A fluke in health insurance discounts? It’s not as crazy as it sounds

Former Democratic Senator Al Franken tweeted recently that Americans will receive $1.1 billion in rebates from health insurance companies this year due to a provision he wrote into the Affordable Care Act.

The chirping has elicited many comments, including some of people who said they have never seen such a check from their insurers. This got us wondering: Is Frankens’ tweet correct, and if so, how exactly do these discounts work?

We reached out to Frankens’ press team to inquire about the source of his data, but received no response.

However, we have found a lot of information on the subject. As with everything related to health insurance, it’s complicated.

Bottom line, though: There are discounts, probably along the lines of $1.1 billion for this year. But the chance that any given consumer will see one is pretty small.

First, the background

Franken was a Senator from Minnesota during the drafting of the Affordable Care Act, which was signed into law in 2010 by then-President Barack Obama. That measure, also known as Obamacare, included a provision related to rebates. And, yes, Franken has made it into law, said health insurance expert Louise Norris.

It’s known as a medical leak ratio, or MLR, and while it sounds wonky, it’s pretty straightforward. The MLR refers to how much insurers spend on medical care for their subscribers compared to other administrative costs. The ACA provision aims to curb the amount of premium dollars insurers use for administrative costs, which can include marketing, profits, salaries and executive bonuses.

Now we have the numbers where we can see how much they spent, how much they cashed in, and how much they owe, said Norris, a health policy analyst for healthinsurance.org. He holds these companies accountable.

How does it work?

The MLR is not calculated based on what each individual patient spends on premiums or other medical care costs during the year. Instead, the standard insurers must meet is to spend at least 80 percent of their premium dollars, in some cases more, on the collective you: all people in the plan, said Cynthia Cox, vice president of KFF, who heads the KFF program on the ACA.

Then insurers add up all the premium dollars they bring into a state for each type of plan they offer, such as those sold to individuals, those that cover small businesses, and those that cover large employers.

They then add up all the claims costs for medical care for all customers enrolled in those plans. For policies offered to individuals or small groups, the insurer must have paid at least 80% of the premiums for direct medical care or quality improvements. Large employer plans have to spend 85% on medical care. One more nuance: the totals are aggregated over the previous three years.

Consumers individually may have spent a lot of money on premiums last year and not used health care, Cox said. But that’s not what the MLR is trying to measure. Examine if the plans offer a good value for all those people who are signed up.

If these objectives are not met, discounts are triggered.

There are many reasons why insurers might miss the mark.

One is that because they set premiums well in advance of the actual plan year, insurers can get wrong guesses, over or underestimating demand or costs for care. For example, insurers set premiums for 2020 during the summer of 2019, when no one knew the covid-19 pandemic would hit months later. So instead of increasing medical bills, the pandemic has actually caused many enrollees to avoid seeing the doctor or going to the hospital. So those years premiums were wildly out of line with spending. The largest volume of rebates in ACA history, $2.5 billion, was granted in the 2020 plan year, according to a KFF report.

About $1.1 billion will be paid out this year, roughly in line with previous years’ discounts, the same report said.

However, the estimate is preliminary and not all insurers have evaluated their data. Discount alerts are expected later this year.

Most enrollees won’t receive a cashback check because most insurance plans fall within the limits set by law, Norris said.

The ACA’s first redemption checks were issued in 2012, when approximately $1.1 billion was distributed. That annual total has declined for a few years as insurers have improved at cost estimation and premium setting, but it has varied, with sharp spikes during the pandemic.

In all, nearly $11 billion has been repaid since 2012, Norris said.

There are caveats

Anyone who gets health coverage through their job is unlikely to see a direct discount. In particular, self-insured employers, who pay medical bills directly and comprise the vast majority of large employers, are not subject to the MLR.

If you work for an employer who purchases coverage from an insurer and is eligible for a discount, you still may not receive a cash payment. Instead, employers can use the discount to boost benefits or offset the employee’s share of the cost of health care coverage. In both cases, the discounts are split between the workers and the employer. The employer tends to pay the bulk of the premium costs, in which case he gets the larger check.

In the individual ACA market, according to KFF, consumers who owed money could get a check or get the discount in the form of premium credit.

Last year, about 6.2 million consumers nationwide, 2.4 million in individual plans and the rest in a group or employer plan, qualified for a reimbursement check, according to analysis of Norris government data. While that’s a substantial number of people, it’s still a small percentage of the more than 170 million who have work-based coverage, or ACA.

The average amount nationwide was $167, with the largest in South Dakota, whose rebate recipients received an average of $603, he wrote. Discounts were not granted in five states: Alaska, North Dakota, Oregon, Rhode Island and Vermont.

So, was Franken accurate when he tweeted that Americans would get this billion dollar windfall? And will these discounts really reach everyone or just a select few?

Norris said many insurers had been approaching those spending caps even before the ACA, but that the law better defines the parameters, caps spending on non-medical costs and allows for discounts. Overall, that can benefit anyone with a commercial health plan, whether or not he gets a check, he said.

He pointed to the pandemic and how it has dampened demand for medical care well after insurers have set their premiums. If we didn’t have MLR rules, there would have been nothing stopping carriers from retaining those excess profits, Norris said.

However, the estimated $1.1 billion in rebates expected this year doesn’t necessarily mean those required to issue them are outrageously profitable right now, because that’s a three-year average, which still includes the early years of the pandemic. when insurers were profitable but only because people used less health care than anyone would have guessed, Cox said.

Our sentence

Franken was largely right in characterizing the insurance reimbursement provision and his role in turning it into law. There will be rebates sent out this year, but the $1.1 billion is still technically an estimate of the amount and could change based on the insurer’s final figures.

But his tweet was misplaced in insinuating that Americans in general would see direct discounts. While the number of Americans getting a discount this year might be similar to last year’s 6 million, that’s a single-digit percentage of the total number of people with insurance. However, Americans are likely to benefit in some form this year, such as through richer benefits packages or reduced cost sharing. But very few will receive an actual check in the mail.

We rate this mostly true.