Health Premiums Rebates and its financial Consequences


Thanks to the Affordable Care Act’s medical loss ratio (MLR) – or 80/20 rule – health insurance companies were required to pay $469 million in rebates to about 5.5 million people in 2015 – bringing the total over four years to more than $2.4 billion.

What is the Medical Loss Ratio?

Obamacare requires health insurance carriers to spend the bulk of the premiums they collect on medical expenses for their insureds. Individual and small-group carriers must spend at least 80 percent of premiums on medical expenses, and for large-group plans the requirement is 85 percent. Profits and administrative expenses can make up no more than 20 percent (15 percent for large groups) of premiums collected. If administrative expenses exceed those amounts, they must remit refunds to their insureds.

If an insurer did not spend enough premium dollars on patient care and quality improvement, they must pay refunds to consumers in one of the following ways:

-a refund check in the mail;

-a lump-sum reimbursement to the same account that was used to pay the premium;

-a reduction in their future premiums; or

-if the consumer bought insurance through their employer, their employer must provide one of the above options, or apply the refund in another manner that benefits its employees, such as more generous benefits.

The 80/20 rule, along with other standards such as the required review of proposed premium increases, is one of many reforms created under the health law helping to slow premium growth and moderate premium rates. Consumers and businesses, therefore, can realize savings in two ways as a result of the MLR requirement: by paying lower premiums than they would have been charged otherwise (as a result of lower administrative costs and profits), or by receiving rebates after the fact.

Rebates 2015

The rebates that were sent out by carriers in 2015 were based on the average MLR (Medical Loss Ratio) for the prior three years (2012 to 2014). The rebates that are sent out in 2016 will be based on each carrier’s average MLR for 2013 to 2015, and so forth.

The primary role of an MLR threshold is to encourage insurers to spend a certain percentage of premium dollars on health care and quality improvement expenses (80 percent in the individual and small group market and 85 percent in the large group market). The MLR rebate requirement operates as a backstop if insurers do not set premiums at a level where they would be paying out the minimally acceptable share of premiums back as benefits. Only if those thresholds are not met are insurers required to provide rebates to consumers or businesses.

2015 is the fourth year of payouts through the 80/20 rule. From 2012 to 2014, total rebate amounts dropped significantly each year. But the total rebate amount in 2015 was higher than it was in 2014; for the individual market, the rebate amount in 2015 was the highest it had been since 2012 (the first year the rebates were sent out).

However, it appears that the MLR requirements have been effective in trimming administrative expenses: Average MLRs have been steadily increasing since 2011. In 2014, they ranged from 85.9 percent in the individual market, to 96.5 percent in the large group market.

In Massachusetts, 98,790 individuals benefited an average rebate of $235. In New Hampshire, 54,519 insurers received $197. In Connecticut, 22,166 for an average of $177. The highest average (per household) rebates among families that received them were in Wyoming ($1,617) and Hawaii ($1,597). In Vermont, South Dakota, Minnesota, and Rhode Island, there were no rebates necessary in 2015.

Taxes Implications

The IRS provides different scenarios based on the company and consumer’s situation. MLR rebates are considered as reduction premiums. State and federal tax consequences depend on health insurance policies purchased on the individual market and group policies (employee after-tax premium payments or employee pre-tax payments).

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