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

59 Pages Posted: 1 May 2017 Last revised: 8 Jul 2023

See all articles by Steve Cicala

Steve Cicala

University of Chicago

Ethan Lieber

University of Notre Dame

Victoria Marone

Northwestern University

Date Written: April 2017

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

Cicala, Steve and Lieber, Ethan and Marone, Victoria, Cost of Service Regulation in U.S. Health Care: Minimum Medical Loss Ratios (April 2017). NBER Working Paper No. w23353, Available at SSRN: https://ssrn.com/abstract=2961078

Steve Cicala (Contact Author)

University of Chicago ( email )

1155 East 60th Street
Chicago, IL 60637
United States

HOME PAGE: http://home.uchicago.edu/~scicala

Ethan Lieber

University of Notre Dame ( email )

361 Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Victoria Marone

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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