The medical loss ratio (MLR) provision of the Affordable Care Act (ACA) limits the amount of premium income that insurers can withhold for administration, marketing and profits. Insurers that do not meet the applicable MLR threshold are required to repay excess profits or margins in the form of discounts to their subscribers.
In the individual and small group markets, insurers must spend at least 80% of their premium income on health care claims and quality improvement efforts, leaving the remaining 20% on administrative, marketing and profit expenses. The MLR threshold is higher for large group insurers, who must spend at least 85% of their premium income on health care claims and quality improvement efforts. The MLR rebates are based on a 3-year average, which means that rebates issued in 2023 will be calculated using financial data from insurers in 2020, 2021 and 2022 and will go to individuals and businesses that bought health coverage in 2022.
We find that insurers estimate they will issue a total of approximately $1.1 billion in MLR rebates across all commercial markets in 2023, using preliminary data reported by insurers to state regulators and compiled by Mark Farrah Associates. Final rebate data will be available later this year. Some insurers have not yet submitted their reimbursement estimates for 2023.
Estimated total rebates across all commercial markets in 2023 ($1.1 billion) are similar to total rebates issued in 2022 ($1.0 billion). In 2022, discounts were given to 2.4 million people with individual coverage and 3.8 million people with employer coverage, although discounts can be shared between employers and employees. In the individual market, the average per-person discount in 2022 was $205, while the average per-person discount for the small-group market and large-group market were $169 and $110, respectively (although enrollees could only receive one part since the discounts could be shared between employer and employee or be used to offset premiums for the following year). The estimated $1.1 billion rebates to be issued later this year will be larger than those issued in most previous years, but are well below the recent record total rebates of $2.5 billion issued in 2020 and $2.0 billion issued in 2021, which coincided with the onset of the pandemic.
In 2022, the individual market average simple loss ratio (meaning there is no adjustment for quality improvement fees or taxes and therefore does not align neatly with MLR ACA thresholds) was 86%, the meaning these insurers spent an average of 86% of their premium income in the form of health claims in 2022. However, the discounts issued in 2023 are based on an average of 3 years of insurers’ experience in 2020-2022. However, some insurers that report relatively high loss ratios in 2022 expect to owe reimbursements this year because those reimbursements also reflect their more profitable experience in the 2020 plan year.
The effects of the pandemic continue to be felt, as this year’s discounts include 2020 and 2021 experience. In 2020, there were several factors that reduced healthcare spending and utilization. Hospitals and providers have canceled elective care at the start of the pandemic and during peaks in COVID-19 cases to free up hospital capacity, preserve supplies and mitigate the spread of the virus. Many consumers have also chosen to opt out of routine care in 2020 due to social distancing requirements or similar concerns. Because insurers had already set their 2020 premiums before the pandemic, many proved too expensive compared to the amount of care their enrollees were using. Some insurers were offering premium vacations, and many were temporarily waiving some out-of-pocket costs, which had a downward effect on their discounts.
In the small and large group markets, the 2022 average simple loss ratios were 83% and 88%, respectively. Only fully insured group plans are subject to the ACA MLR rule; around two-thirds of covered workers are in self-financed plans, to which the MLR threshold does not apply.
Payment logistics with discounts
The 2023 discount amounts in this analysis are still preliminary. Discounts or rebate alerts are sent out by the end of September, and the federal government will publish a summary of the total amount owed by each issuer in each state over the course of the year.
Insurers in the individual market can issue discounts in the form of a check or premium credit. For people with employer coverage, reimbursement may be shared between the employer and employee depending on how the employer and employee share premium costs.
If the reimbursement amount is exceptionally small (less than $5 for individual reimbursements and less than $20 for group reimbursements), insurers are not required to process the reimbursement, as it may not justify the required administrative burden to do it.
What to expect in the coming years?
Another year of higher loss ratios in the individual market could predict further premium increases in 2024, as some insurers aim for lower loss ratios to win back higher margins. In recent years, insurers across all markets have experienced great uncertainty in setting premiums during the pandemic. Looking into 2024, some of this uncertainty may continue, particularly regarding pent-up demand or the health effects of missed and delayed care. Further uncertainty in premium setting could arise from the continued slackening of Medicaid coverage, as millions of people are expected to lose their Medicaid coverage in the coming months and could switch to other sources of insurance. Supplier wage increases and other costs due to inflation could lead to higher premiums. In their 2023 rate statements, insurer actuaries at Marketplace cited rising pricing and usage as drivers of higher premiums.
Methods
We analyzed insurer-reported financial data from the Health Coverage Portal TM, a market database maintained by Mark Farrah Associates, which includes information from the National Association of Insurance Commissioners. The Supplemental Health Care Exhibit dataset analyzed in this report does not include data from California HMOs regulated by the California Department of Managed Health Care. All individual market data in this data note is for major medical insurance plans sold both over-the-counter and over-the-counter. Simple loss ratios are calculated as the ratio between the sum of total claims and the sum of health premiums earned.
Discounts for 2023 are based on preliminary estimates by insurers. The total rebates issued in 2022 differed by approximately 1% from the estimated rebates. In some years, final discounts are higher than expected and in other years, final discounts are lower.
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