Individual Insurance Market Passes on MLR Savings to Consumers in 2011
Consumers
saw nearly $1.5 billion in insurer rebates and overhead cost savings in 2011
due to the Affordable Care Act's (ACA) medical loss ratio (MLR) provision
requiring health insurers to spend at least 80% of premium dollars on health
care or quality improvement activities or pay a rebate to their customers,
according to a new Commonwealth Fund report. Consumers with
individual policies saw substantially reduced premiums when insurers reduced
both administrative costs and profits to meet the new standards. While insurers
in the small- and large-group markets achieved lower administrative costs, not
all of these savings were passed on to employers and consumers, as many
insurers increased profits in these markets.
The report, Insurers' Responses to
Regulation of Medical Loss Ratios, looks at how insurers selling policies for
individuals, small-employer groups (up to 100 workers), and large-employer
groups (more than 50 or 100 workers, depending on the state) in every state
reacted to ACA's MLR requirement between 2010, the year just before the new
rule took effect, and 2011, the first year the rule was in place.
The
authors find that in the individual insurance market, improvements were
widespread: 39 states saw administrative costs drop, 37 states saw MLRs
improve, and 34 states saw reductions in operating profits. Some states stood
out for significant improvements. In New Mexico, Missouri, West Virginia,
Texas, and South Carolina, MLRs improved 10 percentage points or more, while
administrative costs dropped $99 or more per member in Delaware, Ohio,
Louisiana, South Carolina, and New York.
However,
the report finds that in small- and large-group markets, MLRs were largely
unchanged, and while spending on administrative costs dropped, profits
increased. For example, in the small-group market, administrative costs were
reduced by $190 million, profits increased by $226 million, and the medical
loss ratio remained at 83%, unchanged from 2010. In the large-group market,
insurers reduced administrative costs by $785 million, increased profits by
$959 million, and kept their medical loss ratio at 89%, also unchanged from
2010.
The
authors note that while insurers in the individual market have a less stringent
medical loss ratio requirement—80%, as opposed to 85% in the large-group
market—their traditionally higher overhead costs and lower MLRs mean they have
to work harder to reach the new standard. As a result, these insurers lowered
both administrative costs and profit margins, therefore reducing growth in
premiums.
Conversely,
insurers in the small- and large-group markets generally already have MLRs in
the range of the required 85%, so while they reduced administrative costs, they
had the option of turning those cost savings into profits instead of passing
them along to consumers. In light of rising profits and falling administrative
costs, the authors suggest it is possible insurers took profit increases in the
small- and large-group markets to offset the reduced profits in the individual
market. And because many insurers sell policies in all three markets, any
reduction in administrative costs could have been spread across all of a given
insurer’s lines of business.
The
authors conclude that stronger measures—such as rate regulation, tighter loss-ratio
rules, or enhanced competitive pressures—may be needed to ensure that
administrative costs are reduced in all markets and savings are passed along to
consumers.