Kaiser Family Foundation: Insurers on the hook for $1B in rebates this year

Insurers are estimated to issue $1 billion in rebates to customers this year due to a provision in the Affordable Care Act, according to a new analysis that also predicts major headwinds for the individual market next year.

The analysis, released Tuesday by the Kaiser Family Foundation, explores the potential rebates to be issued under the medical loss ratio (MLR) policy of the ACA. The $1 billion in rebates across all markets is less than half of the $2.1 billion insurers doled out in 2021. 

Kaiser said that the MLR rebates—with the majority going to enrollees on the individual market—could be a key indicator of what premiums will look like on the ACA exchanges and the individual market next year.

“After years of relatively flat premiums in the individual market, the higher loss ratios seen in 2021 may foretell steeper premium increases in 2023, as some insurers will aim for lower loss ratios to regain higher margins,” the analysis said.

Under the ACA, an insurer must spend a portion of every premium dollar on healthcare claims and the rest on administrative costs. Individual and small group market plans must spend at least 80% of their premium dollar on claims, and larger group insurers must spend at least 85%. 

The rebates are based on a three-year average of rates from 2019 through 2021. 

Kaiser’s analysis—which is based on data reported by insurers to state regulators—predicts that individual market insurers will have to pay out $603 million in rebates for 2022, with small group markets sending out $275.5 million and $168.1 million for large group plans. The final rates will be released later this year.

The $603 million for individual market plans, which includes the ACA’s exchanges, is far below the $1.3 billion in rebates for 2021 and $1.7 billion for 2020. 

A reason rebates in 2020 and 2021 were so large is that insurers widely overshot their premiums in 2018 on the individual market “amid uncertainty about ACA policymaking in 2017, including whether the law would be repealed and replaced, whether cost-sharing payments would be made, or whether the individual market would be enforced by the federal government,” the analysis said.

The COVID-19 pandemic also continues to impact rebates, as the virus in 2020 drove down healthcare spending and utilization. 

“As insurers had already set their 2020 premiums ahead of the pandemic, many turned out to be over-priced relative to the amount of care their enrollees were using,” Kaiser said. “Some insurers offered premium holidays and many temporarily waived certain out-of-pocket costs, which had a downward effect on their rebates.”

More uncertainty could also be in store for the individual market in 2023, for which insurers are now setting their rates. 

Insurers not only have to grapple with how the continuing pandemic will affect healthcare use but also the fate of enhanced ACA subsidies passed as part of the American Rescue Plan Act last year. The law boosted subsidies and ensured more people got access to aid to lower premium costs, but the enhanced credits will go away after this year.

Congressional Democrats have expressed an interest in renewing the subsidies but so far have not advanced any legislation.

“If insurers overshoot their premiums amid this uncertainty, they will again be required to issue rebates to enrollees under the Affordable Care Act,” Kaiser said.