Among the ins and outs insurers must comply with under the Patient Protection and Affordable Care Act is paying out rebates to policyholders when they do not meet preset medical loss ratio thresholds. Thanks to the sharp decline in health care spending seen over the course of 2020, it seems as though these rebates will add up to billions of dollars nationwide.
All told, it's expected that insurers will have to pay out roughly $2.1 billion on these rebates this year, the second-highest amount seen since the ACA rule went into effect in 2012, according to new analysis from the Kaiser Family Foundation. The latest number is up 50% from the $1.4 billion in rebates distributed in 2019 (which accounted for loss ratios from 2018), but down from last year's $2.5 billion.
The ACA mandates that insurers spend at least 80% of the revenues they collect from health insurance premiums on health care claims or quality improvement, and that number rises to 85% for large-group coverage. Often, these expenses increase for insurers due to elective procedures and care, which were largely canceled across the country amid the novel coronavirus pandemic. That led to larger profits for insurers because they could not have foreseen the effects of the pandemic when they set 2020 premiums.
All told, the average person who receives coverage via the individual market will see a rebate of almost $300. That average falls to $127 for people on small-group plans, and $95 for large-group. Of course, not all enrollees will receive a rebate at all, and the actual amount paid out will vary widely depending on the market.
A look at 2020
As mentioned, last year saw a record high in distributed rebate values, driven largely by those for the individual market, which made up about $1.7 billion of the $2.46 billion total, close to 70%, according to Health Affairs. That subsection of the market alone accounted for more than the nearly $1.4 billion in rebates distributed in 2019.
Four states saw no rebates distributed, but in some of the most populous parts of the country, the payouts were in the hundreds of millions. Texas and Florida led the way, with totals of $278 million and $246 million, respectively. Missouri, Pennsylvania, Illinois, Tennessee, and California also cleared $100 million in total rebates owed.
The bigger picture
This latest news comes at a time when consumers are already seeing their health care costs reduced by other means as well. CNBC recently highlighted changes to the national health care landscape brought about by the American Rescue Plan, which expanded access to health insurance premium tax credits for individual coverage purchased on state and federal exchanges.
Currently, there are about 11.5 million people nationwide enrolled in such coverage who already receive tax credits, but that number is set to expand significantly for at least the next two years. Many of the allowances for these expanded benefits will expire at the end of 2022. Moreover, the law will now not punish people who received larger premium assistance or tax benefits than they initially estimated by making them pay back any overages.
What should insurers know?
As with most other things related to the ACA, there's not always a lot of clarity on how rebates can be used and to whom they are distributed. Typically, plan sponsors (such as employers) will receive a percentage of these payments as opposed to payouts to individual enrollees. Thomson Reuters recently noted that if a company pays 60% of premiums and enrolled employees pay the other 40%, there are rules about how those funds can be used.
In the specific case in question, employers can generally use any payouts they receive at their discretion; that is, if they receive checks for tens of thousands of dollars, they can use it on whatever they may want or need that money to go toward. However, whatever portion belongs to the plan, rather than the business, is a different situation — because at that point it can be considered a plan asset. Here, that would mean 40% of the rebate amount falls into this category.
"For insured plans, plan assets derived from participant contributions can only be used to pay premiums and must be forwarded to the insurer within certain timeframes," Thomson Reuters advised. "Further, insurance refunds that constitute plan assets must be returned to participants within three months of receipt. Therefore, an insured plan relying on the nonenforcement policy cannot pay administrative expenses from refunds that are plan assets."
For all these reasons and more, insurers would be wise to provide their policyholders with details for how rebates should be handled, based on their specific situations. In doing so, it helps guarantee compliance and that the insurer-insured relationship continues to improve.