Billions in ACA rebates show 80/20 Rule’s impact

Medical loss ratio forced carriers to devote more premium dollars to care. The proof of its impact? $3.24 billion refunded to consumers over the last six years.

Ever since 2012, millions of Americans have received rebates from their health insurers each fall, refunding portions of prior-year premiums that were essentially too high.

It’s all thanks to the Affordable Care Act’s medical loss ratio (MLR) a provision – sponsored by Minnesota’s former Senator, Al Franken – that forces health insurance companies to use your premium dollars to provide actual health care and quality improvements for plan participants, or return that money to you. In 2017, insurers were required to pay nearly $447 million in rebates to about 3.95 million people, bringing the total over six years of the program to about $3.24 billion.

In 2017, the highest average rebates were in California, where nearly 31,000 consumers got rebates that averaged $559. Arizona residents who received rebates averaged $268, followed closely by North Dakotans, who received an average of $264.

To clarify, the goal is to have insurers spending the majority of your premium dollars on medical claims so that rebates aren’t necessary. But given that insurers set premiums a year in advance, it’s not always possible to accurately project membership (and thus revenue) and claims costs. So the rebates serve as a backstop, ensuring that even if premiums are ultimately set too high in a given year, the MLR rules still apply.

While the MLR provision has obvious appeal to consumers, it isn’t universally loved – and has been among the ACA provisions in Republicans’ crosshairs as they strive for repeal of the law. Does that mean the provision is endangered? More on that in a bit, but first …

Rebates? What rebates?

The rebates are tied to the medical loss ratio: the percentage of insurance premium dollars spent on actual health care – as opposed to marketing, administrative expenses, and CEO salaries. If an insurer spends less than 80 percent of individual and small-group plan premiums (85 percent for large-group plans) on providing medical care, they must rebate the excess dollars back to plan members and employers via checks that are sent out by September 30 each year.

The majority of very large employers self-insure their employees’ health coverage, and MLR rules do not apply to self-insured plans. There were also initially exemptions for non-profit insurers, although they had to begin complying with the MLR requirements in 2014.

Although the MLR rules are an important regulatory tool, the majority of insureds do not receive a rebate check, as most insurers’ administrative costs are less than the allowable amount. (About 4 million people received rebates in 2017; that’s only about 1.2 percent of the population.)

Medical loss ratio forced carriers to devote more premium dollars to care. The proof of its impact? $3.24 billion refunded to consumers over the last six years.

Rebates are based on a 3-year average MLR

The rebates that are sent out each fall are based on the average MLR for the prior three years. The rebates that were sent out in 2017 were based on each carrier’s average MLR for 2014 to 2016. The rebates that will be sent in the fall of 2018 will be based on average MLR for 2015-2017, and so forth.

2017 was the sixth year of payouts through the 80/20 rule. From 2012 to 2014, total rebate amounts dropped significantly each year. But the total rebate amount in 2015 ($469 million) was higher than it was in 2014; for the individual market, the rebate amount in 2015 was the highest it had been since 2012 (the first year the rebates were sent out).

In 2016, however, the total rebate amount dropped again, although it was still higher than it had been in 2014. And in 2017, the total rebate amount ($447 million) was higher than it had been the year before, but lower than the rebates that were sent to consumers in 2015. But in general, rebates were highest in the first year (paid out in 2012), and have been significantly lower ever since. In addition, the number of states where no rebates are necessary at all has been steadily rising for the last few years, another indication that insurers are right-sizing their premiums.

Most people don’t get a rebate check, because most insurers are spending the majority of premiums on medical costs

Across all market segments, the majority of insurers are meeting or exceeding the MLR rules, which is why most people don’t receive MLR rebate checks. According to the data that was calculated in 2017 (for plan years 2014-2016), the average individual market MLR was 92.9 percent and the average small group MLR was 86.1 percent (both well above the 80 percent minimum requirement). In the large-group market, the average MLR was 90.3 percent, also well above the 85 percent minimum requirement for that market segment. For all three market segments, the average MLR reported for 2017 was the highest it had ever been.

HHS also reported that the vast majority of insurers are enrolled in plans that are meeting the MLR requirements. For the MLR reporting in 2017 (based on 2014-2016 MLR numbers), 95 percent of individual market enrollees were in plans that met the MLR rules — so only 5 percent of individual market enrollees ended up getting rebate checks in 2017. The percentage of individual market enrollees in plans that met the MLR rules was the highest it had ever been. In 2011, just 82.8 percent of individual market enrollees had been on plans that spent at least 80 percent of premiums on medical care and quality improvements. Clearly, insurers have gotten better at this over time.

Total rebate amounts so far have been:

In 2017, the 3.9 million rebated consumers received rebates that averaged $113 (the average was $114 in the individual market, $109 in the small-group market, and $116 in the large-group market).

The highest average (per household) rebates among families that received them in 2017 were in California, where average rebates were $559 – nearly five times as much as the national average.

In 11 states (up from six the year before, and just four the year before that), there were no MLR rebates necessary in 2017, because all of the insurers met the MLR requirements: Alaska, Connecticut, Hawaii, Maine, Minnesota, Montana, New Mexico, Oregon, South Dakota, Vermont, and Wyoming. Five of those states (Maine, Montana, South Dakota, Vermont, and Wyoming) had been among the six states that also had no MLR rebates sent out in 2016 — all of the insurers in those five states have met the MLR requirements for the last two MLR calculation cycles. But it’s worth noting that Wyoming had the highest average MLR rebates in 2015, and Hawaii, which had no rebates in 2017, had the highest average rebates in 2016. In small markets like Wyoming and Hawaii, a few expensive claims can have a very significant impact on MLR numbers.

So although nobody received a rebate check in eleven states in 2017, that’s a good thing — it means that all of the insurers in those states spent at least 80 percent (at least 85 percent for large group plans) of premiums on medical claims and quality improvements, as opposed to administrative costs.

But in most states, at least some consumers received rebate checks in 2017, as had been the case in prior years.

ACA’s 2017 medical loss ratio rebates
State Total Rebates Consumers Benefiting Average per Family
Alaska $0 0 $0
Alabama $1,082,961 5,792 $187
Arkansas $3,405,615 68,758 $48
Arizona $7,614,255 28,931 $268
California $17,296,405 30,945 $559
Colorado $3,490,011 84,019 $42
Connecticut $0 0 $0
District of Columbia $17,283,050 96,771 $179
Delaware $38,315 6,908 $6
Florida $70,055,092 673,907 $104
Georgia $20,138,857 361,248 $56
Hawaii $0 0 $0
Iowa $762,520 3,608 $211
Idaho $145,995 1,396 $105
Illinois $6,168,260 54,915 $112
Indiana $6,728,777 35,727 $188
Kansas $5,469,822 23,567 $232
Kentucky $142,896 861 $166
Louisiana $156,362 1,753 $89
Massachusetts $40,563,956 162,848 $249
Maryland $60,530,581 316,952 $191
Maine $0 0 $0
Michigan $47,254,187 363,756 $130
Minnesota $0 0 $0
Missouri $13,767,411 242,809 $57
Mississippi $8,038,596 75,847 $106
Montana $0 0 $0
North Carolina $7,121,178 71,244 $100
North Dakota $282,828 1,070 $264
Nebraska $118,097 992 $119
New Hampshire $11,207,622 63,460 $177
New Jersey $11,331,648 137,202 $83
New Mexico $0 0 $0
Nevada $4,689,070 38,480 $122
New York $31,637,681 459,305 $69
Ohio $7,806,432 110,196 $71
Oklahoma $531,403 5,230 $102
Oregon $0 0 $0
Pennsylvania $1,861,095 67,011 $28
Rhode Island $2,735,599 16,696 $164
South Carolina $25,234 783 $32
South Dakota $0 0 $0
Tennessee $1,524,373 21,833 $70
Texas $8,019,143 67,857 $118
Utah $133,015 3,189 $42
Virginia $26,394,905 185,431 $142
Vermont $0 0 $0
Washington $1,103,455 50,454 $22
Wisconsin $84,127 1,089 $77
West Virginia $142,748 7,936 $18
Wyoming $0 0 $0
American Samoa N/A N/A N/A
Guam N/A N/A N/A
Northern Mariana Islands N/A N/A N/A
Puerto Rico N/A N/A N/A
Virgin Islands N/A N/A N/A

CMS has a further breakdown by individual, small group and large group markets.

GOP repeal effort could drive up premiums and threaten rebate checks

So what’s the future of the medical loss ratio? If it were up to Congressional Republicans, the provision could see significant changes.

The evidence is in the Senate’s 2017 Better Care Reconciliation Act (BCRA), which would have eliminated the federal requirement that insurers spend the majority of premiums on health care. (That measure did not pass the Senate when it was introduced as a substitute for H.R. 1628 in July 2017.)

Under the BCRA, states would have become responsible for the regulation of insurers’ administrative costs. This is similar to the approach that the Trump Administration is taking with regards to insurers’ network adequacy, and it’s in keeping with the GOP believe that regulatory authority should be concentrated at the state – rather than federal – level.

The Congressional Budget Office estimates that about half the U.S. population lives in states where the current federal MLR rules would have been maintained if the BCRA had been implemented, and the other half live in states where the rules would be relaxed. “Relaxed” rules would have led to increased premiums (and of course, smaller MLR rebates), particularly for people who don’t qualify for premium subsidies in the exchange.

GOP efforts to repeal the ACA in 2017 were not successful, although GOP lawmakers did repeal the individual mandate penalty (starting in 2019) as part of their tax reform bill that was enacted in December 2017. We don’t yet know whether efforts to repeal other portions of the ACA will be resurrected in 2018, but for the time being, the MLR rules remain unchanged, and insurers still have to spend the majority of your premium dollars on medical costs and quality improvements, rather than administrative expenses.

Could the MLR still be ‘neglected?’

For the time being, the MLR rules remain in effect. Timothy Jost, Emeritus Professor at the Washington and Lee University School of Law, noted in 2017 that it’s possible, however, that the Trump Administration might not be as diligent in gathering MLR data and enforcing the rules as the Obama Administration was — although a thorough report was published in January 2018, detailing the rebate payments that were made in the fall of 2017.

But it’s also possible that the rules in terms of what’s counted as administrative costs could be adjusted under the Trump Administration. The ACA established the general rule that at least 80 percent of premiums (85 percent for large groups) had to be spent on medical and quality-improvement costs, but the specifics were left up to HHS, which finalized the details in late 2010. Notably, broker commissions were included in the administrative expense category, which is something that the Trump Administration could potentially change, assuming the overall federal MLR rules remain in effect.

Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for Her state health exchange updates are regularly cited by media who cover health reform and by other health insurance experts.

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