One Way Obamacare Is Lowering Insurance Premiums

While insurance policies purchased through the exchanges and Medicaid expansion (or blocking it in many red states) have obtained the bulk of the publicity regarding the Affordable Care Act, there are many other aspects to the law. (No, Sarah Palin, establishment of death panels is not one of these). In the last post I looked at the benefits of enabling students to remain on their parents’ insurance plans. An even less discussed change is the regulations on medical loss ratios, which require that the bulk of premiums paid in be used for health benefits. Business Week explains that, “Expenses for marketing, fees to brokers, administrative costs, profits, and the like can’t take up more than 20¢ of each premium dollar (or 15¢ for large-group plans). Any amount collected above that threshold must be returned to customers.”

The Commonwealth Club looked at how this is working:

For the past two years, the Affordable Care Act has required health insurers to pay out a minimum percentage of premiums in the form of medical claims or quality improvement expenses—known as a medical loss ratio (MLR). Insurers with MLRs below the minimum must rebate the difference to consumers. This issue brief finds that total rebates for 2012 were $513 million, half the amount paid out in 2011, indicating greater compliance with the MLR rule. Spending on quality improvement remained low, at less than 1 percent of premiums. Insurers continued to reduce their administrative and sales costs, such as brokers’ fees, without increasing profit margins, for a total reduction in overhead of $1.4 billion. In the first two years under this regulation, total consumer benefits related to the medical loss ratio—both rebates and reduced overhead—amounted to more than $3 billion.

These rules are one of the reasons that the insurance industry is unhappy about the Affordable Care Act, even if they do profit from expanding sales to the currently uninsured. The rules do punish them if they set premiums too high while  there are no benefits to the insurance company from setting premiums below the expected medical-loss ratio. Insurance companies are responding by setting their rates as close to the medical-l0ss ratio as possible. This is beneficial for consumers, who benefit from lower insurance rate and from receiving rebates if the insurance premiums are set too high.

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