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Friday, January 22, 2010

How many quarters make a dollar?

MLR: Those three letters seem like an acronym for an obscure tropical disease, but we promise this won't hurt a bit. MLR stands for Medial Loss Ratio. The technical term may be a snooze-inducer, but stick with us for a moment longer.

Imagine you went to a change machine, put a dollar in, and only got back 75 cents. Well, a medical loss ratio can be similar.

If an insurer only uses 75 cents of every premium dollar on health care, they have a medial loss ratio of 75 percent. In short, it's the share of the money you pay in premiums that the insurance companies use for actual medical care.

You may be thinking, so insurance companies don't spend 100% of my premiums on health care? Unfortunately, they don't. Insurance companies use the money they don't spend on health services for things like profits, marketing, and administration-they even use it for a process called underwriting (a fancy term that means they hire people to figure out whether or not they are making a financial risk by insuring you).

Some insurers charge very high premiums and then spend a startlingly low proportion of those premiums on care. In 2008, Families USA learned that some insurers in the individual market spend as little as 60 percent of every dollar on health care. That means that 40 percent of premiums go to administration and/or profits.

So how can we change the game for insurance companies who aren't spending our dollars on health care? We need to reform the health insurance industry and pass the legislation currently moving through Congress.

In both the House and the Senate bill there are major provisions that will set requirements on how much of your premium dollars can go towards administration and profits. In short, insurance companies will be forced to spend more of your premium money on actual health services than they do now.

These requirements not only provide transparency to the consumers-who spend their hard-earned money on premiums-but they also keep insurance companies honest.

As health care premiums rise, consumers deserve to know that their money is being spent on health services and improving the lives of Americans, not on lining pockets of insurance company CEOs.