As plans set premiums, they expect to pay reform-mandated rebates

The largest publicly traded, for-profit health insurers are going to err on the side of setting premiums high and risk sending rebates to members as they start pricing for 2013, industry analysts say. A Commonwealth Fund report predicts those rebates will not be sizable.

Under the Patient Protection and Affordable Care Act, insurers are required to spend at least 80 cents of every premium dollar on health care in the individual and small group markets and 85 cents of every dollar in the large group markets. In every market they don’t spend at least that percentage on care, they must pay the difference to their customers. In August, plans will have to make their first-ever rebate payments, which are based on 2011 spending levels.

Goldman Sachs health care investment analyst Matthew Borsch talked to executives with UnitedHealth Group about their 2013 pricing strategies at a March 23 meeting, according to a note Borsch sent to clients March 26. UnitedHealth Group said it did not want to comment on Borsch’s note.

“Some not-for-profit health plans have apparently priced to eliminate (or minimize) rebates going forward after having accrued rebates in 2011,” Borsch’s note said. “However, [United] stated it will remain disciplined and will price conservatively to favor rebates over the possibility of setting rates at inadequate levels.”

An “inadequate” level for premiums, from insurers’ perspective, would be one that ended up costing them more than the health reform law-mandated minimums.

“They would rather send the rebate check any day than underprice their products,” said health care investment analyst Sheryl Skolnick, PhD, managing director and co-head of research for CRT Capital Group.

However, plans are trying to figure out how to hit a sweet spot between overpaying for care under federal minimums and spending an inordinate amount on rebates. Aetna, Coventry Health Plans, Humana and WellPoint are among the insurers that have said their pricing strategies will likely lead to rebates.

It’s not yet known how much plans will have to pay in rebates for 2011. But a Commonwealth Fund report released in April found that if plans had been forced to pay rebates based on 2010 spending, the results would not have been “onerous” for them (link).

The report by the Commonwealth Fund, a health reform supporter, found that for-profit and nonprofit plans alike would have had to pay about $1.8 billion to 15.3 million Americans for missing the law’s minimum medical-loss ratios if they had been in place in 2010. That collective payout is slightly less than the $1.9 billion in profit Aetna made in 2011. About half the total would have been paid to individual customers, and the rest split between small-group and large-group members. The average rebate for an individual plan would have been $183, $85 for a small-group plan and $72 for a large-group plan. For-profit plans would have been more likely to make rebates than nonprofit plans, the report said.

The Commonwealth Fund noted that rebates are likely to be below the $1.8 billion total it put forth, considering that total was from a year when plans weren’t trying to hit a mandated medical-loss ratio. A Coventry Health Plans executive said at an investors conference that though his company is “not going to target zero” rebates, it is trying to minimize them.

“When we initially looked at rebates just based on projections based on 2010, we would have seen a number probably in the $130 million range,” said Randy Giles, Coventry’s director of investor relations. “The total amount is going to be about $50 million for 2011. And so we feel like we obviously did a good job managing that number down, and we think we can do a better job going forward. & So we’re going to target to pay a small rebate in each of the markets we operate.”