The Policy Behind the Obamacare Rebates
Alyene Senger /
President Obama’s speech today on Obamacare had a heavy focus on the Medical Loss Ratio (MLR) provision.
The provision, which took effect last year, 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. The remaining percentage can be used for administrative costs, including profit. If an insurer doesn’t meet the ratio, it must issue rebates to its customers.
The Kaiser Family Foundation estimates that in 2012 the average rebate for consumers in the individual market was $127. Although there is a federal regulation that requires insurers to notify rebate recipients that their rebate is due to Obamacare, it seems President Obama doesn’t think people are connecting the two: “[M]ost folks wouldn’t know when that check comes in, that this was because of Obamacare, that they got this extra money in their pockets.”
In taking credit for the rebates, the President should also have to accept responsibility for the negative effects this provision has on the insurance market and its customers.
For example, the MLR will likely lead existing insurers to exit the market, thus decreasing competition. As Heritage expert Ed Haislmaier stated in testimony before Congress:
[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 will create new barriers for start-up insurers to enter the market, discouraging their creation. Haislmaier explains:
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.
The MLR rules will also encourage insurers to increase premiums to decrease the chances of a facing loss. As Haislmaier writes:
[I]f 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.
Worse, the MLR acts as an invitation for fraud. Haislmaier explains:
[U]nder any possible scenario of administrative expenses and recoveries, an insurer that spends nothing on preventing or collecting erroneous payments will still retain more funds—which it can use to cover other administrative costs, or to pad its profits—than an insurer that spends money on preventing or recovering improper claims payments.
Offering more empty promises on rebates and premiums won’t stop the “train wreck” that’s coming. One thing that can stop this law is for Congress to stop its funding until it is fully repealed.