Theargument then goes that the only way carriers can increase theirlevel of profit is to "allow" (or some say "intentionally drive")total costs/premiums to increase. (Photo: Shutterstock)

I can't even begin to count the number of times I've read onLinkedIn or heard in live presentations that the BUCAH carriers areactually incentivized to have rates/costs go up.

The argument is based on the ACA's MLR provision that requiresthat carriers spend at least 80 percent (individual and smallgroup) or 85 percent (large group) of collected premiums on claims.That means that the carriers are limited to between 15 percent and20 percent of collected premiums to cover their administrationcosts, including their profit.

Related: Insurers to pay out record $1.3 billion in MLRrebates

KevinTrokey is founding partner and coach at St. Louis-basedQ4intelligence.

The argument then goes that the only way carriers can increasetheir level of profit is to "allow" (or some say "intentionallydrive") total costs/premiums to increase. After all, if profit islimited to a fixed percentage of the whole, the only way profitgoes up is if the size of the whole increases.

It's an easy argument to buy into, right? Maybe too easy.

I'd like to explore this idea further and am writing this as anhonest question rather than to refute one particular argument.

Testing the argument

Let me establish a hypothetical scenario to see how this wouldplay out. These are not actual numbers (or scenarios), but shouldallow for a simpler analysis of this argument.

• Let's assume that total spend for health insurance in the U.S.is $1,000,000,000,000 (one trillion).
• Let's also assume that the five major carriers have equalshares of that spend, or $200,000,000,000 in premiums.
• Let's assume that the average MLR percentage across the spendis 82 percent (combination of small group and large group). Thisgives each carrier $36,000,000,000 (18 percent x their respective$200,000,000,000 in premiums) to cover all of their administrationcosts.
• Let's assume the actual profit margin is 5 percent (of totalpremium) for each carrier, which translates to 27.78 percent of theadministration dollars (5 percent profit margin / 18 percent totaladmin spend). This gives each carrier a profit of $10,000,800,000(27.78 percent of $36,000,000,000).

How the argument is typically made

The argument is that if the carriers reduce their costs, theirprofit listed above (driven by the percentages/formulas) will godown.

Conversely, the only way for them to increase profit is toincrease the starting number, the total health insurance premiumspend.

In other words, if they allow for a 10 percent increase topremiums, their bottom-line profit goes up by 10 percent. Work inthe magic of compounding and it's an enticing formula.

When you read about the waste and fraud and abuse in the system,this actually becomes an easy argument to buy into. And maybe it'sentirely correct. But from a purely economic standpoint, it seemsto me the only way this holds up is if there is collusion among thefive major carriers. I know, many of you are saying, "No s**t, KT!Of course there's collusion!"

But that's not the whole story.

Unfortunately, however, it is as much of the story as I can fitinto this month's column space. Tune in next month to hear mycounterargument.

Read more: 

• Insurers returning to pre-ACAprofitability
• Medicare Advantage, ACA or private insurance: Whichis most profitable?
• UnitedHealthcare's MLR rebates to employers soar 40percent