MLR vs market share, part 2: The counterargument

Last month, we started an exploration of the argument that insurance carriers are incentivized to increase rates (based on the ACA’s MLR provision). On paper, it certainly does look like an advantageous strategy.

But the one factor I have never heard taken into consideration is one of the fundamental drivers of a free market economy: market share.

Even if there is collusion, what if one of the carriers breaks ranks? What if one of the major carriers simply committed to reducing costs by 10 percent? What if this allowed them to take a conservative 10 percent market share from each of the other four?

Related: Fixing health care hinges on data, transparency

Let’s break down the numbers after a year of this rogue strategy:

• Total health insurance spend is now $1,060,000,000,000 ($180,000,000,000 for the Rogue carrier that reduced costs by 10 percent, plus a combined $880,000,000,000 from the other four carriers that continued to allow costs to go up by 10 percent—both calculations based on a starting point of $200,000,000,000 each).

• For each point of market share, the total health insurance premium spend (assuming an equal market share starting point) with Rogue drops to $9,000,000,000. For each of the other four carriers, each point of market share goes up to $11,000,000,000.

Factor in what Rogue’s commitment to lowering cost does to market share:

• Because of their lower cost base, let’s assume Rogue carrier now has 28 percent market share, having taken two points from each of the other four carriers, leaving them with 18 percent each.

• Because Rogue now has 28 percent market share, the total market health insurance spend is affected. The spend for market share with Rogue now equals $252,000,000,000 (28 points x $9,000,000,000 per point). The cumulative market share for the other four is now $792,000,000,000 (72 points x $11,000,000,000 per point).

Finally, let’s look at how this change affects their profitability:

• Profitability for Rogue is now $12,601,008,000. This is compared to the previous profit of $10,000,800,000. • Profit for each of the other four is now $9,900,792,000 (their cumulative premiums of $792,000,000,000 being driven by the same MLR profitability calculation, divided by 4).

That is a serious deviation of profit!

Every one of these numbers is open for debate and attack’s that this is an overly simplistic analysis. However, I’m simply trying to say the argument being made by so many that MLR is the only force driving decisions may be flawed.

I just don’t see them going away

The major carriers have a collective market capitalization that is staggering. If you think they are going to survive driven purely on greed and misaligned incentives, you’re wrong. If you don’t think there are enough zeros on their balance sheets to ensure they figure this out, you’re wrong. If you don’t think market share matters, you’re wrong.

Read more: 

• 10 states with the least competitive health insurance markets
• Limited competition drives up ACA premiums in rural areas
• Health care market competition tied to lower costs