 2017. "Cost of Service Regulation in U.S. Health Care: Minimum Medical Loss Ratios," NBER Working Papers 23353, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:23353
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    References listed on IDEAS

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    3. Daniel W. Sacks & Khoa Vu & Tsan-Yao Huang & Pinar Karaca-Mandic, 2017. "How do insurance firms respond to financial risk sharing regulations? Evidence from the Affordable Care Act," NBER Working Papers 24129, National Bureau of Economic Research, Inc.
    4. Lieber, Ethan M.J., 2018. "Does health insurance coverage fall when nonprofit insurers become for-profits?," Journal of Health Economics, Elsevier, vol. 57(C), pages 75-88.

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    More about this item

    JEL classification:

    • I10 - Health, Education, and Welfare - - Health - - - General
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy

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