Health insurance companies have been on a wild ride recently, as the future of health-care reform and its effects on the industry have been somewhat up in the air. Now that the courts have had their say, insurers can concentrate on the variety of new rules that will have a direct impact on their businesses. One of these rules, the 80/20 rule, stipulates that insurers must use 80% of premium dollars on health-care-related expenses, or refund the difference to customers by Aug. 1. This minimum Medical Loss Ratio (MLR) climbs to 85% for large insured groups, such as the employees of a large company.
The rule went into effect Jan. 1 of last year, and insurance companies handed in their MLR reports for 2011 to the Department of Health and Human Services by June 1. While many insurers don't have to refund any money, those who do include some of the biggest players in the field.
Altogether, insurance companies will pay out between $1.1 billion and $1.3 billion this year, and had set aside reserves to cover the rebates. Companies such as Aetna
The idea is to help hold down health insurance costs by forcing insurers to spend premium payments on providing coverage. Insurance companies disagree that the rule will be of much use, as they claim the true sources of skyrocketing costs aren't being addressed. It appears, however, that companies were able to trim total rebate costs from an earlier estimate of $2 billion by reducing premiums last year. Aetna reported that it tweaked plan pricing for this year after noting which plans previously triggered rebates.
The rule is a step in the right direction, but its effects won't be felt acutely by either insurers or consumers. While the total amount is large, the refunds being paid out per company are not crippling. An analysis by Goldman Sachs predicted that eight public companies would pay out about $850 million of the total, with UnitedHealth footing the largest bill of more than $300 million. That amount is based on premiums paid totaling nearly $29 billion, while WellPoint's tab of $94 million is against a pool of $33 billion. Coventry's portion is smaller still, at $50 million.
Just as these refunds are a drop in the bucket of insurer profits, the amount expected to be sent to consumers is not huge, at an average of $151 per household. For those spending hundreds of dollars each month on their own family coverage, this amount is not likely to make much of an impression.
The rule seems to be working, though, and insurers are already tightening up their standards. As an investor, it's good to know that these refunds won't really impact the industry's bottom line. As an insurance consumer, you just might be eligible for one of those rebate checks, or, perhaps, reduced premiums starting this year. A small step, but it's a start.
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