On the medical loss ratio (MLR) and sticky selling general and administrative costs: Evidence from health insurers

The Patient Protection and Affordable Care Act of 2010 (ACA) imposed an important constraint on health insurers: if the medical loss ratio (MLR), determined as the ratio of claims paid to premiums collected, declined below certain legislative targets, the insurer would be obliged to rebate a portion of the premiums to the customer. It might be expected that this increase in the MLR would result in a decrease in premium dollars available to cover selling, general and administrative costs (SG&A) and a concomitant decrease in profits. However, there is earlier evidence that SG&A “cost stickiness” presents a counter-effect in this instance: namely, that an increase in SG&A costs per each dollar of revenue increase is more than the magnitude of a decrease in SG&A costs per each dollar of revenue decrease. In this context, this paper offers the first preliminary evidence of the impact of the MLR regulatory change on SG&A cost stickiness in the health insurance industry.Applying the Anderson et al. (2003) methodology, our sample of publicly-traded health insurers shows evidence of significant mitigation of the SG&A cost stickiness after the implementation of the ACA medical loss ratio rules and that in periods of revenue declines, SG&A costs decreased more significantly post-ACA than pre-ACA. These results further illustrate the tension created by regulatory policy designed to improve healthcare cost efficiency and its impact on the profit seeking activities of for-profit healthcare enterprises. Thus, this paper contributes to both healthcare and accounting literature by documenting a significant effect of regulatory policy on managerial decisions regarding cost control.