On Thursday, the Department of Health and Human Services (HHS) announced that, thanks to the Affordable Care Act’s medical loss ratio (MLR) provision, 77.8 million Americans paid $3.4 billion less in health insurance premiums in 2012 because insurance companies operated more efficiently. Additionally, by August of this year, consumers will receive $500 million in rebates from companies that didn’t meet efficiency standards, with 8.5 million enrollees due to receive an average rebate of around $100 per family. This totals nearly $4 billion in savings for consumers in 2012 due to the medical loss ratio provision.
The medical loss ratio provision, commonly known as the “80/20 rule,” requires insurers in the individual and small group market to spend at least 80 cents of every premium dollar (and 85 cents in the large group market) on health care services or activities that improve health care quality. The provision is based on the idea that premium dollars should go toward medical care, not excessive administrative costs or profits. If an insurer fails to meet the provision’s standard, the insurer must pay its policy holders the difference. As a result, last year, more than 2.6 million households received rebate checks from individual market insurers who spent too much money on administrative costs and not enough money on their medical care.
However, the primary goal of the medical loss ratio provision is not to produce rebate checks for consumers at the end of the year. A true win for consumers is evidence that insurers are taking steps to lower their administrative and overhead costs so that consumers never have to pay excessive premiums in the first place. Yesterday’s announcement shows that insurers are taking those steps, with consumers reaping the benefits. This is even more exciting because a previous analysis by the Kaiser Family Foundation estimated the savings would only total $2.1 billion for 2012—less than half of what consumers actually saved in lower premiums and rebates.
As insurance companies continue to operate more efficiently, consumers can feel confident that their premium dollars are going toward the most important thing—their health care.