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Health Insurers’ Customer Rebates May Reach $1.3 Billion

UnitedHealth Group Inc. (UNH), WellPoint Inc. (WLP) and other health insurers may have to forfeit to consumers $1.2 billion to $1.3 billion in profits from last year because of changes to U.S. law that limit revenue from premiums.

Rebates for exceeding the limits, called medical loss ratio, will amount to about 6 percent of the industry’s $21 billion in profits from 2011, said Matthew Borsch, a Goldman Sachs Group Inc. (GS) analyst. For consumers, that translates into rebates of as much as $517 a person, according to the Kaiser Family Foundation.

The rebates are being promoted as one of the successes of the 2010 health-care law, as the Obama administration awaits word from the Supreme Court on whether portions of the overhaul violate the Constitution. Changes to the health system included limiting to no more than 20 percent the premium revenue insurers can keep for administrative costs and profit.

“Today’s news is yet another sign of how the Affordable Care Act is already strengthening the health-care system,” Health and Human Services Secretary Kathleen Sebelius said in an e-mail. “The 80-20 rule ensures that consumers get a good value from the money they spend on their insurance plan by requiring 80 cents on every premium dollar to go towards better health care instead of overhead and executive bonuses.”

The largest checks based on the national average, $127 each, will go to people who don’t have insurance through their employer and instead buy coverage on their own, Kaiser, a nonprofit research group in Menlo Park, California, said in a report today. People employed by large companies will receive rebates averaging about $14 each, the foundation said. Insurers will pay those rebates to the companies, not to individuals.

Excess Costs

“Greater regulatory scrutiny of private insurance is improving value and helping to get excess costs out of the system,” Kaiser President and Chief Executive Officer Drew Altman, said in a statement.

Kaiser estimated that the rebates will total $1.3 billion, while Borsch at Goldman said the figure will be $1.2 billion, or 5.7 percent of $21 billion in 2011 profits. Both relied on data insurers submitted to state regulators last week.

The cost to the industry is “more positive than negative,” as the government had forecast refunds of about $1.4 billion, Borsch said in a note to clients yesterday.

Eight publicly traded insurers, also including Bloomfield, Connecticut-based Cigna Corp. (CI) and Aetna Inc., would pay a combined $850 million of those rebates this year because they exceeded the limits, Borsch said. UnitedHealth will pay the most, $307 million, Borsch estimated. A spokesman for the company, Daryl Richard, said Borsch’s estimate is accurate.

‘Unpredictable’ Costs

Aetna, based in Hartford, Connecticut, will pay about $177 million, and Indianapolis-based WellPoint $94 million, Borsch estimates. Coventry Health Care Inc. (CVH), based in Bethesda, Maryland, will pay about $50 million, he projected. Nonprofit Blue Cross Blue Shield plans will owe $250 million, Borsch said.

The industry expected to pay rebates, Robert Zirkelbach, a spokesman for America’s Health Insurance Plans, a Washington- based trade group, said in a phone interview last week.

“Given the inherent unpredictable nature of health-care costs, it won’t be surprising if some plans are paying rebates to customers in certain markets,” he said.

Aetna (AET), the third-biggest U.S. insurer, was able to better price some plans for 2012 after seeing which ones generated rebates last year, Chief Financial Officer Joseph Zubretsky said in a telephone interview.

State Waivers

“If there was a particular geography in the country that was in significant rebate status for 2011, we may have chosen to take those funds and include them in the pricing of the product for 2012,” he said.

Rebates may be lower than forecast because insurers “proactively” reduced their premiums to avoid paying back customers, Borsch said. His estimate doesn’t reflect waivers the government granted to insurers in seven states, allowing them higher profit limits, he said.

Those waivers won’t affect rebates that plans pay by more than about 1 percent, he said. Minnetonka, Minnesota-based UnitedHealth is the biggest U.S. health insurer by sales.

People in Texas and Florida -- states that had their requests for waivers denied by the Obama administration -- will receive the largest rebates, Kaiser said. Texas consumers and businesses will receive $186 million; Florida rebates will total $149 million.

Hawaii is the only state where no one will receive a rebate, Kaiser said.

Rebates could take the form of either checks sent to insurers’ customers or discounts on future premiums, Kaiser said.

Consumers probably won’t see any notable reduction in their premiums because other provisions of the health law are increasing costs, Zirkelbach said.

“If the goal is to bring down the rising cost of health care, having this arbitrary cap on administrative costs isn’t the way to do it,” he said.

To contact the reporter on this story: Alex Wayne in Washington at awayne3@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net

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