How Obamacare Rules Triggered $1.6 Billion in Insurance Rebates

One of the less discussed pieces of the Affordable Care Act is a measure to control insurance premiums by limiting how much companies can spend on stuff other than medical claims. Expenses for marketing, fees to brokers, administrative costs, profits, and the like can’t take up more than 20¢ of each premium dollar (or 15¢ for large-group plans). Any amount collected above that threshold must be returned to customers.

This rule is known as the medical-loss ratio, and it has resulted in rebates of $1.6 billion to individuals and businesses over the last two years, according to a new tally of federal data from the Commonwealth Fund, a health research foundation. In 2012, the second year the rule was in effect, insurers returned $513 million, about half as much as the year before. That means the insurance companies got better at setting premium prices closer to the medical costs they actually paid out.

Courtesy Commonwealth Fund

The medical-loss ratio is all downside for insurers. Price too high and they have to refund money, but the rule doesn’t compensate them if they price too low. (Other Obamacare mechanisms backstop some losses.) So insurance companies have an incentive to charge close to—but not less than—the expected medical-loss ratio.

For-profit and publicly traded insurance companies were more likely to have to rebate premiums than nonprofit insurers or those run by health-care providers, according to the Commonwealth Fund analysis, and the rule helped insurers contain overhead costs that otherwise would have been passed on to customers.

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