December 23, 2021 - AIS Health
Leslie Small
Recently, CMS revealed that private health plans had to deliver $2 billion in rebates to their customers for the 2020 reporting year, with the bulk of that money going toward individual market enrollees. Affordable Care Act experts say that while the large rebate payout does mean premiums have been overpriced, it’s also indicative of just how profitable the ACA exchanges have become for insurers.
“The presence of large, persistent MLR rebates triangulates very well with the return of old insurers that left the market in 2017 and 2018 as well as the expansion of coverage area for current and new insurers,” says David Anderson, a research associate at the Duke-Margolis Center for Health Policy who studies the ACA marketplaces. “Insurers are looking at this market and they’re…making the assumption that the market is fundamentally stable, it is fundamentally profitable [and] it is fundamentally predictable, and therefore they want to get involved in the market.”
The ACA’s medical loss ratio (MLR) provisions require health insurers in the individual/small-group markets and large-group markets to spend at least 80% and 85%, respectively, of their premium income on medical care and quality improvement initiatives ? therefore limiting the amount they can use for profit and other expenses. If the percentage falls below those thresholds, insurers must pay a rebate to customers. Rebates are based on a three-year average, so 2020 rebates are calculated using insurers’ financial data in 2017 through 2019.
Overall MLR rebates have been on the rise, going from $700 million in 2018 to $1.4 billion in 2019, and now, an all-time high of $2 billion for the 2020 reporting year. And during those three years, individual market MLR rebates have comprised an ever-larger share of overall private plan rebates. For the 2020 reporting year, about $1.3 billion in rebates came from individual market insurers, $384 million from the small-group market and $291 million from the large group market, according to CMS. Anderson says those results make sense considering how individual market insurers’ fortunes have changed since the rocky, early years of the ACA marketplaces.
Insurers participating in the ACA exchanges “lost their shirts” from 2014 to 2016, while in 2017 they largely broke even, Anderson tells AIS Health, a division of MMIT. Then in 2018, there was a mass exodus from the marketplaces due to profitability challenges and policy uncertainty, driving the remaining carriers to massively overprice their premiums and then take in “extraordinarily high profits.”
“So in a counterfactual world where there was no COVID and 2020 had insurers on the ACA market starting to return in significant numbers, starting to understand what silver loading means in terms of how they should price and how they should offer plans, and competition increasing, we would have seen decent-sized rebates because we would have had two very good-for-insurers years (’18 and ’19) and one year that would have been typical profitability, 2017,” Anderson says.
But because 2020 did feature a massive drop in health care utilization tied to the pandemic, that significantly boosted insurers’ bottom lines and pushed rebates even higher. Plus, the threat of contracting COVID motivated more people to sign up for plans who otherwise would not have ? with those signups made possible by a pandemic-related special enrollment period ? and the newcomers were healthier than the population insurers initially priced for, Anderson explains.
That combination was very good for insurers, Anderson says. “They love to insure very healthy people but charge rates that are set for a sick population.” And even though the ACA does put a cap on insurer profits, carriers still make out pretty well by only having to issue rebates if their MLRs fall below 80%, he suggests.
As to whether the continued rise in MLR rebates might provoke some sort of regulatory action, Anderson seems doubtful. “[The fact] that 2020 was fundamentally weird will be the dominant policy response,” he predicts.
Indeed, during a press call on Dec. 22 to discuss 2022 enrollment figures (see story, p. 4), CMS Administrator Chiquita Brooks-LaSure cited the public health emergency as a major driver of high MLR rebates.
“One of the reasons why the insurers have seen higher MLRs has been the pandemic, and so the last couple of years have not looked the same as we would expect them to look over next year,” she said in response to a question from AIS Health. Still, “we’ll certainly be looking at, do we see some similar things as we move forward in 2022,” she added.
In general, “as we look at our administrative authority, we are going to continue to make sure that plans are giving comprehensive coverage in a way that’s making sense for people. And it’s not just the subsidies, of course, but also just making sure that we’re getting value for the benefits,” Brooks-LaSure said.
Anderson says that the Biden administration could make minor technical changes to how MLR rebates are calculated via the regulatory process, but any major change would require an act of Congress. “It probably is not worth the effort of Congress to do anything with it because it’s big money in an absolute sense [but] it’s small money in U.S. health care expenditure sense,” he suggests.
However, “where I think that there could be plausible interest in some type of legislative adjustment is [that] MLR could be a modest pay-for for other programs, because currently the MLR rebate goes to the policyholder,” Anderson says. “The policyholder gets a proportion of the total of MLR rebate from the insurance company relative to the proportion of gross premium that they are responsible for. The gross premium is often very different than the net premium ? which is what the individual actually pays ? and that difference is taken up by federal subsidies. So it is quite possible…for someone to get a zero-premium plan, which has been very common since 2017 [and] even more common now, and receive a several-thousand-dollar MLR rebate check 16 months later. So they’re effectively getting paid to buy insurance.”
To rectify that, any MLR rebate above a certain value could be split between the policyholder and the government, “so if an individual is paying 20% of the premium, they get 20% of the MLR rebate; the federal government would get the other 80%,” Anderson explains. “It would not be a huge amount of money ? a couple billion dollars over 10 years ? but it’s a useful pay-for that removes something dumb from the system.”
Consumers aren’t likely to protest if such a change is made, he adds, given that the MLR rebates are so little understood anyway.
“From my understanding, most people have no idea why the hell the checks show up,” he tells AIS Health. “It’s esoteric, it’s weird [and] it is extraordinary divorced from time and space in terms of when the MLR rebate was accumulated and when the money actually shows up.”
Leslie Small
Leslie has been reporting and editing in various journalism roles for nearly a decade. Most recently, she was the senior editor of FierceHealthPayer, an e-newsletter covering the health insurance industry. A graduate of Penn State University, she previously served in editing roles at newspapers in Pennsylvania, Virginia and Colorado.