The Street Makes a Killing Helping Insurers Kill Customers

Do you know what a medical loss ratio (MLR) is? If you like to invest in health insurance stocks, you probably do. And with the obscene profits these companies have been reaping, the subsequent returns make them attractive to many investors.

The MLR is basically the calculation of how much of every dollar taken in by an insurer is paid out in benefits to the insured (its customers). On average, the top seven insurers today - UnitedHealth Group, WellPoint, Aetna, Humana, CIGNA, Health Net, and Coventry Health Care - pay out only $.81 on every dollar they take in compared to the non-profit, single payer, Medicare program which pays out $.97 on each dollar it collects. The extra sixteen cents on the dollar kept by the private insurance companies is profit. It is garnered by denying coverage to customers once they fall ill or by boosting the premiums of the sick so high that they are forced to drop their coverage. The higher the MLR, the less profitable the company is.

It is no secret that Wall Street looks closely at the Medical Loss Ratios of insurance companies as a gauge of the company's profitability. When an insurer's MLR rises, its stock price falls commensurately. Take the case of leading insurer Aetna. They are the nation's third largest publicly-traded health insurance plan. Three years ago, the company reported that its quarterly MLR had risen from 77.9 percent to 79.4 percent year over year. On the day this was disclosed, Aetna's share price plummeted 20 percent as investors dumped their shares, reducing the company's market value by billions of dollars.

Recently, Senator Al Franken introduced an amendment to the healthcare bill in the Senate that would limit the MLR of all insurers not permitting any MLR to fall below 90%. Keep in mind that Medicare's MLR has never fallen below 97% since 1993! This simple rule would protect the American consumer from the greed of insurers beholden to their investors. It would also probably lower the value of the insurance industry stocks.