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Due to the Medical Loss Ratio provision of the Affordable Care Act, health insurers will issue roughly $1 billion in rebates to customers in 2022, according to a new analysis from the Kaiser Family Foundation.
The MLR provision limits the amount of premium income that insurers can keep for administration, marketing and profits. Insurers that fail to meet the applicable MLR threshold are required to pay back excess profits or margins in the form of rebates to their enrollees.
The estimated $1 billion in rebates is across all commercial markets, but the expected rebate amounts vary by market segment. Insurers in the individual market estimate they will issue $603 million in rebates, small group market insurers will issue $275 million in rebates and large group market insurers will issue $168 million in rebates later this year.
These rebates are larger than those issued in most prior years, but it falls short of the record-high rebate amounts of $2.5 billion in 2020 and $2 billion in 2021. In most years, changes in the rebate totals have been driven primarily by fluctuations in the individual market. Rebates in the small group and large group market are generally smaller and more consistent over time.
Individual market insurers in 2021 had higher loss ratios, meaning they were likely less profitable, on average, than they had been in recent years. The average individual market loss ratio – without adjusting for quality improvement expenses or taxes – was 88%, meaning these insurers spent an average of 88% of their premium income in the form of health claims in 2021.
But rebates issued in 2022 are based on a three-year average of insurers’ experience in 2021, 2020 and 2019. Some insurers experiencing relatively high loss ratios in 2021 nonetheless expect to owe rebates this year because those rebates reflect their more profitable stretches in the 2020 and 2019 plan years.
They’re the first rebates in years that do not include 2018 in their three-year averages. This is significant, because 2018 was an especially profitable year for many insurers. Many of them overshot their premiums amid uncertainty about ACA policymaking in 2017, including whether the law would be repealed and replaced, whether cost-sharing payments would be made, or whether the individual market would be enforced by the federal government.
The large profits and overhead seen in 2018 are part of why individual market rebates issued in 2019, 2020 and 2021 were so large, according to KFF.
WHAT’S THE IMPACT
In the individual and small group markets, insurers have to spend at least 80% of their premium income on healthcare claims and quality improvement efforts, leaving the remaining 20% for administration, marketing expenses and profit. The MLR threshold is higher for large group insurers, which must spend at least 85% of their premium income on healthcare claims.
The effects of the pandemic continue, found KFF. The rebates for this year include experience from 2020 and 2021, and in 2020 there were several factors driving down health spending and utilization. Hospitals and providers canceled elective care early in the pandemic and during spikes in COVID-19 cases to free up hospital capacity, preserve supplies and mitigate the spread of the virus. Many consumers also chose to forego routine care in 2020 due to social distancing requirements or similar concerns.
Since insurers had already set their 2020 premiums ahead of the pandemic, many turned out to be overpriced relative to the amount of care their enrollees were using. Some insurers offered premium holidays, and many temporarily waived certain out-of-pocket costs, which drove down their rebates.
Rebates or rebate notices are mailed out by the end of September and the federal government will post a summary of the total amount owed by each issuer in each state later in the year.
THE LARGER TREND
KFF predicts that the higher loss ratios seen in 2021 may foreshadow steeper premium increases in 2023, since some insurers will likely aim for lower loss ratios to regain higher margins. Plus, higher rates of inflation in the rest of the economy may translate to increases in prices demanded by providers, which would drive premiums even higher.
Insurers are currently setting premiums for 2023 and have the difficult task of predicting the continued impact of the pandemic, amid further uncertainty about the future of American Rescue Plan Act subsidies in the individual market.
According to KFF, insurers setting premiums for the 2023 plan year will need to factor in several pandemic-related considerations, including but not limited to: potential pent-up demand for care; the negative impact of foregone care on the health of some enrollees; the rate of future COVID-19 hospitalizations; and the need for more booster shots.
Private insurers may need to pick up the costs of vaccines and boosters next year.
As of April 5, the Department of Health and Human Services no longer adjudicates claims submitted for vaccine administration due to a lack of funds, according to the Health Resources & Services Administration.
If insurers overshoot their premiums amid that uncertainty, they’ll again be required to issue rebates to enrollees under the ACA, according to KFF.