We have been going through a tough time in this country, with the rising cost of gas, groceries, and so much more due to inflation. Keeping up with these increasing prices can feel incredibly frustrating, but there might be at least one light at the end of the tunnel that will help. Health insurance companies will be sending out rebate checks to millions of Americans. Find out why, and how much you can expect to see from your health insurance company.
The medical loss ratio provision requires insurance companies that cover individuals and small businesses to spend at least 80% of their premium income on healthcare claims and quality improvement. That means only 20% can be spent on administration and marketing expenses, or kept for profit. When private insurance companies don’t meet this standard, they are required to issue refunds to policyholders.
The rebates are calculated based on a three-year average, meaning this year’s rebates will be calculated based on the figures from the years 2019, 2020, and 2021. This year, insurance companies will be distributing an aggregate total of $1 billion to customers, down from the $2 billion issued in 2021, and a record $2.5 billion in 2020.
“In the last couple of years we’ve seen some really large rebates — twice the size of this year’s amount,” said Cynthia Cox, a vice president at the Kaiser Family Foundation and director of its Affordable Care Act program. “But I’d say $1 billion is still significant.”
How Much Can You Expect To See?
Of the $1 billion in rebates going out, the majority (an estimated $603 million), will generally go to people with a health plan through the public exchange. The refunds are expected to average $141 per participant in plans through the marketplace, $155 for those in plans through small employers, and $78 for enrollees in large-group plans. However, the rebate amount can vary widely, depending on your location and insurer.
If you’re wondering when you will see your check, get ready, because over eight million Americans can expect a rebate in the coming weeks.
Health insurance companies are projected to owe rebates to almost 8 million people this year. Are you one of them? According to the Kaiser Family Foundation, 7.9 million policyholders will receive some money back from an estimated $2.7 billion in premium rebates. This year’s rebate for those with individual policies or who participated in small or large group plans is twice what it was last year, but it is unclear whether the amount will continue to rise.
Why The Rebates?
Insurance companies that sell individual or group policies are required by law to spend a certain percentage of the premiums they collect on healthcare costs, as opposed to on their own administrative costs. This “medical loss ratio” is usually 80/20, meaning insurance companies are allowed to put only 20% of premiums paid by enrollees towards their own marketing, administration, and profits. The rest has to go towards medical costs and quality improvements. If insurance companies do not meet this standard, then they must give a rebate to their policyholders.
How Much Will The Rebate Be?
Each year, the medical loss ratio rebate is calculated based on a three-year average of insurance companies’ financial data. The rebates this year are based on data collected from 2017, 2018, and 2019. Insurance companies who were not in compliance with the 80/20 rule during these years will either send a check to policyholders or deduct a rebate from premiums. The average rebate for 2019 was $208, depending on the state and the insurance company.
So will rebates remain the same for next year or will they be affected by the coronavirus pandemic? Right now, it’s unclear, because it’s unclear how the health crisis will end up affecting the price of insurance premiums. According to Karen Pollitz, a senior fellow with the Kaiser Family Foundation, “Insurance companies aren’t having a bad year, profit-wise. While they’ve paid out for claims related to treatment of coronavirus patients, they’ve paid far less than projected on claims related to elective medical procedures.”
Pollitz suggested that early estimates by insurers have been all over the board as to how much monthly 2021 premiums will cost. So far, insurers have changed their cost-sharing structures in order to reduce the amount that policyholders will have to pay out-of-pocket. “The thought was that people who are struggling during the economic crisis would appreciate this relief and help some to maintain coverage they might not otherwise be able to afford,” Pollitz said.
It is estimated that next year there will be an even bigger rebate due to the pandemic, but “if insurers do reduce their premiums now, then the medical loss ratio looks better,” meaning that there is still a chance that the rebate will be smaller next year.
When we pay for health insurance, we want to know that our money is going where it should be going. Contributing to premiums can be expensive, and until recently, we’ve had to trust that insurance companies were doing the right thing and putting those premium dollars towards getting the best care possible. Thankfully, insurance companies are now required by law to spend a certain percentage of premiums on medical costs as opposed to administrative costs. If they don’t, you will receive a medical loss ratio (MLR) rebate.
Background of the MLR Provision
Insurance companies are required by law to spend a certain percentage of premiums on medical costs. If they don’t, you will receive a medical loss ratio (MLR) rebate.
Before the Affordable Care Act (ACA) was passed in 2010, insurance companies could decide for themselves how much of your premium dollars went towards medical costs and quality improvements, and how much went towards their administrative costs. If an insurance company had particularly high administrative costs, then you were stuck paying their bills and getting less in return. You had no recourse, and most likely, no way of knowing.
While some states had minimum standards before the ACA, there were no nationwide standards, and little review or enforcement. However, the ACA set a standard maximum percentage of premiums that insurance companies are allowed to put towards their own administration, marketing, and profits. Insurance companies are now also required to publicly report their percentages in each state where they operate. What’s more, if they don’t meet these standards, you can look forward to getting a MLR rebate.
The Standards
So how much of your premium dollars need to go towards actual healthcare? If you are a small employer (less than 50 people), then 80% must be spent on care and improvements. If you are a large employer, that number rises to 85%. That means that up to 20% of small group plan premiums still goes in the pockets of the insurers, but you can rest assured that it will never be more than that.
The Rebates
Insurers failing to meet the standards must pay a rebate based on a 3-year average of their financial data. While most seem to meet the requirements, many rebates have been paid out to policy holders since 2012. In 2019, insurers returned $312 million to the small group market, which broke down to an average of $1190 per employer. Most of that (93%) was given back as a lump sum. So if you do receive this money, what do you do with it?
What Do You Do with an MLR Rebate?
If you do find yourself with one of these MLR rebate checks, it is your responsibility as an employer to use it a certain way. There are a few steps you should follow when figuring out how to deal with this rebate:
Determine which plan the rebate applies to – generally, the rebate only applies to one plan that an employer has offered (such as a PPO or HDHP), and can only be given to employees who are participating in that plan.
Determine how much of the rebate relates to employer contributions vs employee contributions towards the plan’s premiums – if you are contributing to your employees’ premiums, then you can keep the same percentage of the rebate as the percentage you have contributed. The rest is considered “plan assets” and must benefit your employees. So, for example, if employees contribute 50% of the premium, then 50% of the rebate would need to be used for the benefit of plan participants.
Determine who will get the rebate– distribution of the rebate only needs to be “fair” and “reasonable.” You don’t need to spend all your time figuring out exactly how much each employee contributed and give them each an exact percentage. You can make it easy on yourself and give a flat amount to everyone. You can also decide to only give the money to current plan participants if it will cost you too much to distribute it to everyone who ever participated in the plan.
Determine how to distribute the rebate– you have four choices of ways to give the rebate to your employees:
Cash
Premium reductions
An added benefit
A premium holiday
Thanks to provisions in the ACA, you can now feel a little bit more comfortable knowing that your premium dollars are being put towards the health of you and your employees.
Anything that adds transparency to the insurance market is definitely a good thing. And so is a little bit of money back in your pocket!
