Health insurance premiums in California rose 86% between 2002 and 2007, far higher than the inflation rate. To address these rising costs, policymakers have suggested regulating health plan administrative costs and profits. Legislation has been proposed to require that insurance companies in the state spend at least a minimum percentage of their premium income on medical care. The percentage of premiums that go to pay for medical services (as opposed to administrative costs) is known as the medical loss ratio.
This issue brief examines three main questions:
- To what extent are health plan administrative costs and profits responsible for the fast rise in premiums?
- Are California health plans' administrative costs and profits "reasonable"?
- What has been the effect of medical loss ratio regulations in other states?
The findings suggest that medical spending was the primary driver of recent premium increases. The research does not provide a strong case for or against medical loss ratio regulation in California, but rather raises issues and offers implementation considerations.
The complete issue brief is available under Document Downloads.