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Health Insurers Overcharged Customers $332 Million Last Year

People wait in line to speak with insurance agents in Miami as they try to purchase health plans under the Affordable Care Act

Photograph by Joe Raedle/Getty Images

People wait in line to speak with insurance agents in Miami as they try to purchase health plans under the Affordable Care Act

Health insurers owe $332 million in refunds to consumers and employers for collecting excessive premiums last year, the Obama administration announced on Thursday. Under the Affordable Care Act, insurance companies must spend 80¢ of each premium dollar on medical care, leaving 20¢ to go toward administrative costs and profits. For policies sold to large employers, they have to spend 85 percent of premiums on care.

All told, 6.8 million consumers are entitled to refunds for 2013 premiums, with an average refund of $80 per family. Insurers must notify people about refunds by Aug. 1 and explain whether they’ll send a check, a refund to the credit or debit card used to buy the policy, or a credit consumers can use to offset future premiums. When employers get the refunds, they can provide a cash refund to workers or use it to benefit current subscribers in other ways.

Almost a million Florida insurance buyers will get a refund, more than in any other state. The Blue Cross & Blue Shield of Florida plan alone has to refund more than $10 million to small-group buyers, according to government data. The same company’s HMO plan, called Health Options, owes almost as much. Together, the two Florida Blue plans rebates’ exceed the amount owed by all insurers in any other state. The rebates represent less than 1 percent of the premiums Florida Blue collected, spokesman Paul Kluding said in an e-mail.

There’s a complicated set of factors insurers consider when setting premiums, including how fast medical costs are increasing, how healthy they expect their members to be, and how much competition there is. Rates are submitted to state regulators for approval.

In the past, if premiums exceeded medical costs by more than insurance companies anticipated, they kept the difference. Now they have to refund it. Beyond the actual refunds, the government claims this change saved consumers $3.8 billion upfront by forcing insurers to set lower premiums from the outset and operate more efficiently.

There’s no benefit for insurance companies in the new rule, known as the medical-loss ratio. Rather than get a bonus if they underprice premiums, the companies are still on the hook for medical costs, even if they exceed the insurer’s expectations. So depending on how much competition health plans face for customers, they might have an incentive to set premiums on the higher side to be safe, then issue refunds after the final accounting.

Tozzi is a reporter for Bloomberg Businessweek in New York.

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