Affordable Care Act Insurance Company Rebates

Today’s Managing Health Care Costs Indicator is $1.93 billion

The Commonwealth Fund released a study today estimating that insurers would have had to refund almost $2 billion to employers and consumers in 2010 if the Affordable Care Act provisions requiring “medical loss ratios” of at least 80-85% were in place.    

The paper reviews MLR methodology  -and points out that the Affordable Care Act has a broader definition of medical cost than that traditionally used by actuaries – including quality and antifraud programs, excluding tax payments from consideration, and allowing for additional administrative cost for plans with very few members.  A number of states have received waivers – and the decreased rebates due to waivers is modeled in the calculations.

The rebates would have been highest in the individual market (53%; an average of $183 per policy), but lower for small group (24%; $85 per policy) and lowest for large group (15%; $72 per policy).  This is not necessarily because health insurance plans are fleecing individuals.  The MLR includes everything besides for claims costs paid to providers, and the marketing and administration costs are much higher for policies sold to individuals compared to policies where a single signature arranges insurance for hundreds or thousands of policyholders.

Some states already regulate MLR – and no insurers would have owed rebates for individual insurance in Hawaii, Rhode Island and Vermont, while 98% of the market would be owed rebates in Kentucky, and 95% in Arizona. Insurers representing 12% of the Minnesota market would have owed rebates, even though that state prohibits for-profit insurers. 

I wouldn’t expect that health care costs would have been $2 billion lower if the ACA had been in place in 2010.   There is considerable judgment in determining what is a medical cost and what is a nonmedical cost.  When insurer stock price soared with low MLRs, health plans were more likely to count slightly clinical services as nonmedical.  With regulations to prevent low MLRs, health plans will do all they can to move arguably nonclinical costs into the medical loss ratio.  

While the MLR ratio requirements won’t save as much money as suggested in this white paper – it does put pressure on health plans to reduce nonmedical costs.  That pressure will force tiny plans to consolidate, which will help them increase efficiency. It discourages health plan arms races that lead to inordinate investments in expensive marketing.  It is likely to put downward pressure on brokers’ fees– and lead to health plan products that are simpler to administer and need fewer explanations. This regulation pressures the individual health insurance market to deliver health care products that have far more value to health care consumers (aka patients.) 

That seems like a great idea to me.

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