In a speech earlier this month, President Obama highlighted the ongoing positive effects of the Affordable Care Act’s “80/20” rule. The rule caps health insurance profits and overhead costs at 20% of premium costs, saving 80% of premium costs for actual medical care and healthcare improvement costs. With the development of state-based healthcare marketplaces, the rule – formally called the “Medical Loss Ratio” (MLR) rule has already begun to shrink premium costs for Americans with health insurance.
Less discussed by President Obama – but just as important – is its effect of rationalizing and making fairer premium costs across state lines. As outlined in our recent report on the implementation of state-based healthcare marketplaces, premium costs can be driven by a variety of market forces unrelated to patients’ health or age. With its prioritization of healthcare costs over administrative costs and profit, the 80/20 rule will reign in costs unassociated with patients’ health and make healthcare costs more equitable across state lines.
LOWER PREMIUMS, LATER THAN SOONER
The rule requires health insurance companies not meeting the profit and overhead caps (20% for small group markets and 15% for large group markets) to rebate the excess premium they charge customers. Since first implemented in 2011, the rule has returned almost $1.6 billion to consumers in rebates (see chart 1). In 2012, those returns translated to almost 9 million American families receiving checks for an average of $100 each.
But more importantly, the rule has driven health insurance companies to change their cost structures to avoid forced rebates, driving down premiums and saving consumers billions. Figure 1 shows that, across markets, Americans saved almost $3.5 billion in premium costs due to the profit and overhead caps in the 80/20 rule. Though total rebates in 2012 were $600 million less than in 2011, this decline shows that more companies are meeting the 80/20 rule and delivering premium savings to consumers.
FAIRER PRICING ACROSS MARKETS
As discussed in our recent report on the value of efficient healthcare marketplaces, premiums can be determined by a variety of factors only tangentially related to an individual’s health and can vary widely by region. With the creation of these new marketplaces, the 80/20 rule will ensure that insurer cost structures and premiums are roughly comparable across state lines.
A first look at data from the first year’s implementation of the MLR rule suggests that the “profitability premium” is a national problem largely seen in our biggest insurance companies. Figure 2 shows that rebates in 2011 were disproportionately owed by some of the largest companies. In fact, while almost 25% of insurance companies owed consumers a rebate of some kind, only six insurance companies were responsible for a full 68% of all owed funds.
But that view of the insurance marketplace is complicated by HHS’ finding that profit margins at some of the largest firms are actually far lower than required by the MLR rule (Figure 3). Where firms with fewer enrollees have a profit margin of roughly 11%, the companies with the largest number of enrollees that were required to pay back rebates in 2011 saw profit margins of only 7%. Both statistics are considerably lower than the 20% and 15% overhead thresholds required by HHS for the two market sizes.
The missing piece of the puzzle comes in that the government calculates rebate requirements on a state-by-state basis and based on particular market type. While the largest firms do business across the country and appear exempt from rebates based on national data, premium rates and cost structures vary widely across state lines even within the same firm. Though firms may be exempt from rebates in some states, they may be required to pay back significant rebates in others.
This can most clearly be seen through rebate data in just one geographic region – the South (Figure 4). Only 2% of families in Alabama were eligible to receive a rebate based on their 2011 expenses, receiving an average of $389 per family that received a check. Meanwhile, around 40% South Carolina and Virginia families received a check in the mail, on average $117 and $113 respectively.
The differing size of rebates and number of eligible consumers suggest wide variation in premium costs not due to actual health expenses. As companies begin to adjust these costs to avoid mandatory rebates, this variation should shrink. That means greater equity across state lines. It also means that more patients’ premium costs will reflect the cost of their own care, not the market power of their insurer in their state or other factors out of their control.
As we wait to see the results of the state-based insurance market places, we are already starting to see the beginnings of a more rational approach to health expenditures thanks to the 80/20 rule.