Insurers may owe billions in ACA rebates

One of the biggest changes for the insurance industry enacted by the Patient Protection and Affordable Care Act was the limit on how much companies could spend on administration and marketing, versus how much had to be put back into the insurance pool.

A minimum of 80 cents of every $1 spent on premiums have to go toward improving the quality of care policyholders receive, and these are figures that have to be reported each year. The remaining 20 cents can be used to cover administration and marketing costs, as well as be counted as profits. These disparities are even steeper for larger insurance plans (85% to 15%). When companies go over those numbers – based on three-year averages – they have to provide repayments known as Medical Loss Ratio rebates, and that compensation can come in the form of credits or lump sum payouts.

Where things stand in 2020
According to the Kaiser Family Foundation, based on data from the three-year period of 2017-19, the total value of rebates insurers may owe to millions of Americans is in the neighborhood of $2.66 billion. The largest chunk of that money is due to Americans who purchased coverage during this time on the individual market – totaling some $1.97 billion owed to nearly 4.74 million people nationwide, an average of $420 per policyholder.

Another estimated $341 million worth of MLR rebates is owed to nearly 2.99 million people who had coverage through large group insurance. Finally, roughly 189,000 people who had small-group coverage are due a combined total of $348 million in rebates. These figures will be finalized later in 2020.

Insurers likely owe billions in rebates this year.

Understanding the growth
However, despite the fact that these are preliminary figures, the value of these rebates seems to be exploding – nearly doubling from 2019 ($1.4 billion) to 2020 ($2.66 billion). The KFF noted that relatively small part of that growth is likely tied to the repeal of the individual mandate, but 2019's number was also double the figure seen in 2018 ($700 million).

What's driving these increases in rebates? According to both this and last year's analysis of the data, a large part of it is due to growing costs for the individual market. Again, the repeal of the individual mandate certainly changed people's relationships to insurance, but coverage costs also declined. However, because these numbers were based on three-year data, Kaiser noted that while 2016 and 2017 saw insurers taking losses on individual coverage, things turned a corner more recently.

In last year's analysis, KFF noted, “Insurers in 2018 were highly profitable and arguably overpriced, which is why rebates are so large despite being averaged across less favorable years.” Last year's rebates were the highest seen in the industry since they were first mandated in 2012, and the health insurance landscape has changed considerably since then.

Going forward
Of course, the market continues to change as well, and with millions losing their jobs already in 2020 – and many more likely to do so before any kind of economic recovery actually begins – enrollment in employer-provided health plans is potentially going to decline steeply, potentially putting more strain on the health care market overall. Benefits Pro notes that the true cost of dealing with the novel coronavirus pandemic can't even be roughly estimated at this point, especially because many care providers are focusing much of their attention on dealing with the virus and suspending or significantly curtailing elective procedures.

That's likely to have a big impact on health insurance premiums for 2021 – some estimates see average increases in populous states pushing toward 40% or more. However, it's possible there will continue to be MLR rebate requirements simply because, due to the three-year averages, these companies may still be playing catchup from 2018 and 2019.

Understanding the big picture
Under the ACA, the actual rules for how these rebates must be provided to individuals or plan overseers (that is, employers, union groups, pension funds, etc.) are not necessarily hard and fast. For instance, just because the average rebate per individual amounts to hundreds of dollars, there is no requirement for the insurer to make sure that gets into each person's hand. Rules may also depend upon the terms and requirements of the group plan's contract, according to Parker Smith & Feek.

In addition, if – under the terms of a specific plan – the rebate amounts to less than $5 per participant, insurers are not required to pay that money out due to the administrative costs and burden involved. Certainly, all involved will want to be sure that all I's are dotted and T's are crossed to ensure they are either adhering to the terms of these agreements (and the ACA itself) or that they are receiving all the rebate funds that may be due to them.