I Don’t Really Want My $127 Medical Loss Ratio Rebate

Under the Affordable Care Act, health plans have to issue rebates to policyholders if they don’t spend at least 80 or 85 percent of premiums on medical costs. (The 80 percent threshold is for individual and small group policies, 85 is for large groups.) Now that the law is in effect, about $1.3 billion is to be paid out. Checks will average $127 per person for those who are due a refund.

I’m a supporter of the ACA overall, and it’s always nice to get a check, but I’m not too pleased with this result. The policy treats any dollar spent on medical costs as good, and any money not spent –or spent on administrative costs– as bad. That means if a health plans spends more money –for example by overpaying for services, paying for too many services, or paying fraudulent claims– they don’t have to provide a rebate. Some proponents expect that the rebate rules will keep premium increases in check because plans will be embarrassed by the prospect of having to pay rebates.

But a counter-argument is that plans will treat the MLR requirement similarly to how individuals treat their flexible spending accounts (FSAs). When December comes, FSA holders check their accounts and are eager to exhaust their funds through purchase of things they don’t really need, like another pair of eyeglasses. Similarly it seems health plans could relax their cost containment initiatives if it looks like they are not spending up to the 80 or 85 percent mark. Cost containment requires administrative expenditures, which the ACA frowns on. A plan could cut back on administrative costs and keep that money. Policyholders wouldn’t get rebate checks and plans would make more profits.