Consumers saw nearly $1.5 billion in insurer rebates and overhead cost savings in 2011, due to the Affordable Care Act’s requirement that health insurers spend at least 80 percent of premium dollars on health care or quality improvement activities, according to a new Commonwealth Fund report. If health insurers don’t follow the rule, they must pay a rebate to their customers.
Consumers with individual policies saw reduced premiums when insurers reduced both administrative costs and profits to meet the new standards, Michael McCue of Virginia Commonwealth University and Mark Hall of Wake Forest University, authors of the report, said. While insurers in the small- and large-group markets achieved lower administrative costs, not all of these savings were passed on to employers and consumers, as many insurers increased profits in these markets.
“The medical loss ratio requirements are intended to give insurers an incentive to be more efficient and use most of their premium dollars for patient care,” Sara Collins, Commonwealth Fund vice president for affordable health insurance, said in a statement.
“This report is encouraging, as it demonstrates that these new rules are improving value for people buying health insurance on their own, which has traditionally been very challenging,” Collins said. “However, it will be crucial to monitor insurers’ responses to this regulation over time to ensure that all purchasers and consumers benefit from the savings the law is designed to encourage.”
The report looks at how insurers selling policies for individuals, small-employer groups, and large-employer groups in every state reacted to the Affordable Care Act’s medical loss ratio requirement in 2011, the first year the rule was in place. Small-employer groups have up to 100 workers, while large-employer groups have more than 50 or 100 workers, depending on the state.
The authors found that in the individual insurance market improvements were widespread: 39 states saw administrative costs drop, 37 states saw medical loss ratios improve, and 34 states saw reductions in operating profits.
Some states had significant improvements. In New Mexico, Missouri, West Virginia, Texas, and South Carolina, medical loss ratios improved 10 percent or more, while administrative costs dropped $99 or more per member in Delaware, Ohio, Louisiana, South Carolina, and New York.
However, the report finds that in small- and large-group markets, medical loss ratios were largely unchanged, and while spending on administrative costs dropped, profits increased.
Small- and large-group policies
For example, in the small-group market, administrative costs were reduced by $190 million, profits increased by $226 million, and the medical loss ratio remained at 83 percent, unchanged from 2010. In the large-group market, insurers reduced administrative costs by $785 million, increased profits by $959 million, and kept their medical loss ratio at 89 percent, also unchanged from 2010.Insurers in the individual market have a less stringent medical loss ratio requirement – 80 percent compared to 85 percent in the large-group market – but their higher overhead costs and lower medical loss ratios mean they have to work harder to reach the new standard, the authors of the report said. As a result, these insurers lowered both administrative costs and profit margins, which reduced the cost of premiums.
On the other hand, insurers in the small- and large-group markets already have medical loss ratios in the range of the required 85 percent, so while they reduced administrative costs, they had the option of turning those cost savings into profits instead of passing them along to consumers.
Insurers may have taken profit increases in the small- and large-group markets to offset the reduced profits in the individual market, the authors said. Many insurers sell policies in all three markets, so any reduction in administrative costs could have been spread across all three markets.
Possible stronger rules
The authors conclude that stronger measures – such as rate regulation, tighter loss ratio rules, or enhanced competitive pressures – may be needed to ensure that administrative costs are reduced in all markets and savings are passed along to consumers.