Obamacare Is Making Insurance Companies More Efficient

Obamacare may already be making private health insurers more efficient, according to a year-over-year comparison of data related to the biggest consumer protection in the law.

Last year, insurers had to rebate $1.1 billion to consumers because they failed to meet the minimum payout percentage required by the law.  That was the first year the payout provision, or mandatory minimum loss ratio, was in effect.

This year, the federal government has announced that the rebate will be just half that – slightly more than $504 million.

And the number of consumers who receive a rebate will also be smaller.  Last year, 12.7 million customers received rebates.  This year, the number receiving rebates has dropped by one-third, to 8.5 million.

Why are fewer and smaller rebates a good thing?

According to the Department of Health and Human Services, this is evidence that insurers are “spending more of their premium dollars directly toward patient care and quality, not red tape and bonuses.”

The loss ratio provision is sometimes described as the 80/20 rule.  It states that, for every health insurance plan it offers, a private insurer must pay out at least 80 cents of every premium dollar on patient benefits, reserving only 20 cents for administrative costs and profits.  (For some plans, the requirement is 85 cents.)  Whenever it does not, it has to rebate its customers the difference.

The provision does not affect Medicare, because Medicare has significantly lower administrative costs than private insurers, and regularly pays out around 95 cents in care for every dollar it takes in.

Those who receive rebates may be happy, but it is better not to receive one.  A rebate is a sign that your insurance company has not paid out enough in benefits to the people as a whole who are covered by your plan.  This can happen to any insurer – especially when its customers have a healthier year than expected.  But if you have received rebates for two years in a row, you might want to ask why, and consider whether another plan would be better for you.

HHS breaks the data down by state and by three categories.  This year there were six states in which every plan met the standard in the individual insurance category, fifteen states in which every plan met the standard in the small group category, and ten states in which every plan met the standard in the large group category.

In no state did every insurer meet the standard in all three categories, but there were six states in which insurers met the standard in at least two categories.  

In Vermont and Alabama, every small group and large group market insurer met the standard.  In South Dakota, Rhode Island, Maine, and Hawaii, every individual and small group market insurer met the standard.  Rhode Island probably edges out the other states as best overall – in the one category its insurers will pay some rebates, the average will be only $43 per policyholder.

For this year, every Connecticut insurer met the standard in the large group market, after at least some fell short in all three areas last year.  And there was a big drop in the average rebate in the individual market, from $124 to $64.  The small group market, though, saw an increase, from $162 to $357.

And even Floridians, with a weak state insurance regulator, have something to celebrate.  The size of the average rebates went down in all three categories, from $240 to $164 in the individual market, from $190 to $94 in the small group market, and from $94 to $51 in the large group market.

In general, the results for this year appear clearly more attributable to the work of the federal government than to the states. 

In fact, last year, there were 37 total times across all fifty states when all the insurers in a given category met the standard.  This year, that number went down to 31.

But the bottom line is unmistakable.  On the whole, insurers are paying attention to this consumer protection, and working to meet this new standard.  And this is something that would not be happening if it were not for Obamacare.

As HHS headlined in its release, consumers have saved a total of $3.4 billion upfront in their insurance premiums this year as a result of Obamacare, in addition to the $500 million in rebates.  This may not be all we wanted.  But it is a start.

Paul Gionfriddo via email: gionfriddopaul@gmail.com.  Twitter: @pgionfriddo.  Facebook: www.facebook.com/paul.gionfriddo.  LinkedIn:  www.linkedin.com/in/paulgionfriddo/