On February 16, 2012, Health and Human Services (HHS) Secretary Kathleen Sebelius announced that consumers will soon begin receiving information on the value of their health insurance coverage, and some will receive rebates from insurance companies that spend less than 80 or 85 percent of their premium dollars on health care. The Affordable Care Act requires that insurance companies this year begin notifying customers how much of their premiums they have spent on medical care and quality improvement. Beginning in 2011, insurers were required to spend at least 80 percent of total premium dollars they collect on medical care and quality improvement. Insurance companies that do not meet the 80/20 or 85/15 standard (also known as the Medical Loss Ratio–MLR) are required to pay rebates to their customers this year.
In the individual market, the Affordable Care Act allows the Secretary to adjust the medical loss ratio standard for a state if it is determined that meeting that standard may destabilize the state’s individual insurance market. HHS has allowed adjustments to the medical loss ratio rule in several states and denied others.
The announcement is part of the Obama Administration’s effort to increase transparency in the health insurance marketplace. The notification will let consumers know if their insurer did not meet the MLR standard — and that they or their employer will receive a rebate. HHS is also considering requiring insurers notify consumers if their insurer did meet the MLR standard.
Some insurance companies spend a substantial portion of consumers’ premium dollars on administrative costs and profits, including executive salaries, overhead, and marketing. Under the Affordable Care Act, insurance companies will be required to spend 80 to 85 percent of premium dollars on medical care and health care quality improvement, rather than on administrative costs, starting in 2011. If they don’t, the insurance companies will be required to provide a rebate to their customers starting in 2012.
Over 20 percent of consumers who purchase coverage in the individual market today are in plans that spend more than 30 cents of every premium dollar on administrative costs. An additional 25 percent of consumers in this market are in plans that spend between 25 and 30 cents of every premium dollar on administrative costs. And in some extreme cases, insurance plans spend more than 50 percent of every premium dollar on administrative costs.
Estimates indicate that up to 9 million Americans could be eligible for rebates starting in 2012 worth up to $1.4 billion. Average rebates per person could total $164 in the individual market.
The new medical loss ratio rules will:
- Establish Greater Transparency and Accountability: Beginning in 2011, the law requires that insurance companies publicly report how they spend premium dollars. This information will provide consumers with meaningful information on how their premium dollars are spent, clearly accounting for how much money goes toward actual medical care and activities to improve health care quality versus how much money is spent on administrative expenses like marketing, advertising, underwriting, executive salaries and bonuses.
- Establish MLR Standards: Beginning in 2011, the law requires insurance companies in the individual and small group markets to spend at least 80 percent of the premium dollars they collect on medical care and quality improvement activities. Insurance companies in the large group market must spend at least 85 percent of premium dollars on medical care and quality improvement activities.
- Provide Rebates to Consumers: Insurance companies that are not meeting the medical loss ratio standard will be required to provide rebates to their consumers. Insurers will be required to make the first round of rebates to consumers in 2012. Rebates must be paid by August 1st each year. Enrollees owed a rebate will see a reduction in their premiums, receive a rebate check, or, if the enrollee paid by credit card or debit card, a lump-sum reimbursement to the same account that the enrollee used to pay the premium. In some cases, the rebate may go to the employer that paid the premium on the enrollee’s behalf. Regardless of whether the rebate is provided to enrollees directly or indirectly through their employer, each enrollee must receive a rebate that is proportional to the premium amount paid by that enrollee.
Beginning in 2011, insurance companies that issue policies to individuals, small employers, and large employers will have to report the following information in each State it does business:
- Total earned premiums;
- Total reimbursement for clinical services;
- Total spending on activities to improve quality; and
- Total spending on all other non-claims costs excluding federal and State taxes and fees.
These reports will be posted publicly by HHS so residents of every State will have information on the value of health plans offered by different insurance companies in their State.
Following NAIC recommendations, the regulations specify a comprehensive set of “quality improving activities” that allows for future innovations and may be counted toward the 80 or 85 percent standard. Quality improving activities must be grounded in evidence-based practices, take into account the specific needs of patients and be designed to increase the likelihood of desired health outcomes in ways that can be objectively measured.
The regulations generally require health insurance companies to report to the Secretary by June 1 of each year. Insurers will be required to make the first round of rebates to consumers by August 2012 based on their 2011 medical loss ratio. Self-funded plans are not subject to the MLR rules.
