Insurers will likely owe massive rebates to consumers next year, even if their 2020 profits are more typical than healthcare executives expect.
More than 11.2 million people will qualify for nearly $2.5 billion in medical loss ratio rebates from insurers this year—an average of $219 per person—according to CMS data on Friday. It's an increase of more than $1 billion over last year. That includes almost 5.2 million people enrolled in Affordable Care Act marketplace coverage, who will get more than $1.7 billion in rebates with an average refund of $322 per person. Rebates paid to people enrolled in small group market coverage will be much smaller. Roughly 3.4 million people will receive about $423 million in rebates, which works out to $124 per person.
After Congress repealed the ACA's individual mandate and the Trump administration froze payments to insurers to reduce out-of-pocket costs for people with low incomes who buy Affordable Care Act marketplace coverage, insurers expected their administrative costs to skyrocket. But those costs never fully materialized, causing insurers to overshoot when they set their marketplace premiums, said Daniel McDermott, a research associate at the Kaiser Family Foundation.
Now insurers have to pay back consumers for their outsized profits because the ACA's medical loss ratio limits how much of an insurer's premium revenue could go to profits. Individual and small group plans need to put 80% of their premiums toward medical costs, while 85% of large group plans' premiums have to pay for beneficiaries' care. They can spend the rest on administration, marketing and profits.
Several insurers are entering or returning to the individual marketplaces, hoping to cash in on the once scorned exchanges. Those already on the marketplaces are growing their footprint.
"Consumers in the individual market are going to have more choice this year," McDermott said. Insurers "view it as a more stable market than I think it was perceived a few years ago."
Delayed care and COVID-19 testing and treatment costs could cut into insurers' profitability in 2020, but it probably won't make up the decreased spending in the early days of the pandemic.
"The MLR rebates next year are likely to make the MLR rebates paid out this year look small in comparison … even if utilization returns to baseline or above baseline in the latter half of 2020, as some insurers have indicated," McDermott said.
That's because CMS calculates MLR rebates based on a three-year average of insurers' spending. The agency will base next year's refunds on 2018, 2019 and 2020 financial data. Several insurers have waived costs for COVID-19 treatment costs and telehealth visits and offered up premium holidays or rebates to lower the MLR rebates they could owe over the next couple of years.
"I don't think 2020's unusual results will be decisive in an insurers decision to enter the market or expand their footprint," Duane Morris partner Erin Duffy said in an email.