Under the federal health reform law, insurers offering health coverage must meet minimum “medical loss ratios,” that is, they must spend a minimum percentage of premiums they collect in a given state, for a given year, on medical claims or quality improvements for their insured in that state. The medical loss ratio is 80 percent in the individual and small-group market, and 85 percent in the large group market. If a health insurer doesn’t spend the required percentage on medical claims and quality improvements, it must give back the difference to customers.
The Kaiser Family Foundation estimates that under these medical loss ratio rules, $1.3 billion in rebates will be paid-out by August 2012 to individual health policy holders and employers who have group health plans, on account of premiums collected and claims paid in 2011.
More than three million individual policyholders will reap rebates of $426 million, averaging $127 apiece. These are individuals who are not covered through an employer and buy their policies directly from an insurance company.
In the small employer market, plans covering nearly five million people will receive rebates totaling $337 million. Large employer plans will receive rebates of $541 million, covering 125 plans with 7.5 million participants.
Rebates for employer-sponsored plans will generally go to the employers which, in some cases, may be required to treat at least some or all of the rebates as an asset of the plans. That means the employers will be required to use that portion of the rebates to benefit the covered employees, either through enhanced benefits, premium holidays, or in other ways. An employer’s obligation to share the rebates depends on what the plan says (if anything) about who owns the rebate. If the plan is silent, then the employees’ share of the rebate might depend on the portion of premiums paid by employees. See our Compliance Alert on this topic by clicking here.
The rebate provision does not apply to self-insured plans because they pay their own health claims. According to the Kaiser Foundation, 60% of employees with workplace coverage were enrolled in self-funded plans in 2011.
When averaged by state, the largest per-person rebates will be paid to individuals in Alaska ($305) and Maryland ($294). Texas and Florida will reap the largest total amount of rebates with insureds in Texas receiving $186 million and insureds in Florida receiving $149 million in rebates. The report’s findings don’t include California, where data wasn’t available yet.
The Kaiser report said the rebate requirement may be acting as a brake on the health insurance industry, discouraging insurers from seeking big premium increases to avoid having to issue rebates later.