ver since Gov. Arnold Schwarzenegger’s ABX1 1 stumbled just short of the finish line last January, he and his Democratic allies in the Legislature have been looking to move bits and pieces of the failed health reform plan forward. Amazingly, one bill that he favors is sponsored by the legislator who killed ABX1 1: state Sen. Sheila Kuehl, D-Santa Monica.

SB 1440 threatens to impose an 85 percent Medical Loss Ratio on health plans. Put simply, the MLR is the share of premiums that must go to health spending. SB 1440 is a misguided attempt to move cash out of “profits” and into “patient care.” This may sound friendly to patients, but it is not.

The MLR is an accounting measure, not a gauge of quality or effectiveness. For some plans, the MLR is quite impossible to interpret, especially those that serve government programs. For example, Molina Healthcare of California is a Medi-Cal managed-care plan that reported an MLR of 167.26 for 2006. Obviously, there is no real way for a health plan to spend two-thirds more on medical costs than it earns.

Regulating the MLR is also deadly for consumer-directed plans, which are becoming increasingly popular. Let’s assume a scenario where a consumer-directed health policy incurs exactly the same costs as a traditional policy. (In fact, this is unlikely, because total costs of consumer-directed plans are significantly lower than for traditional ones, as patients have better incentives to control costs.) The traditional policy costs $4,000 and spends $3,400 on patient care, for an MLR of 85.00. With the consumer-directed policy, the patient controls $800 more of the medical spending than with the traditional policy (through a higher deductible), and his premium goes down by $800. In this case, the MLR goes down to 81.25 ($2,600/$3,200). There is no real difference, but the accounting looks worse.

The California Medical Association also supports the idea, a rather parochial and even myopic stance. The CMA believes that if the law somehow compelled all health plans magically to adhere to an 85 percent MLR, that money would go to patient care. But it would not: Capital would flee the state, fewer medical procedures would get done, and more Californians would become dependent on the state for health care. Currently, two of California’s top 10 health plans do not comply with the 85 percent MRL, and three more are close to the brink. Enforcing this arbitrary accounting convention threatens to reduce competition in health insurance by one-half.

Schwarzenegger and Kuehl are wrong to try to subject our choice in health care to arbitrary bookkeeping. And organized medicine must focus on restoring physicians’ rights to practice medicine in their patients’ interests—not imposing a government accountant’s right to practice it for them.

John R. Graham is the director of health care studies at the Pacific Research Institute.