It often seems like healthcare costs only go one direction: up. But this year, millions of Americans can look forward to getting money back from their health insurer.
According to the Kaiser Family Foundation (KFF), health insurers expect to rebate $1 billion to 8.2 million health plan members, equivalent to $128 per member.
The anticipated windfall for health plan members is thanks to an Affordable Care Act (ACA) rule which requires health insurers in the individual and small group commercial markets to spend 80% of their premium incomes on members’ healthcare costs. This ratio is known as the medical loss ratio (MLR), the percentage of premium income spent on medical costs. The same rule requires large group insurers to spend 85% of premiums on healthcare claims.
The income left over after paying for claims can go toward health insurers’ administrative costs, marketing, and profits. But if those leftovers exceed the allotted amount, insurers have to give back the excess to the members who paid the premiums in the first place.
MLR rebates are based on a three-year average of premiums and costs. The projected rebates for 2022 are therefore based on insurers’ results from 2019, 2020, and 2021 for policies purchased during 2021. That time period includes a significant drop in healthcare utilization during the onset of the pandemic, when people avoided non-urgent, non-Covid-19 care.
When people use fewer services and insurers have to pay fewer claims, it translates into higher profits for insurers. In 2020, health insurers’ financial performance improved substantially over 2019. That trend has continued for many health insurance companies, including Cigna, CVS Health, and Humana.
The 2022 rebate levels vary by segment. For example, insurers expect to rebate the largest amount in the individual market—$603 million total or $141 to each of 4.3 million people. In the small group market, insurers expect to issue $275 million in rebates, equivalent to 1.8 million people receiving $155 each. Large group insurers expect to rebate $168 million total, or $78 each for 2.2 million people.
These estimates are preliminary and will be finalized later this year. Final rebates must be communicated to consumers by August 1.
If the current estimates hold, 2022 rebates will be higher than those issued between 2013 and 2018 but lower than the prior three years. According to KFF, in 2020, record-high rebates reached $2.5 billion. Last year, insurers issued $2.0 billion in rebates.
As exciting as it may be to get money back from a health insurer for a change, MLR are simply a silver lining to a less positive reality: MLR rebates mean that insurers have set their prices way too high.
According to Mark Shepard, assistant professor of public policy at the Harvard Kennedy School of Government, higher prices are likely the result of relatively low levels of competition in commercial health insurance markets, despite some progress.
“There has been some entry since the low point in 2018, but it’s still not a very competitive market,” Shepard said. “That will tend to lead to higher price markups.”
This year, consumers got more and better options, with an average of five insurers offered per state. But, at the highwater mark in 2015, consumers could choose from an average of six insurance carriers per state.
Another downside of the MLR rebate rule, Shepard points out, is that it can create an incentive for insurers to spend more rather than to charge less.
According to an analysis in the American Economic Journal: Applied Economics, regulations that set limits on insurer profits the way the MLR rebate rule does actually motivate insurers to spend more on medical expenses to reduce their surplus. The analysis found no impact on premiums. In other words, insurers did not lower premiums as a way of avoiding having to pay rebates.
While getting a health insurance rebate indicates you’ve been charged too much, there’s little you can do about it. At least you don’t have to do anything else to get your money. Rebates are processed automatically.