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

Medical Insurance

MLR rebates: An overview

In the 8th year of MLR rebates, the rebate checks in 2019 are larger than they’ve ever been

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 2019, insurers were required to pay $1.37 billion in rebates to nearly 9 million consumers. That was based on insurer revenue and spending for 2016-2018, and it was the highest total rebate amount since the MLR rebate program began.

Rebate checks were first sent to consumers in 2012, and totaled $1.1 billion that year (this was based on performance in 2011, before the bulk of the ACA’s provisions had taken effect; the individual market was still medically underwritten in nearly every state at that point). Rebate totals have been smaller in subsequent years, but the checks mailed in 2019 are the largest they’ve ever been, driven in large part by the individual market. The individual market only covers about 7 percent of the US population, but it’s a volatile market and premiums increased drastically in 2017 and 2018, leading to significant insurer profits in 2018 and triggering MLR rebates for more than 3.7 million individual market consumers.

Including the rebates issued in the fall of 2019, total rebates issued from 2012 through 2019 amount to more than $5.3 billion. The rebates issued in the fall of 2019 were based on insurers’ MLR performance across 2016, 2017, and 2018. Premiums in the individual market spiked in 2017 and again in 2018, and based on the MLR data, it appears they were set too high by 2018.

Not only are total MLR rebates larger in 2019 than they’ve ever been, but more than 56 percent of the total rebates were sent to consumers in the individual market, despite the fact that a very small segment of the population is enrolled in individual market plans; most people with private health insurance coverage have employer-sponsored plans (for perspective, about 19 percent of the total amount that was rebated to consumers in 2018 was for individual market coverage, but the continued sharp increases in premiums in 2018 pushed profitability considerably higher and has resulted in a much larger total MLR rebate amount for individual market consumers in 2019).

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.

Rebates vary by state and by insurer

Although total rebates were larger in the fall of 2019 than they had ever been, most people didn’t receive a rebate check at all, since most insurers tend to be in compliance with the MLR requirements. Every year, there are some states where no rebates are issued (ie, all of the insurers in that state hit the MLR targets; this was the case in seven states in 2019), and even in states where MLR rebates are issued, they’re usually only sent out by a few insurers.

In 2018, almost 6 million people received rebates (including the individual, small group, and large group markets). The largest average rebates were in Minnesota, where more than 41,000 consumers received average rebates of $479 each. Average rebates in Hawaii were $384, but only 818 consumers in Hawaii were owed a rebate. In DC, average rebates were owed to more than 93,000 consumers and averaged $285 each. Nationwide, the average rebate check was $119.

But in 2019, nearly 9 million people received rebates, and the average rebate check was $154 (it averaged $208 for the 3.7 million people who received an MLR rebate based on individual market coverage). The largest average rebate checks were sent in Kansas, where about 25,000 people received rebates that averaged $1,081.

For subsidized enrollees, rebate amounts can exceed net premiums

MLR rebates are paid to policyholders. In the case of employer-sponsored plans, the rebates are sent to the employer (who can pass them on to employees or use the money to reduce employees’ future premiums or provide enhanced benefits). And in the case of individual market plans, the rebate is sent to the individual who purchased the plan. And the rebate amount is based on the full cost of the plan, regardless of how much of that cost was offset by a premium subsidy.

Premium subsidies became disproportionately large in 2018, due to the way insurers handled the cost of cost-sharing reductions (CSR). That resulted in a sharp uptick in the number of individual market enrollees who paid very low premiums, or no premiums at all, for bronze plans, and even gold plans in some areas.

But if a plan has to send out MLR rebate checks, the checks are based on a percentage of the full cost of the plan. And the full amount of the rebate is sent to the enrollee — it’s not sent to the US treasury, even though that might have been who paid the bulk of the premiums via premium subsidies. Dave Anderson and Charles Gaba both have excellent explainers about this.

The short story is that the rebate amounts might not seem “fair” at all. A person who paid very little in after-subsidy premiums might receive a significant rebate check, while their neighbor might receive no rebate check at all — even if they weren’t eligible for a subsidy and had to pay what seemed an exorbitant monthly premium — because they were enrolled in a plan that met the MLR requirements. To reiterate, most Americans do not receive a rebate check. And the relative affordability of a person’s premiums has little to no bearing on whether they’ll end up receiving a rebate check.

Rebates? What rebates? How do they work?

The rebates are tied to the medical loss ratio: the percentage of insurance premium dollars spent on actual health care – as opposed to marketing, profits, CEO salaries, and other administrative expenses. 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 to consumers each fall.

MLR rebates are calculated at the insurer level for each of the three market segments (individual, small group, and large group), and on a state-by-state basis. An insurer’s aggregate numbers in each of those markets are considered to determine whether rebates are necessary. If they are, they apply to everyone who had coverage under that insurer’s plans in that market segment in that state — it’s not broken down on a plan-by-plan basis beyond that. However, the exact amount of each policyholder’s rebate is based on the (pre-subsidy) premiums for the plan that person had.

So if an insurer offers several different plans in the individual market and the aggregate MLR across all of those plans is under 80 percent, the insurer is going to owe rebates to everyone enrolled in those plans. But people with higher-priced plans (including older people, people who selected richer-benefit coverage, and people in higher-priced areas of the state) are going to get larger rebates than people with lower-priced plans, since the rebate is calculated as a percentage of the premium.

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. Some states received CMS approval to modify MLR requirements within the state in the early years, but there are no longer any states with MLR requirements that are lower than the federal rules (Massachusetts has a much higher MLR requirement, at 88 percent for individual and small group plans; New York’s is 82 percent).

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 9 million people received rebates in 2019, which is less than 3 percent of the population.

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 2018 were based on each carrier’s average MLR for 2015 to 2017. The rebates that were sent out in the fall of 2019 were based on average MLR for 2016-2018, and so forth.

Prior to 2019, the largest total rebates had been sent in 2012, as that was the first year that rebates were sent to consumers and insurers were still fine-tuning their revenues and expenses to comply with the ACA’s new rules. But the total rebates sent out in 2019 were higher than they had ever been.

And while the number of states where no rebates are necessary at all had been steadily rising for the last few years, reaching 11 in 2017 (an indication that more insurers were right-sizing their premiums), it dropped to seven in 2018, and remained at seven in 2019. And although the individual market was the primary driver for the spike in total rebates in 2019, there were 15 states where no rebates were sent to individual market enrollees in 2019 (and a total of seven states where no rebates were sent to consumers in any markets.

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 (this was an improvement from 2011, when about 83 percent of individual market enrollees were in plans that met the MLR requirements).

But obviously, that has changed quite a bit in the last two years; there were 3.7 million individual market enrollees who received MLR rebates in 2019, which amounts to nearly a quarter of the roughly 15.2 million people enrolled in individual market plans. However, that means that more than three-quarters of individual market enrollees are in plans that are meeting the MLR targets, despite the sharp rate increases in 2017 and 2018.

Loss ratios have dropped as insurers regained profitability in the individual market (thanks to large rate increases in 2017 and 2018), and this is the driving factor behind the much larger MLR rebates in 2019. Kaiser Family Foundation reported that for the first half of 2018, the average individual-market loss ratio was just 69 percent. That’s only for the individual market, and it’s only the first half of the year — loss ratios tend to increase as the year goes on, because claims tend to increase after people meet their annual deductibles. But it was no surprise that MLR rebates were larger in 2018 (for plan years 2015-2017) than they had been in prior years, and it’s not surprising that they were larger than ever in 2019 as well (based on revenue and losses for 2016-2018).

Premiums in the individual market only increased slightly for 2019, despite some significant upheaval in the market (elimination of the individual mandate penalty, along with the expansion of short-term plans and association health plans). And they’re barely changing at all for 2020. That’s an indication that premiums were certainly adequate in 2018, and possibly too high in some cases (the expectation is that without the aforementioned market upheaval, average rates would have decreased for 2019).

Total rebate amounts so far have been:

In 2019, nearly 9 million consumers received rebates that averaged $154. (The average was $208 in the individual market, $105 in the small-group market, and $128 in the large-group market; rebates in the group market are sent to employers, who then have options for how to use the money.)

The highest average rebates among consumers that received them in 2019 were in Kansas, where average rebates were $1,081 – about seven times as much as the national average. But average rebates in Kansas the year before were only $157, illustrating how much the market can change from one year to another based on premiums and total claims.

In seven states, there were no MLR rebates necessary in 2019, because all of the individual, small group, and large group insurers met the MLR requirements: Maine, North Dakota, Oregon, Rhode Island, South Dakota, Vermont, and Wyoming

Maine, South Dakota, Vermont, and Wyoming have had no MLR rebates for four years in a row (2016, 2017, 2018, and 2019), because all insurers in those states have met the MLR requirements each of those years. 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 and the second-highest average rebates in 2018. 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 seven states in 2019, 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. [You can think of this as similar to a tax refund: People certainly like receiving a tax refund, but the ideal scenario is to not overpay your taxes during the year, since that just gives the IRS an interest-free loan.]
But in most states, at least some consumers received rebate checks in 2019, as had been the case in prior years.

State Total Rebates (including individual, small group, and large group markets) Number of consumers who received a rebate Average rebate amount
*USA* $1,370,265,255 8,924,643 $154
AK $5,885,625 19,019 $309
AL $26,348 490 $54
AR $16,226,275 147,415 $110
AZ $99,535,043 139,065 $716
CA $89,538,302 1,007,064 $89
CO $19,425,443 153,791 $126
CT $20,891 1,062 $20
DC $31,804,452 107,939 $295
DE $8,261,424 38,251 $216
FL $107,406,822 1,102,427 $97
GA $65,648,241 209,802 $313
HI $277,110 701 $395
IA $2,402,990 51,116 $47
ID $140,221 1,181 $119
IL $19,560,851 145,881 $134
IN $5,392,696 89,544 $60
KS $27,210,671 25,175 $1,081
KY $44,505 363 $123
LA $10,105,345 74,315 $136
MA $48,775,291 263,727 $185
MD $59,369,470 522,126 $114
ME $0 0 $0
MI $19,993,937 191,621 $104
MN $50,249,199 91,064 $552
MO $52,067,788 226,223 $230
MS $35,078,651 95,552 $367
MT $528,294 2,960 $178
NC $9,874,567 537,983 $18
ND $0 0 $0
NE $827,045 45,641 $18
NH $27,088,031 127,617 $212
NJ $15,568,469 97,780 $159
NM $14,180,935 34,468 $411
NV $8,680,429 65,980 $132
NY $24,041,704 449,222 $54
OH $4,656,274 25,442 $183
OK $16,000,483 291,073 $55
OR $0 0 $0
PA $129,984,697 487,734 $267
RI $0 0 $0
SC $6,701,642 98,565 $68
SD $0 0 $0
TN $61,406,473 334,273 $184
TX $91,875,636 680,961 $135
UT $8,778,764 49,316 $178
VA $149,564,650 515,567 $290
VT $0 0 $0
WA $3,696,911 220,975 $17
WI $20,988,802 150,396 $140
WV $1,373,859 3,777 $364
WY $0 0 $0

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

GOP tried unsuccessfully to repeal the federal MLR rules in 2017

While the MLR provision has obvious appeal to consumers, it isn’t universally loved – and was among the ACA provisions in Republicans’ crosshairs as they attempted to repeal the ACA in 2017. The Senate’s 2017 Better Care Reconciliation Act (BCRA) 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 has taken with regards to insurers’ network adequacy, and it’s in keeping with the GOP belief that regulatory authority should be concentrated at the state – rather than federal – level.

The Congressional Budget Office estimated 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 have been 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. [As noted above, individual market rebates are sent to the policyholders, even if the bulk of their premiums were paid by the federal government via subsidies. But without an MLR requirement, insurers would be able to charge higher prices without having to worry about future rebates, and consumers who don’t qualify for subsidies would be hardest hit.]

GOP efforts to repeal the ACA in 2017 were not successful, though, so insurers in every state still have to spend the majority of your premium dollars on medical costs and quality improvements, rather than administrative expenses.

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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