By Rachel Fehr and Cynthia Cox
KFF, April 17, 2020
The Medical Loss Ratio (or MLR) requirement of the Affordable Care Act (ACA) limits the portion of premium dollars health insurers may use for administration, marketing, and profits. Under the ACA, health insurers must publicly report the portion of premium dollars spent on health care and quality improvement and other activities in each state in which they operate.
The Medical Loss Ratio provision requires insurance companies that cover individuals and small businesses to spend at least 80% of their premium income on health care claims and quality improvement, leaving the remaining 20% for administration, marketing, and profit. The MLR threshold is higher for large group insured plans, which must spend at least 85% of premium dollars on health care and quality improvement. Insurers failing to meet the applicable MLR standard have been required to pay rebates to consumers since 2012 (based on their 2011 experience). Currently, MLR rebates are based on a 3-year average, meaning that 2020 rebates are calculated using insurers’ financial data in 2017, 2018, and 2019. Insurers may either issue rebates in the form of a premium credit or a check payment and, in the case of people with employer coverage, the rebate may be shared between the employer and the employee. Insurers will begin issuing rebates later this fall.
Using preliminary data reported by insurers to state regulators and compiled by Market Farrah Associates, we estimate insurers will be issuing a total of about $2.7 billion across all markets – nearly doubling the previous record high of $1.4 billion last year. The amount varies by market, with insurers reporting about $2 billion in the individual market, $348 million in the small group market, and $341 million in the large group market. These amounts are preliminary estimates, and final rebate data will be available later this year.
Insurers in the individual market in 2018 and 2019 are driving this record-high year of MLR rebates in 2020. Rebates issued in 2020 are based on 2017, 2018, and 2019 financial performance. As our previous analysis of insurer financial performance found, in 2017 financial performance in the market had begun to stabilize as premiums rose. Insurers in 2018 were highly profitable and arguably overpriced. In 2019, despite the absence of the individual mandate penalty and premiums dropping a bit on average, insurers continued to perform strongly. On average, insurer loss ratios (the share of premium income paid out as claims) in the individual market in 2019 were 79%. (This is a simple loss ratio; the ACA allows insurers to make some adjustments to this ratio when calculating rebates).
Rebates in the small and large group markets are more similar to past years.
As more people are expected to move into the individual market this year after losing job-based coverage, it is worth considering the possibility of future rebates based on the 2020 calendar year. The cost to insurers for covering coronavirus treatment are still unknown, but could be tens if not hundreds of billions of dollars. That said, hospitals and outpatient offices are canceling elective procedures and individuals are delaying or forgoing other care due to lessened access from social distancing measures and concerns over contracting the virus. Even if individual market insurers experience losses in 2020, it is entirely possible they will owe rebates in 2021 because those rebates will be based on 2018 and 2019 experience as well.
These high rebate estimates come at a time when insurers are working on submissions to regulators for proposed premiums for 2021, in the midst of significant uncertainty about how the coronavirus pandemic will affect health care costs. For 2021 premiums, key factors will include how many people are expected to become infected and severely ill next year, as well as how much pent up demand there may be for care delayed this year. Enrollment in individual market plans is expected to increase as millions of people lose their jobs and health insurance and qualify for a special enrollment period, but these new enrollees will not qualify for rebates when they are paid out in 2020 unless they were also enrolled at some point in 2019.
By Don McCanne, M.D.
At the time that the Affordable Care Act was crafted, it was realized that, since private insurance coverage would be mandated for a large sector of the population, the private insurers would have essentially a blank check to gouge as much as the traffic would bear. Thus it was decided that a minimum medical loss ratio would need to be established; that is, the insurers would be required to pay out at least 80 percent of their premium revenues in the form of medical benefits for those enrolled in their individual or small group plans and 85 percent for their large group plans. (They were also allowed to count “quality improvement” programs as a medical loss, though some of us feel that they should really be considered administrative and advertising expenses, but we won’t cover that here.)
The point is that private insurers are allowed to keep 15 to 20 percent of premium revenues to be used to cover administrative services (the actual product that they are selling us) and profits. This has made the private for-profit insurers the darlings of Wall Street considering their high profit margins plus the increased market value of their stocks.
If the insurers end up paying out less in benefits than the required amount, then they have to refund the difference. But that is not such a bad deal for them. That way they can be sure that they received the maximum profit allowable, whereas if they paid out more in benefits than required, they would draw down their profit margins. Also, with extra funds under their control, they have more which they can use to work the float (invest the excess funds in order to increase their profits). Granting premium refunds with extra funds is certainly better for them than absorbing greater losses.
Under the ACA medical loss ratios of 80 to 85 percent, the private insurers can spend 15 to 20 percent on overhead and profits. Under Medicare, administrative costs are about 2 percent and profits are not a category in the Medicare budget. That means that Medicare has what would be a medical loss ratio of about 98 percent. That is desirable since that means the funds are being spent on patient care.
Another point. Insurers usually report their profits as a percentage of their entire premium revenues. If you consider that most of their premium revenues are our funds that they are merely holding in trust to pay out future health benefits, then the real product they are selling us is their administrative services. If you count the profits they retain as a percentage of their administrative services, then they have an egregiously outrageous profit margin. (Bank investors are much more concerned about their return on equity than their return on assets – other peoples’ money that they hold in trust.)
The medical loss ratio game is simply one more reason that we should reject private insurers and replace our current dysfunctional health care financing system with a single payer program of Medicare for All. We would each be paying in our equitable contribution based on what we could afford, and the funds would be going where they should be going – taking care of our health. What gall it takes to keep in place an industry that thinks it is a loss to invest in our health.
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