Your Health Insurance Company May Owe You Money

By John Tozzi for Bloomberg Businessweek

Last year health insurance companies sent small businesses $321 million in rebates. In California, tens of millions more are on the way, according to the Los Angeles Times. The money comes from a little-known piece of Obamacare meant to keep premiums in check.

In all the talk about death panels, mandates, and insurance exchanges, it’s easy to miss how the Affordable Care Act tries to limit health insurance premiums. The rule, known as the medical loss ratio, requires insurers to spend at least 80¢ of every premium dollar on medical care. That means marketing, salaries, dividends to shareholders, and other expenses can’t make up more than 20 percent of what an insurer collects from policyholders. (The proportion insurers must spend on medical care goes up to 85¢ for policies sold to large employers.)

The idea is that if the actual cost of paying for medical care comes in well below what insurance companies predict when they set premiums, that money goes back to the policyholders rather than becoming a windfall for the carrier. The first rebates went out last summer. Insurers refunded $1.1 billion on policies that covered more than 12 million Americans, with an average rebate of $151 per family, according to the Department of Health and Human Services.

While it’s easy to conclude that insurers are deliberately overcharging consumers and employers, the rebate actually discourages insurers from pricing plans too conservatively, says Cori Uccello, a senior health fellow at American Academy of Actuaries, the professional society of risk modelers.“There is some underlying uncertainty in what claims are going to be,” she says. And the adjustment only works in one direction: to benefit policyholders if plans are priced too high. “If that plan’s claims experience is worse than expected, they don’t get to go back and charge more,” Uccello says.

The bulk of the rebates in California this year are heading to small businesses, the L.A. Times’ Chad Terhune reports:

“Blue Shield, the state’s third-largest health insurer, will be sending rebates to about 29,000 small businesses. That’s because the San Francisco insurer spent 76.6% of premiums on their medical care. Those small firms cover 90,000 employees and dependents.

“Anthem Blue Cross, a unit of industry giant WellPoint Inc. (WLP), will be giving rebates to nearly 45,000 small businesses. The state’s largest for-profit health insurer spent 79.3% of premiums on their medical care, just shy of the threshold. Those small employers cover about 322,000 workers and family members.”

For businesses of all sizes, the rebates go to the employer. Companies are supposed to pass along the portion of the refund that applies to employees’ contributions to health premiums.

Insurance companies, unsurprisingly, are not fans of the rule. The industry lobby, America’s Health Insurance Plans, points out that medical costs—not insurers’ overhead—drive rate increases. And the majority of health insurance policies didn’t have to send back money last year, according to HHS: “Approximately 66.7 million consumers are insured by an insurance company that provides the required value for their premium dollars. … 62% of consumers in the individual market; 83% in the small group market; and 89% in the large group market.”

Health insurers must pay rebates for 2012 by Aug. 1. Lots of people are focused now on what premiums will look like for the year ahead—and how much employers and consumers should fear rate shock in the first year of Obamacare’s mandates. But the real verdict on the premiums we’ll see quoted this fall may not come until 2015, when we find out how much insurers may have to refund.

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