Insurers say health reform-related rebates will exceed $1 billion

Insurers will pay out more than $1 billion in rebates to their members for failing to meet a requirement that they spend a minimum of premiums on care — a total that includes payments to physicians.

Insurers expect to send $1.3 billion in rebates to customers for plans that failed to meet the federal minimum medical-loss ratios set under the Patient Protection and Affordable Care Act, according to an estimate released by the Kaiser Family Foundation on April 26. The figure was based on filings with state regulators. The estimate excluded rebates that might be paid in California, where insurers had not yet filed reports. Under the health reform law, which went into effect in 2011, insurers must pay rebates in August.

The Kaiser estimate was close to a $1.4 billion projection in November 2010 by the U.S. Dept. of Health and Human Services and slightly higher than a $1.2 billion estimate Goldman Sachs analyst Matthew Borsch made in a note to investors released April 25.

Borsch said the rebates were smaller than health plans had estimated in many cases, creating better-than-expected earnings for some insurers. In all, he expected publicly traded companies to pay $850 million in rebates; nonprofit Blues plans, $250 million; and all other plans, $100 million,

The Kaiser report notes that in many cases individuals won’t actually get a check in the mail. Where employers or other organizations sponsor health benefits, the rebate goes to them, and they can use it to reduce future premiums.

The Kaiser report stated that 31% of those in the individual market are owed a rebate, and that the rebates will average $127. Of small businesses that provide health benefits, an estimated 28% are expected to receive rebates, averaging $76 per enrollee. In each of those markets, insurers must spend at least 80% of premium dollars on care. Insurers covering large employer-sponsored plans, where they are required to spend at least 85% of premiums on health care, expect to pay rebates to 19% of large group enrollees, paying an average of $72 per enrollee.

The minimum is calculated by individual plans and states, rather than the across-the-board calculation of medical spending that insurers report in their financial statements. At least until insurers make their rebate filings in California, Hawaii is the only state where companies aren’t issuing rebates.

Insurers have been forced to pay more for care, but that doesn’t necessarily mean they have paid for more visits to doctors’ offices. Insurers continue to report that unit cost — what they pay for each drug and procedure — is driving the increase in medical spending to a much greater degree than utilization, the measure of how often people see a doctor. Insurers are reporting higher unit costs despite the inflation rate for physician services rising only 1.3% from March 2011 to March 2012, below the overall inflation rate of 2.7%.

Several recent reports have shown a decline in physician visits, a trend attributed to the struggling economy and increased patient financial responsibility, even for those with insurance.

Health insurance trade group America’s Health Insurance Plans released a statement in response to the attention on rebates.

“Given the inherently unpredictable nature of health care costs, it is not surprising that some health plans expect to pay rebates to consumers in certain markets,” the statement said. “However, the coverage disruptions and other unintended consequences of imposing a new arbitrary federal cap on health plan administrative costs are likely to outweigh any benefit these rebates will provide to consumers. Moreover, the taxes, benefit mandates and other regulations included in the health care reform law will cause premium increases that far exceed the value of prospective rebates.”

Health plans such as Aetna, Coventry, Humana, UnitedHealth Group and WellPoint have said they expect to continue paying rebates because of a strategy of trying to price plans so they get close to the mandated minimum spending but don’t fall below that minimum.