Sponsors of fully insured health-benefits plans could be getting rebates this year from the insurance companies that underwrite their plans. At the same time, the cost of such plans may rise, which could push some plan sponsors to evaluate switching to a self-insured plan.
Under the Affordable Care Act, by June insurers must provide data on their 2011 plan year that reveals their “medical loss ratio” (MLR) — the percentage of collected premiums used to provide plan participants’ medical care and make quality improvements — to each state in which they do business.
In each state, and for each product line offered in that state, insurers must have had an 85% MLR for clients with at least 100 employees and an 80% MLR for smaller employers and individual insureds. If an insurer failed to achieve those thresholds, it will have to pay rebates to policyholders by August 1.
How many companies will get a rebate is not yet clear, but most will not. “There are going to be some insurers in some states that come in under the threshold,” says Edward Kaplan, national health practice consulting leader at The Segal Co. He estimates that, because most insurers are comfortably over the thresholds in most states, only about 10% of Segal’s corporate clients will receive rebates. Many of those clients, though, are large companies that do not qualify for the rebates because they have self-insured health plans.
For companies that do get a rebate, Kaplan estimates the average amount for a typical 100-employee firm will be from $200 to $250 per employee, or $20,000 to $25,000. In late 2010, the Department of Health and Human Services projected that the initial rebates in 2012 would average $164 per person.
Rebate recipients will have to assess whether and to what degree the funds received are to be considered plan assets. According to Labor Department guidance, if the policyholder is the plan or its trust, the entire amount will be plan assets. Where the employer is the policyholder, rebates will be considered plan assets in proportion to the portion of plan costs paid for by participants; the employer will keep the rest.
But more important than the rebates is the likelihood that insurers will mitigate the fiscal hit from paying rebates by charging higher premiums. Until now, insurers have been able to subsidize less-profitable product lines and types of groups (usually small ones), and do it across state lines, with the profits of the more-lucrative ones. Now, with insurers under the threat of paying out rebates on the latter, they may give small-group policyholders fewer subsidies and charge higher premiums. Conversely, large-group loss ratios may improve but not trigger a rebate (for example, going from 89% to 86%), and there might be no corresponding drop in premium rates.
That’s why Kaplan advises CFOs at fully insured firms to take a look at becoming self-insured. And the more companies that make the switch, the higher rates will go for the diminishing pool of fully insured plans.