ACA legislation introduced a key cost control to the insurance market that aims to rein in insurers’ overhead. That’s supposed to save all of us—government, business, and consumers—money. Here’s how it works: Insurers must spend the bulk of the premiums they collect on actual medical claims (also called the medical loss ratio or MLR)—as opposed to operational costs, marketing, and profits. The law spells out that insurers must spend at least 85% of all premiums on medical claims for the large group market (defined as companies with over 100 employees) and 80% for the small group market. Insurers with MLRs below those minimums will have to issue rebates to their policyholders. Employees of group plans will share proportionally in rebates to their plans.
Conveniently, the first required reporting period for MLR calculations is June 1, 2012, with rebates to be provided by August 1, 2012—three months before the presidential election. Industry estimates peg the aggregate rebate at $1.3 billion. While that may seem like a lot of money, it’s actually a tiny percentage of premiums (amounting to significantly less than 1%). Private insurers administer approximately $2 trillion in medical spend each year.
Some reasons why the rebate dollar amount is so small relative to the size of the private insurance market are:
• The carriers were more competitive in pricing in the beginning of the year, recognizing any excess profits would need to be refunded
• This is an extraordinarily competitive marketplace and establishing a MLR will not make it more competitive.
• MLR rules will only apply to the fully insured market, which is roughly half of all covered members nationally
In recent conversations with executives at a large national insurer, we learned that almost all of their product lines will meet the MLR minimum, with the couple that miss falling within 0.5%. Insurers are aggressively pricing all of their products with the intent of getting as close to the MLR minimums as possible so as to not cede any profit opportunity while also avoiding the embarrassing headlines of large rebates.
While this attempt to control costs will produce some one-time savings in the form of rebates, MLR rules will not directly address the rate of increase in medical cost, which is the real driver of premium increases. Those challenges are addressed in other parts of the legislation, which expand the powers of insurance commissioners in the approval of rate filings. The primary function of the MLR rules is to formalize the price competitiveness that already exists in the market—and, perhaps, to generate some valuable election year headlines.