Payers Slated to Pay $2.7B in Medical Loss Ratio Rebates in 2020

April 28, 2020 - Private payers could issue a total of $2.7 billion in medical loss ratio rebates in 2020, more than double the previous year’s record high of $1.4 billion, according to estimates from the Kaiser Family Foundation.

The medical loss ratio (MLR) requirement of the Affordable Care Act limits the amount of premium dollars payers can use for administration, marketing, and profits. Payers must use the majority of premium dollars on healthcare claims and quality improvement, Kaiser Family Foundation explained in the recent Data Note report.

For plans that cover individuals and small businesses, 80 percent of premium income must go to claims and quality improvement, leaving 20 percent for administration, marketing, and profit. The MLR is higher for large group insured plans, which must spend at least 85 percent on claims and quality improvement.

Payers that exceed the MLR threshold must pay rebates to consumers. These rebates are based on a three-year average, so 2020 rebates will be determined using financial data from 2017, 2018, and 2019.

Using preliminary data reported by payers to state regulators and compiled by Market Farrah Associates, researchers from Kaiser Family Foundation found that payers may be sending more rebates to consumers in 2020, with insurers on the individual market owing the most.

Payers on the individual market are likely to pay about $2 billion in MLR rebates in the fall, according to the new estimates. The average rebate per member would be about $420, which can be paid out in the form of a premium credit or, the more favored option, as a lump-sum payment.

Meanwhile, payers in the small group market and the large group market are slated to pay $348 million and $341 million, respectively. That translates to about $1,850 for beneficiaries of plans on the small group market and $110 for beneficiaries on plans in the large group market.

The MLR rebate amounts are just preliminary estimates, researchers stressed. However, historical financial performance sheds a light on why payers in the individual market are driving the record-high year of MLR rebates.

“As our previous analysis of insurer financial performance found, in 2017 financial performance in the market had begun to stabilize as premiums rose,” researchers wrote in the report. “Insurers in 2018 were highly profitable and arguably overpriced. In 2019, despite the absence of the individual mandate penalty and premiums dropping a bit on average, insurers continued to perform strongly.”

“On average, insurer loss ratios (the share of premium income paid out as claims) in the individual market in 2019 were 79%,” they explained.

In contrast, rebates in the small and large group markets were more similar to past years.

More people are projected to move into the individual market in 2020 are losing employer-based coverage due to the COVID-19 pandemic. This could mean more MLR rebates in 2021 and beyond, researchers stated.

“The cost to insurers for covering coronavirus treatment are still unknown, but could be tens if not hundreds of billions of dollars,” they wrote.

“That said, hospitals and outpatient offices are canceling elective procedures and individuals are delaying or forgoing other care due to lessened access from social distancing measures and concerns over contracting the virus,” they continued. “Even if individual market insurers experience losses in 2020, it is entirely possible they will owe rebates in 2021 because those rebates will be based on 2018 and 2019 experience as well.”

People transferring to plans on the individual market in 2020 will not qualify for MLR rebates unless they were also enrolled in 2019.

Final information on the amount payers on the insurance marketplaces will owe to their beneficiaries will be issued in the fall.