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
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!