The U.S. Government Accountability Office generated some minor headlines last week when it reported on how much health insurers paid in rebates to policyholders in the first two years under the Affordable Care Act’s medical loss ratio (MLR) rules.
A close read of the report, “Private Health Insurance: Early Effects of Medical Loss Ratio Requirements and Rebates on Insurers and Enrollees,” reveals important details about how insurers spent the premium income they collected from consumers and businesses. The report shows insurers spend very little on quality improvement, that they report modest profit numbers and that MLR rules have not had caused them undue harm.
The report shows that insurers spent less than 1.6 percent of their annual premium income on quality improvements (QI). In 2011, health insurers’ average spending on QI activities as a percentage of net premiums ranged from a low of 0.2 percent (in Wyoming) to a high of 1.5 percent (in Tennessee). The 2012 numbers were similar — Wyoming was still the lowest (at 0.3 percent) and New Mexico was highest at 1.6 percent.
Insurers’ advertisements often tout their focus on QI, but Timothy S. Jost, a law professor at Washington & Lee University, and one of the nation’s experts on the ACA, explained that quality improvement is clearly not an important cost item for insurers.
When the MLR rules were being considered, there was some concern that insurers would categorize spending on routine operations, such as utilization review, as QI, Jost said. Doing so would move these costs from administration to claims, and thus help them avoid paying MLR rebates to consumers and businesses. “But that does not seem to be happening in a major way,” he wrote in an email. “It might be happening with some, however.”
As Jost pointed out, there was concern about how the MLR rules would work in practice. Proponents believed the rules would be good for consumers. Wendell Potter at the Center for Public Integrity explained a bit of the history in a blog post recently, “Forcing health insurers to do what’s right,” and said that these rules have saved consumers billions of dollars in the past two years. Potter says that retiring Sen. Jay Rockefeller (D-W.Va.) played a key rule in getting the MLR provisions into the ACA.
In fact, Rockefeller requested this GAO report, asking the office to review the effects of the MLR requirements on insurers and enrollees and how the rebates would change if agent and broker payments were excluded from the MLR formula. The GAO found that, “Getting insurance agent and broker compensation out of [MLR] calculations would probably lead to a big drop in MLR rebates,” writes Allison Bell at LifeHealthPro.
Contrary to predictions that MLR rules would drive up insurers’ costs, the GAO report found that the rules had little influence on insurer spending. The GAO interviewed representatives from eight health insurers, which said was not a representative sample. All eight insurers said the MLR requirements had no effect or a very limited effect on their spending on QI activities. They also said the rules did not affect their decisions to stop offering health plans in certain markets.
One of the strengths of the report is the detail it provides on how much insurers reported in premium surplus. Premium surplus is what insurers report as profit or reserved capital but not spending for MLR rebates. It’s the amount remaining after subtracting medical claims, quality improvement and non-claim costs from net premiums.
In 2011, the average premium surplus among insurers ranged from a high of 6.7 percent in the District of Columbia to a low of a 0.8 percent loss in New Mexico. In 2012, the numbers ranged from a high of 6.7 percent in Wyoming to a low of a 3.0 percent loss in Idaho.
Putting the premium surplus issue in context, Jost said insurers include unpaid claim reserves for claims incurred during the year. “So I expect that what they are referring to here as reserves are essentially profit or the non-profit equivalent,” he wrote.
Last month, Paul Levy pointed out in his blog, Not Running a Hospital, that adding to reserves is a way to make a health system’s financial reports look better to the public. “Additions to reserves are debits against income in the year they are booked. When a year’s receipts are looking ‘too good,’ all you have to do is invent a need for some new or expanded reserve accounts before the fiscal year closes and park the cash there,” he wrote.
Jost could not say whether the GAO’s reported premium surplus levels are reasonable or not. He did say that health insurers have ways to generate income besides premiums such as serving as third-party administrators for employer-sponsored health networks or running subsidiaries related to the insurance business. “All of this needs to be taken into account when considering their profitability,” he added.
Jonathan Gruber, a professor of economics at MIT and one of the architects of the ACA, said the premium surplus numbers, “seem like they are in a good spot between zero and ‘too much.’” But he added this: “The more interesting question is how this shakes the industry out. Are there enough insurers making enough money to stay in the business, or are a few large ones making all the money?”
The heart of the report, of course, is what insurers paid in MLR rebates in 2011 and 2012. Under the MLR rules, insurers must spend a minimum of 85 percent of premium income in the large group market and 80 percent of premium income in the small group and individual markets. Some states have a higher MLR standard, such as Massachusetts, which set the MLR at 90 percent for small groups and individuals. Also, the federal Department of Health and Human Services can adjust the MLR in a state’s individual market.
To calculate the MLR, an insurer divides the amount spent on medical claims and QI by the premiums collected minus federal and state taxes and licensing and regulatory fees. This denominator is called net premiums.
Tables in the report show what insurers in the large group, small group, and individual markets reported spending to pay members’ claims, other costs unrelated to claims, QI and any net premium surplus or loss. All the spending was reported as a percentage of net premiums in 2011 and 2012, the most recent year for which these numbers were available.
Non-claims costs include insurers’ expenses for cost containment, claims adjustment, sales department salaries and benefits, fees and commissions for agents and brokers, taxes and general administrative expenses.
In 2011, insurers paid $1.1 billion in MLR rebates. Insurers in Texas had the distinction of paying the most ($168.5 million) among insurers in all 50 states. Florida’s insurers were second, paying $123.6 million in MLR rebates to employers and consumers. In 2012, insurers paid $520 million in MLR rebates and California’s insurers paid the most at $65.6 million, followed by Florida’s insurers at $55.5 million.
The report does not include how much insurers paid on average to consumers in each state. But John Dicken, GAO’s director, health care, sent a link to a report from the federal Centers for Medicare & Medicaid Services, 2012 MLR Rebates by State (pdf). This table shows the average rebate per family in all markets and the individual, large and small group markets. It also shows the number of policy holders benefiting from rebates in each state.