The CBO has just reached an absurd conclusion that will doom one of the other components in Harry Reid’s grand compromise on the public option. The strange decision on the part of the CBO could force Reid to drop the medical loss ratio of 90 percent.

The CBO came to the ridiculous conclusion that requiring insurance companies to pay 90 percent of the money they collect as premiums out as medical care would make a private insurance company part of the federal government. This would come as a huge shock to the people who run Aetna or buy their products.

Taking those differences into account, CBO has determined that setting minimum MLRs [medical loss ratios] under the PPACA at 80 percent or lower for the individual and small-group markets or at 85 percent or lower for the large-group market would not cause CBO to consider transactions in those markets as part of the federal budget.

A proposal to require health insurers to provide rebates to their enrollees to the extent that their medical loss ratios are less than 90 percent would effectively force insurers to achieve a high medical loss ratio. Combining this requirement with the other provisions of the PPACA would greatly restrict flexibility related to the sale and purchase of health insurance. In CBO’s view, this further expansion of the federal government’s role in the health insurance market would make such insurance an essentially governmental program, so that all payments related to health insurance policies should be recorded as cash flows in the federal budget.

Doug Elmendorf, the director of the CBO, has made a determination that defies logic. He claims that the current level of regulation in the bill is not sufficient to trigger his decision to treat the entire insurance market as part of the federal budget, yet he decided a 5% increase in the minimum medical loss ratio would be the straw that breaks the camel’s back. So, now there is some exact magical minimum MLR between 85 and 90 percent which turns private insurance companies and/or markets into government programs. Is this magic threshold 86.7 percent? 89.8 percent? 87.2 percent? Who knows? Only Doug Elmendorf because he completely made up this criteria and has not told anyone. (I doubt even he knows because I doubt he has ever sat down to decide what he thinks is this magic threshold.)

Regardless how logically nonsensical Elmendorf’s conclusions are, they have been made. If Reid goes forward with a minimum MLR of 90 percent, the CBO will claim all business done on the private insurance market is now magically part of the federal budget. The result would be a massive increase in the appearance of the CBO price tag. Even if this change would save the government money, the new, absurdly inflated CBO net price tag will doom the change for PR reasons.

With Joe Lieberman flip-flopping on his support of the early Medicare buy-in and Elmendorf’s decision to single-handedly sink the new MLR standard, almost every part of Reid’s grand compromise is gone. From what we know of Reid’s “deal”, the only thing that remains is probably the worthless OPM exchange within the exchange, and possibly a tweak to the Cantwell’s basic health program. Overall, the “compromise” on the public option is looking less like compromise, and more and more like pure capitulation to Joe Lieberman.