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

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

NBER Working Paper No. 23353
Issued in April 2017, Revised in July 2017
NBER Program(s):Health Care, Health Economics, Industrial Organization, Public Economics

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.

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Document Object Identifier (DOI): 10.3386/w23353

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