ObamaCare's Health Insurance Rebates May Make Insurance More Expensive


The Department of Health and Human Services has taken to touting ObamaCare's alleged consumer benefits, and in particular the rebates insurers are now required to send customers thanks to the law's medical loss ratio (MLR) rule, also known as the 80/20 rule.

That provision requires health insurers to spend at least 80* percent of collected premium dollars on medical care. If not, they have to rebate the difference to the customer. This year, insurers rebated slightly over $1 billion, or about $151 per person on average. "Thanks to the law," HHS Secretary Kathleen Sebelius said in a press release discussing the provision, "our health care system is more transparent and more competitive, and that's saving Americans real money." 

Journalists covering the provision have often made similar points. ABC News reported this summer that the rule is "aimed at holding health insurance companies accountable for how they spend the money collected through premiums." On the same day the ABC News piece ran, CBS let the world know that the health law "requires insurers to spend premiums on patients — or pay rebates." USA Today published a news report that boreder on advertorial under the headline "Health insurance rebates may keep premiums down for everyone." 

Or they may not. Not one of these articles noted that the provision is actually likely to make health insurance premiums more expensive. For that, you'll have to turn to the folks at NPR's Planet Money. Reporter David Kestenbaum called six health economists. "No one thought the provision would do much good,"reports Kestenbaum, "and several thought it could be harmful." That list includes one of ObamaCare architects and supporters, Jonathan Gruber. 

Why are economists so sour on the provision? The worry is that rather than look for ways to control costs, insurers will simply let spending balloon, leading to higher premiums — and bigger profits. It's easier to cover someone's health costs on 80 percent of $1,000 than it is on 80 percent of $100. And because insurer profits and other administrative costs must come from the remaining 20 percent, there's a larger pool from which to draw profits and business expenses. 

But as the administration surely knows, a check in the mail is easier to see than cost restraint, and lower premiums, in the absence of those rebates. Indeed, the administration has worked to ensure that customers know exactly where those rebate checks are coming from. Health insurers sending out rebates this year were required to include a letter stating in the first paragraph that the rebates are required by ObamaCare.  

I'm glad to see that Planet Money is giving this provision some of the scrutiny it deserves, though I wish more attention would have been paid to it before now. For that, you would have had to look here, herehere, here, here, here, and here

*Changed to say 80 percent, not 20 percent.