Obamacare’s medical loss ratio (MLR) provision began this year and requires insurers in the individual and small-group markets to spend 80 percent of premiums—85 percent for insurers in the large-group market—on medical claims or quality improvements. If the insurer doesn’t spend the required percentage, it must issue a rebate to consumers.
Earlier this month, the Department of Health and Human Services (HHS) finalized a rule that requires insurers to notify rebate recipients that their rebate is all thanks to Obamacare. In the first paragraph it must state, “This letter is to inform you that you will receive a rebate of a portion of your health insurance premiums. This rebate is required by the Affordable Care Act—the health reform law.”
The Kaiser Family Foundation estimates that the rebates to customers will range from $76 on average for those insured in the small-group market to $14 on average for those in the large-group market.
In essence, the new rule forces insurers to advertise for Obamacare. However, this free Obamacare promotion leaves out the real effects of the harmful rule.
One effect is increased consolidation and decreased competition in insurance markets. Obamacare’s MLR provision will decrease the amount of insurers in the market as it kills start-up insurance companies. In recent testimony before Congress, Heritage expert Ed Haislmaier stated, “The MLR regulations effectively constrain the amount, and delay the timing, of any excess premium revenues that a start-up health insurer could plan to either reinvest in growing its business (say, through additional marketing) or repaying its initial investors.” This means it will take much longer for a new insurer to become profitable, discouraging the creation of one in the first place.
In addition, existing insurers will likely exit the market. Haislmaier explains:
[T]he fact that the MLR provisions in [Obamacare] constrain health insurance administrative spending and profitability while its other new insurance regulations increase benefit and administrative costs will certainly discourage companies with other options from continuing to offer health plans.
Moreover, the MLR rules will encourage insurers to charge higher premiums. As Haislmaier writes, “if an insurer overestimates expected spending on medical care, it must refund excess premiums to policyholders, but if it underestimates expected claims costs, it cannot keep more revenue the next year to recoup that loss.” Thus, insurers will charge higher premiums to decrease the chance of profit loss.
Another devastating effect of the MLR will be on health savings accounts (HSA). The structure of HSAs is incompatible with the MLR rules as currently written. As a result, the 11.4 million people who enjoy health plans with HSAs may lose their existing coverage.
While the Obama Administration touts $14 rebates, the American people will continue to be hurt by the MLR rule and the rest of Obamacare until it is fully repealed.